AMG

Business Context and Reporting Period

Affiliated Managers Group, Inc. (AMG) filed its Quarterly Report on Form 10-Q for the period ended September 30, 2009. AMG is an asset management company that invests in a diverse group of boutique investment management firms ("Affiliates"). As of September 30, 2009, AMG's Affiliates managed approximately $199.3 billion in assets across three distribution channels: Mutual Fund, Institutional, and High Net Worth.

Key Financial Metrics

EBITDA: $60.5 million (Three Months); $162.9 million (Nine Months).
Cash Net Income (Non-GAAP): $45.6 million (Three Months); $125.8 million (Nine Months).

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 25% ($73.3 million) for the three months and 36% ($337.6 million) for the nine months ended September 30, 2009, compared to the same periods in 2008. This was primarily driven by a 17% and 29% decrease in average assets under management (AUM), respectively, due to declines in global equity markets and negative net client cash flows.
• Net Income Volatility: Net Income (controlling interest) increased 8% for the three-month period but decreased 58% for the nine-month period compared to 2008. The nine-month decline was driven by lower revenue and income from equity method investments, partially offset by lower operating expenses and income taxes.
• Expense Reduction: Operating expenses decreased 19% (three months) and 29% (nine months). Compensation expenses dropped significantly due to the revenue-sharing structure of Affiliates. Selling, general, and administrative expenses fell 47% and 40%, aided by a $6.0 million insurance recovery and the absence of acquisition-related fees incurred in 2008.
• Debt Repayment: AMG repaid the entire outstanding balance of its $233.5 million Term Loan in the first quarter of 2009. The company had no outstanding senior bank debt as of September 30, 2009.
• Acquisition: On August 26, 2009, AMG acquired a majority interest in Harding Loevner LLC. The transaction added $139.2 million in goodwill and $118.6 million in acquired client relationships. Harding Loevner's contribution to revenue and earnings for the quarter was not material.

Guidance, Outlook, and Risks

• Market Sensitivity: AMG's performance is directly tied to global financial markets. A decline in equity markets reduces advisory fees and performance fees. Performance fees, which comprised 2% of revenue in Q3 2009 (down from 6% in Q3 2008), are expected to be a recurring component but vary significantly by period.
• Liquidity and Capital: AMG maintains a strong liquidity position with $225.3 million in cash and a $770 million revolving credit facility (undrawn). The company's internal leverage ratio was 0.5:1 as of September 30, 2009. It is in full compliance with all credit facility covenants (Bank Leverage Ratio: 2.00; Interest Coverage Ratio: 5.02).
• Forward Equity Sales: AMG has entered into three forward equity sale agreements totaling up to $600 million. As of September 30, 2009, $260 million had been sold but not yet settled. Proceeds from these settlements are expected to augment liquidity.
• Contingent Obligations: AMG expects to repurchase approximately $50 million of Affiliate equity in the next twelve months. Additionally, the company has contingent payment obligations of up to $60 million related to the Harding Loevner acquisition payable in late 2009 or early 2010.
• Accounting Changes: The adoption of new accounting standards in 2009 required the bifurcation of convertible debt and the reclassification of non-controlling interests, impacting the presentation of interest expense and equity.

Investor Verification Checklist

• Assets Under Management (AUM) Trends: Verify the impact of negative net client cash flows ($7.1 billion outflows YTD) versus investment performance gains ($39.8 billion YTD) on future revenue stability.
• Performance Fee Realization: Monitor the recovery of performance fees, which dropped significantly in 2009 compared to 2008, as a key driver of margin expansion.
• Convertible Securities: Review the terms of the $460 million 2008 Senior Convertible Notes and $730.8 million Junior Convertible Trust Preferred Securities, noting their conversion prices and potential dilution or cash settlement requirements.
• Harding Loevner Integration: Assess the long-term revenue contribution of the Harding Loevner acquisition and the potential payout of the $60 million contingent consideration.
• Forward Equity Settlements: Track the timing and settlement method (cash vs. stock) of the $260 million in unsettled forward equity sales, which will impact share count and cash balances.