Affiliated Managers Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. Results are unaudited and presented under U.S. GAAP. AMG is a global asset management company operating through affiliated investment managers across Mutual Fund, Institutional, and High Net Worth distribution channels. Assets under management were approximately $249.0 billion at June 30, 2010, compared with $208.0 billion at December 31, 2009.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $332.1 million | $201.2 million | $583.1 million | $379.7 million |
| Operating income | $95.8 million | $50.9 million | $164.4 million | $96.7 million |
| Operating margin | 28.9% | 25.3% | 28.2% | 25.5% |
| Net income | $58.2 million | $56.2 million | $111.0 million | $79.5 million |
| Net income attributable to controlling interest | $25.2 million | $11.0 million | $42.7 million | $17.1 million |
| Diluted EPS | $0.53 | $0.26 | $0.92 | $0.41 |
| Operating cash flow | $115.1 million | $72.2 million | $183.1 million | $87.9 million |
| EBITDA | $81.7 million | $53.2 million | $150.0 million | $102.4 million |
Q2 revenue increased 65%, operating income increased 88%, controlling-interest net income increased 129%, and diluted EPS increased 104% year over year. For the six months, revenue increased 54%, operating income increased 70%, controlling-interest net income increased 150%, and diluted EPS increased 124%.
- Average assets under management increased 39% in Q2 and 34% year to date, primarily from new Affiliate investments and investment performance.
- Performance fees included in consolidated revenue were $33.6 million for the six months ended June 30, 2010, an increase of 191% from the prior-year period.
- Q2 revenue growth was led by Mutual Fund revenue, up 105%; Institutional revenue, up 50%; and High Net Worth revenue, up 16%.
- Economic Net Income, a non-GAAP measure, was $63.8 million in Q2 and $114.6 million for the six months, compared with $42.4 million and $80.1 million, respectively, in the prior-year periods.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $220.5 million at June 30, 2010, compared with $259.5 million at December 31, 2009.
- Senior bank debt was $659.5 million at June 30, 2010, versus no outstanding senior bank debt at December 31, 2009. The revolving credit facility had a $770 million capacity and matures in February 2012.
- Outstanding senior convertible securities had a carrying value of $415.9 million; junior convertible trust preferred securities had a carrying value of $508.6 million.
- The company’s internal leverage ratio was 2.2x. Actual bank leverage and interest coverage ratios were 2.7x and 5.7x, respectively, versus covenant limits of 3.5x and a minimum of 3.0x.
- On July 2, 2010, AMG settled $200.7 million of forward equity sales by issuing approximately 3.2 million shares and used the net proceeds to reduce Revolver borrowings to approximately $465 million. Pro forma bank leverage was 2.3x, with approximately $305.2 million of remaining borrowing capacity without violating covenants.
- Investing cash outflows were $814.8 million for the six months, primarily reflecting investments in Pantheon and Aston. Financing cash inflows were $593.8 million, principally from borrowings and equity transactions.
Material Changes and Unusual Items
- AMG completed investments in Artemis during the first quarter and Aston and Pantheon during the second quarter. Pantheon is a global private equity fund-of-funds manager; Aston provides sub-advised mutual fund and managed-account products.
- The Pantheon transaction had a provisional enterprise value of $894.3 million, including $387.8 million of goodwill and $513.1 million of acquired client relationships. AMG may owe contingent payments of up to $225 million over three to five years, with a projected present value of approximately $15.3 million at June 30, 2010.
- The Aston transaction had a provisional enterprise value of $168.2 million, including $81.7 million of goodwill and $95.7 million of acquired client relationships.
- Goodwill increased from $1.413 billion at December 31, 2009 to $1.983 billion at June 30, 2010. Acquired client relationships increased from $571.6 million to $1.397 billion.
- Zero coupon senior convertible notes were converted into 873,626 common shares and retired during the second quarter.
- Income tax expense increased substantially, partly because of higher pretax income and a one-time $3.0 million prior-year benefit from reversing a Massachusetts net operating loss valuation allowance. The controlling-interest effective tax rate was 37.0% for Q2 and 37.8% for the six-month period.
- Comprehensive income attributable to controlling interest was only $1.0 million in Q2, compared with $35.7 million in the prior-year period, primarily due to foreign currency and investment-security valuation changes.
Outlook, Commentary, and Risks
The filing does not provide formal quantitative earnings or revenue guidance. Management expects performance fees to remain a recurring revenue component, although their timing and amount may vary and most annual performance fees are typically realized in the fourth quarter. Management also expects approximately $100 million of Affiliate equity repurchases during the next twelve months, although timing and amount are difficult to predict.
- Results depend materially on global financial-market conditions, asset values, investment performance, client flows, fee rates, and performance fees.
- Negative market performance or sustained client outflows could reduce assets under management, advisory fees, performance fees, and cash distributions from Affiliates.
- AMG faces acquisition and integration risks, including the ability to identify and complete additional investments on favorable terms and the possibility that new or existing Affiliates may not meet operating expectations.
- Future acquisitions and Affiliate equity purchases may require additional borrowing or equity issuance, creating leverage, financing-cost, and dilution risks.
- The company had contingent acquisition obligations with expected settlements of $106.6 million and maximum potential payments of up to $601 million through 2015 under past acquisition agreements.
- AMG had approximately $97 million of commitments to co-invest in certain Pantheon partnerships, expected to be reimbursed by Russell Investments when called.
- At June 30, 2010, the company reported $22.2 million of liabilities for uncertain tax positions, including interest and related charges.
Investor Verification Priorities
- Verify the final purchase price allocations for Pantheon and Aston, which remained provisional at quarter-end, including goodwill, intangible assets, deferred taxes, and contingent payment obligations.
- Verify the July 2, 2010 forward-equity settlement, share issuance, Revolver paydown, and resulting leverage and liquidity.
- Assess the sustainability and timing of the significant increase in performance fees, particularly the concentration of annual performance fees in the fourth quarter.
- Reconcile reported net income, controlling-interest earnings, EBITDA, and Economic Net Income, including the effects of non-controlling interests and non-GAAP adjustments.
- Monitor assets under management, net client cash flows, market performance, and the mix of equity, alternative, fixed-income, domestic, and international products.
- Review debt maturities, conversion and put rights, credit-facility covenants, contingent acquisition payments, Affiliate equity repurchase obligations, and potential equity dilution.