Business Context and Reporting Period
Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: AMG is an asset management company holding equity investments in a diverse group of mid-sized investment management firms ("Affiliates"). As of September 30, 2002, Affiliates managed approximately $68.5 billion in assets across three distribution channels: High Net Worth, Mutual Fund, and Institutional.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 |
|---|---|---|
| Revenue | $115,258 | $364,224 |
| Operating Income | $45,225 | $150,523 |
| Net Income | $12,819 | $42,680 |
| Earnings Per Share (Diluted) | $0.57 | $1.88 |
| Cash Flow from Operating Activities | N/A | $91,901 |
| Cash and Cash Equivalents (Sep 30, 2002) | $77,892 | |
| Total Debt (Long-term + Current) | $533,751 |
Note: Total debt consists of $75,000 senior bank debt, $228,751 zero coupon convertible debt, and $230,000 mandatory convertible debt.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 19% for the quarter and 22% for the nine months ended September 30, 2002, compared to the same periods in 2001. This growth was driven by new investments (Third Avenue, Friess, Welch & Forbes) and positive net client cash flows, partially offset by a broad decline in equity markets.
- Net Income: Net income rose 3% for the quarter and 14% for the nine months. The increase was aided by the adoption of FAS 142, which eliminated the amortization of goodwill and certain intangible assets, reducing operating expenses.
- Assets Under Management (AUM): Total AUM decreased from $81.0 billion at December 31, 2001, to $68.5 billion at September 30, 2002. The decline was primarily due to a $15.6 billion drop in investment performance over the nine months, reflecting broader equity market declines.
- Interest Expense: Interest expense doubled (100% increase for the quarter, 106% for the nine months) due to the issuance of $230 million in mandatory convertible debt securities ("FELINE PRIDES") in late 2001 and early 2002.
- Acquisitions: On August 8, 2002, AMG acquired 60% of Third Avenue Management LLC, adding $4.6 billion in AUM.
Guidance, Outlook, and Risks
- Market Sensitivity: AMG's performance is directly tied to financial market conditions. Declines in equity markets reduce assets under management and advisory fees. Management anticipates that Q3 market declines will decrease average AUM for the current quarter.
- Capital Needs: The company has obligations to purchase additional equity in Affiliates totaling approximately $650 million over the next 15 years. AMG may need to raise additional capital through debt or equity issuance to meet these obligations and fund new acquisitions.
- Debt Structure: AMG replaced its revolving credit facility in August 2002 with a new $250 million facility (expandable to $350 million) maturing in 2005. The company also holds significant mandatory convertible debt due in 2006 and zero-coupon convertible notes due in 2021.
- Accounting Changes: The adoption of FAS 142 (Goodwill and Other Intangible Assets) on January 1, 2002, significantly reduced amortization expenses, improving reported net income and EBITDA compared to prior periods.
Investor Verification Checklist
- Acquisition Integration: Verify the financial contribution and integration progress of the Third Avenue Management LLC acquisition.
- Debt Covenants: Review compliance with financial covenants (net worth, leverage, interest coverage) in the new $250 million revolving credit facility.
- Future Equity Purchases: Assess the company's liquidity and capital raising plans to meet the ~$650 million in future obligations to purchase Affiliate equity.
- Market Exposure: Monitor the impact of continued equity market volatility on Assets Under Management and fee revenue.
- Non-GAAP Measures: Review "Cash Net Income" and "EBITDA Contribution" metrics provided by management to understand cash generation capabilities independent of non-cash amortization.