Affiliated Managers Group, Inc. — First-Quarter 2017 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2017, with comparative results for the three months ended March 31, 2016. Affiliated Managers Group is a global active asset management company that invests in and supports boutique investment management firms. Assets under management were $753.5 billion at March 31, 2017, up 17% year over year, across more than 550 investment products.
Beginning in the first quarter, management evaluated the business as a single global active asset management operating segment rather than three distribution-channel segments. Prior-period segment disclosures were updated, and impairment assessments under both the former and current approaches identified no impairments.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $545.4 million | $544.3 million | Flat |
| Operating income | $178.8 million | $176.6 million | Down 1% |
| Operating margin | 32.8% | 32.4% | Down approximately 40 bps |
| Income from equity method investments | $68.0 million | $85.9 million | Up 26% |
| Net income | $173.5 million | $193.6 million | Up 12% |
| Net income attributable to controlling interest | $104.0 million | $122.5 million | Up 18% |
| Diluted EPS | $1.90 | $2.13 | Up 12% |
| Adjusted EBITDA attributable to controlling interest | $215.7 million | $243.8 million | Up 13% |
| Economic net income attributable to controlling interest | $159.3 million | $183.2 million | Up 15% |
| Economic EPS | $2.92 | $3.21 | Up 10% |
Revenue from consolidated Affiliates declined slightly because performance fees fell $10.4 million, partly offset by higher advisory and other fees. Equity method revenue increased 82% to $819.7 million, primarily from the 2016 investments in new Affiliates. Equity method earnings increased 31% to $107.6 million, while related intangible amortization increased 53% to $21.7 million.
Total operating expenses were essentially unchanged at $367.7 million. Compensation and related expenses increased 7% to $242.0 million, primarily due to Affiliate equity transactions and Affiliate compensation. Selling, general and administrative expenses decreased 8% to $88.7 million, and intangible amortization and impairments decreased 18% to $21.9 million.
Average assets under management rose 19% to $744.5 billion, including a 36% increase at equity method Affiliates and a 6% increase at consolidated Affiliates. Aggregate net client cash flows were negative $1.3 billion, but market changes, new investments and foreign exchange increased assets under management.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow increased to $122.1 million from $25.6 million, primarily reflecting higher distributions received from equity method investments.
- Investing cash flow was an inflow of $16.3 million, compared with an outflow of $550.9 million in the prior-year period, which included $551.3 million of Affiliate investments.
- Financing cash flow was an outflow of $277.4 million, reflecting $160.0 million of senior debt and convertible-security repayments, $80.0 million of common-stock repurchases, $11.3 million of dividends and $92.0 million of distributions to non-controlling interests.
- Cash and cash equivalents declined from $430.8 million at December 31, 2016 to $293.6 million at March 31, 2017.
- Carrying values at March 31, 2017 were $785.0 million of senior bank debt, $945.3 million of senior notes and $308.0 million of convertible securities.
- The company had approximately $1.1 billion of remaining capacity under its $1.45 billion revolving credit facility and was in compliance with its debt covenants. The credit facilities mature September 30, 2020.
- The company’s credit ratings were A3 from Moody’s and BBB+ with a positive outlook from S&P Global Ratings.
Material changes versus the prior comparable period
- Assets under management increased 17%, while average assets under management increased 19%.
- Equity method Affiliates became a substantially larger contributor to operating results following the 2016 investments in new Affiliates.
- Net income attributable to the controlling interest increased faster than consolidated revenue because of stronger equity method earnings, lower intangible amortization at consolidated Affiliates, higher investment income and a lower effective tax rate attributable to the controlling interest.
- The controlling-interest effective tax rate decreased to 32.1% from 34.6%, primarily due to stock-compensation-related windfall tax benefits and increased indefinite reinvestment of certain foreign earnings.
- Common-stock repurchases increased to $80.0 million from $16.9 million. The company repurchased approximately 0.5 million shares during the quarter at an average price of $161.87.
- The company initiated a quarterly common-stock dividend of $0.20 per share and declared a second-quarter dividend of the same amount, payable May 25, 2017.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings guidance. Management expects operating cash flow, revolver borrowings and proceeds from its equity distribution program to be sufficient for foreseeable cash needs. Expected uses include debt repayment, Affiliate equity repurchases, dividends, common-stock repurchases, working capital and investments in new or existing Affiliates. Management expects to repurchase approximately $125 million of Affiliate equity during 2017.
Management cites continued demand for alternative, multi-asset and other active return-oriented strategies, but notes that performance depends on market conditions, client flows, fee rates and investment results. Consolidated Affiliate revenue was affected by lower performance fees, fee-arrangement restructuring and reduced United Kingdom renewal commissions following a regulatory change.
- Unfunded co-investment commitments totaled $97.1 million; $11.0 million may be reimbursable by a prior owner if certain commitments are called.
- Contingent payments for consolidated Affiliates could reach $84.9 million, although expected payments were $10.3 million, including $3.0 million expected in 2017. Equity method Affiliate contingent liabilities could reach $170.0 million, with no payments expected in 2017.
- Affiliate equity interests had a current redemption value of $733.5 million and holders have conditional put rights. Affiliate equity obligations recorded as liabilities increased to $91.5 million at March 31, 2017 from $12.1 million at year-end.
- Third Avenue Management, a consolidated Affiliate, recorded a $15.0 million reserve related to litigation arising from the liquidation of the Third Avenue Focused Credit Fund. The reserve is funded by Third Avenue and did not affect controlling-interest net income; resolution remains subject to court approvals.
- Foreign exchange sensitivity estimates indicated that a 1% change in pound sterling and Canadian dollar exchange rates would affect stockholders’ equity by approximately $12.3 million and $2.0 million, respectively.
- Management states that it is not aware of significant violations of applicable regulatory minimum capital or financial requirements.
Important facts for investors to verify
- Whether the growth of equity method Affiliates continues to translate into cash distributions and controlling-interest earnings after increased intangible amortization and lower ownership percentages.
- The sustainability and composition of assets under management, particularly negative net client cash flows in U.S. equity strategies and reliance on market appreciation.
- The timing and cash impact of Affiliate equity redemptions, the $97.1 million of unfunded commitments and contingent payment obligations.
- Debt maturities, covenant compliance, borrowing costs and the effect of any credit-rating changes.
- The litigation resolution involving Third Avenue and whether the existing reserve is sufficient.
- The effect of future accounting standards, including revenue recognition, financial asset measurement, leases, cash-flow classification, business definition and goodwill impairment guidance.