Affiliated Managers Group, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company that invests in independent boutique investment managers and provides centralized support. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Management reported aggregate assets under management of $653.5 billion, down 13% from September 30, 2019, and stated that operations experienced minimal disruption from COVID-19.
Key financial metrics
| Metric | Q3 2019 | Q3 2020 | 9M 2019 | 9M 2020 |
|---|---|---|---|---|
| Consolidated revenue | $549.0 million | $494.8 million | $1,684.0 million | $1,473.2 million |
| Net income | $162.1 million | $127.8 million | $209.3 million | $231.2 million |
| Net income attributable to controlling interest | $86.3 million | $71.3 million | $(6.8) million | $86.3 million |
| Diluted EPS | $1.71 | $1.53 | $(0.13) | $1.83 |
| Adjusted EBITDA attributable to controlling interest | $206.5 million | $181.2 million | $641.3 million | $543.6 million |
| Economic net income attributable to controlling interest | $159.4 million | $152.1 million | $498.5 million | $433.0 million |
| Operating cash flow | — | — | $616.6 million | $626.8 million |
Q3 2020 net income attributable to the controlling interest represented an approximate 14.4% consolidated revenue margin, versus approximately 15.7% in Q3 2019. The comparable nine-month margin was approximately 5.9% in 2020 versus a negative margin in 2019. These are simple calculations based on reported consolidated revenue and controlling-interest net income.
- Aggregate fees declined 15% to $961.7 million in Q3 and 10% to $3.176 billion for the nine months. Asset-based fees fell 15% in Q3 and 13% year to date; performance-based fees were nearly flat in Q3 and increased 3% year to date.
- Average assets under management declined 14% in Q3 and 15% year to date. Q3 net client cash outflows were $14.0 billion; year-to-date net outflows were $46.0 billion.
- Total consolidated expenses declined 4% in Q3 and 4% year to date. Compensation and selling, general and administrative expenses decreased, while intangible amortization and impairments increased.
- Equity method income was $17.0 million in Q3 2020 versus $10.3 million in Q3 2019. Year-to-date equity method loss improved to $(78.8) million from $(318.5) million, primarily because of lower impairment charges.
- Cash and cash equivalents were $929.4 million at September 30, 2020, compared with $539.6 million at December 31, 2019. Total assets were $7.670 billion and total equity was $3.328 billion.
- Debt increased to $2.311 billion from $1.794 billion at year-end 2019. The company had $350.0 million of senior bank debt, $1.092 billion of senior notes, $313.1 million of junior convertible securities, and $556.4 million of junior subordinated notes.
Material changes versus the prior comparable period
- Q3 consolidated revenue fell 10%, controlling-interest net income fell 17%, diluted EPS fell 11%, Adjusted EBITDA fell 12%, and Economic net income fell 5%.
- Year-to-date controlling-interest net income improved from a $6.8 million loss to $86.3 million of income, despite lower revenue and a 15% decline in Adjusted EBITDA. The improvement primarily reflected substantially lower equity method impairment charges.
- Q3 intangible amortization and impairment expense increased 51% to $31.9 million. The company recorded $12.5 million attributable to the controlling interest for an acquired client relationship impairment and $7.4 million for the closure of an Affiliate retail investment product. Aggregate charges were $24.9 million for these Q3 items.
- In the second quarter, AMG recorded a $32.8 million controlling-interest impairment charge related to the strategic repositioning and subsequent sale of an Affiliate; the sale closed in July with no significant gain or loss.
- AMG issued $350.0 million of 3.3% senior notes due 2030 and $275.0 million of 4.75% junior subordinated notes due 2060. It used part of the senior-note proceeds to repay revolver and term-loan borrowings.
- AMG repurchased 1.3 million common shares in Q3 and 2.8 million shares year to date, spending $84.4 million and $204.0 million, respectively, in the equity statements. The company paid $0.01 per share in Q3 and $0.34 per share year to date, compared with $0.32 and $0.96 in the prior-year periods.
Liquidity, outlook, risks, and unusual items
Operating cash flow was $626.8 million for the nine months ended September 30, 2020. Investing activities used $8.0 million, while financing activities used $221.5 million, including Affiliate equity repurchases, distributions to non-controlling interests, share repurchases, dividends, and debt repayment. Management stated that operating cash flow, together with available revolver capacity, should be sufficient for foreseeable cash needs. The $1.25 billion revolver had no outstanding borrowings at September 30, 2020; the term loan matures in January 2023 and the revolver in January 2024.
The filing does not provide formal earnings or revenue guidance. Management expects approximately $65 million of net Affiliate equity repurchases during the remainder of 2020 and anticipates continued investment in Affiliates, capital returns, debt repayment, distributions, and working capital. AMG reported investment-grade ratings of A3 from Moody’s and BBB+ from S&P Global Ratings.
- COVID-19 could reduce market values, assets under management, fee revenue, client demand, and Affiliate valuations. Management specifically noted that worsening markets could result in additional intangible or equity method investment impairments.
- Year-to-date net client outflows were concentrated in alternatives and equity strategies, while demand remained stronger in illiquid alternative, multi-asset, and fixed-income strategies.
- Unfunded commitments to co-invest in Affiliate-sponsored investment products were $129.4 million.
- Expected contingent payments were approximately $53 million, although maximum potential obligations could reach $150.0 million in 2021, $77.5 million in 2022, and $62.5 million from 2023 through 2025.
- Contractual obligations totaled $4.649 billion, including debt, leases, Affiliate equity repurchase obligations, and other obligations. The filing excludes certain co-investment commitments, uncertain tax positions, and potential derivative obligations from this total.
- The company’s effective tax rate attributable to the controlling interest was 31.3% in Q3 and 28.1% for the nine months. Q3 tax expense included a deferred tax charge related to an increase in the U.K. tax rate.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether assets under management and net client flows stabilize, particularly in alternative and equity strategies, and how those trends affect asset-based fees.
- The sensitivity of goodwill, acquired client relationships, and equity method investments to COVID-19, market declines, performance, and further client outflows.
- The company’s ability to manage the higher $2.311 billion debt balance, fixed interest obligations, and long-dated junior subordinated notes while continuing share and Affiliate equity repurchases.
- The timing and amount of contingent Affiliate payments, unfunded investment commitments, and Affiliate equity put obligations.
- The sustainability of operating cash flow, dividends, share repurchases, and the reduced quarterly dividend relative to 2019.
- The reconciliation and comparability of non-GAAP measures, including Adjusted EBITDA and Economic net income, against GAAP results.