Affiliated Managers Group, Inc. — 2020 Second-Quarter 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 capabilities. The filing covers the unaudited three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Management reported that AMG and its Affiliates remained operational during the COVID-19 pandemic, with minimal disruption to client service, but noted continuing economic uncertainty.
Assets under management were $638.4 billion at June 30, 2020, down 17% from $772.2 billion a year earlier. Average assets under management declined 18% for the quarter and 16% year to date.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Consolidated revenue | $471.1 million, down 20% | $978.3 million, down 14% |
| Net income | $63.5 million, down 65% | $103.4 million, versus $47.2 million |
| Net income attributable to controlling interest | $30.7 million, down 71% | $15.1 million, versus a $93.1 million loss |
| Diluted EPS | $0.65, versus $2.11 | $0.32, versus a $(1.81) loss |
| Adjusted EBITDA attributable to controlling interest | $162.1 million, down 26% | $362.4 million, down 17% |
| Economic net income attributable to controlling interest | $129.6 million, down 24% | $280.9 million, down 17% |
| Operating cash flow | Not separately provided for the quarter | $375.4 million, versus $309.2 million |
Consolidated net margin was approximately 13.5% in the second quarter of 2020 versus 30.4% in the prior-year quarter. The controlling-interest net margin was approximately 6.5% versus 18.2%. For the first six months, consolidated net margin was approximately 10.6% versus 4.2%, while the controlling-interest net margin was approximately 1.5% versus negative 8.2%.
- Aggregate fees declined 17% to $960.9 million in the second quarter and declined 8% to $2.214 billion year to date. Second-quarter asset-based fees decreased 16% and performance-based fees decreased 1%; year-to-date asset-based fees decreased 12%, partly offset by a 4% increase in performance-based fees.
- Total consolidated expenses declined 1% to $409.6 million in the second quarter and 5% to $763.9 million year to date. Compensation and selling, general and administrative expenses declined, while intangible amortization and impairments increased substantially.
- Equity method income was $17.4 million in the quarter versus $29.4 million and a loss of $95.8 million year to date versus a loss of $328.8 million. The year-to-date comparison benefited from lower prior-year impairment charges.
- Cash and cash equivalents were $681.6 million at June 30, 2020, compared with $539.6 million at December 31, 2019. Total assets were $7.496 billion and total equity was $3.342 billion.
- Debt was $2.043 billion at June 30, 2020, compared with $1.794 billion at year-end 2019. This included $350.0 million of senior bank debt, $1.091 billion of senior notes, $312.3 million of junior convertible securities and $289.7 million of junior subordinated notes.
Material Changes Versus Prior Comparable Period
- COVID-19-related market declines, net client outflows and foreign-exchange effects reduced assets under management and fee revenue. Second-quarter net client cash outflows were $18.2 billion; year-to-date net outflows were $32.0 billion.
- Second-quarter consolidated revenue fell $120.8 million, primarily from lower asset-based and performance-based fees. Year-to-date revenue fell $156.8 million.
- The company recorded a $60.3 million aggregate impairment to acquired client relationships at a consolidated Affiliate, including a $32.8 million charge attributable to AMG’s controlling interest. AMG expects to sell its equity interest in that Affiliate, with closing anticipated in the third quarter of 2020.
- In the first quarter, AMG recorded a $140.0 million impairment of an equity method Affiliate. The reduction in year-to-date impairment expense versus 2019 materially improved equity method results.
- Investment and other expense was $12.1 million in the second quarter and $9.7 million year to date, compared with income of $7.2 million and $15.2 million, respectively, in the prior-year periods, primarily due to unrealized investment losses.
- AMG issued $350.0 million of 3.3% senior notes due June 15, 2030. Proceeds were used to repay $250.0 million of revolver borrowings and $100.0 million of term-loan debt. The company had no revolver borrowings at June 30, 2020.
- Share repurchases totaled $113.3 million year to date, and 1.5 million shares were repurchased at an average price of $76.03. The company had 5.4 million shares remaining under its October 2019 authorization at June 30, 2020.
Cash Flow, Liquidity, Outlook and Risks
Operating cash flow of $375.4 million was the principal source of liquidity during the first six months. Investing activities provided $3.1 million, while financing activities used $226.3 million, including distributions to non-controlling interests, Affiliate equity repurchases, shareholder returns and debt repayment. Management expects operating cash flow, together with revolver availability, to support foreseeable cash needs and stated that debt and equity capital markets may also be available.
Management expects net Affiliate equity repurchases of approximately $110 million during the remainder of 2020. It also expects primary future uses of capital to include investments in Affiliates, Affiliate equity repurchases, share repurchases, distributions to non-controlling interests and debt repayment. The filing does not provide formal earnings or revenue guidance.
- COVID-19 could further reduce market values, assets under management, fee revenue, investment performance and client demand. Management stated that the duration and magnitude of the effects remain uncertain.
- Future impairment risk remains for goodwill, acquired client relationships and equity method investments if financial markets deteriorate.
- Unfunded commitments to co-invest in Affiliate-sponsored investment products totaled $135.3 million.
- Contractual obligations totaled $3.895 billion, including debt, leases, Affiliate equity repurchase obligations and other obligations. Expected contingent payment arrangements totaled $52.5 million, while the maximum potential contingent payments disclosed were substantially higher.
- Affiliate equity holders have conditional put rights, which can require AMG to repurchase interests. Affiliate equity repurchase obligations recorded as liabilities were $73.3 million at June 30, 2020.
- AMG had an equity distribution program permitting up to $500.0 million of common-stock sales, but no sales had occurred under the program as of June 30, 2020.
- The company maintained A3 and BBB+ credit ratings from Moody’s and S&P Global Ratings, respectively, and reported no significant violations of applicable regulatory capital requirements.
Important Facts for Investors to Verify
- Assess the sustainability of assets under management, net client flows and performance-based fees as COVID-19 and market conditions evolve.
- Reconcile GAAP earnings and EPS with Adjusted EBITDA and Economic net income, particularly the effect of impairment and amortization add-backs.
- Review the planned third-quarter sale of the repositioned Affiliate and any resulting gain, loss, cash proceeds or additional impairment.
- Monitor debt maturities, interest expense, revolver availability and compliance with credit-facility covenants.
- Evaluate the timing and cash impact of Affiliate equity repurchases, put rights, contingent payments and the expected $110 million of remaining-2020 repurchases.
- Review sensitivity of goodwill, acquired client relationships and equity method investments to further market declines.
- Confirm the effect of continued share repurchases and the potential $500.0 million equity distribution program on share count and dilution.