Affiliated Managers Group, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Global asset management company with equity investments in boutique investment managers. The filing covers the three and six months ended June 30, 2019; financial statements are unaudited and presented in millions except per-share data.
- Assets under management were $772.2 billion at June 30, 2019, down 6% from $824.2 billion a year earlier.
- Average assets under management declined 7% in both the quarter and year-to-date period.
- Management cited continued demand for illiquid alternatives, multi-asset and fixed-income strategies, while reporting outflows in quantitative, liquid-alternative and certain equity strategies.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Consolidated revenue | $591.9 | $600.1 | $1,135.1 | $1,212.6 |
| Net income | $180.2 | $205.2 | $47.2 | $429.3 |
| Net income (loss), controlling interest | $107.7 | $117.0 | $(93.1) | $270.0 |
| Diluted EPS | $2.11 | $2.16 | $(1.81) | $4.92 |
| Adjusted EBITDA, controlling interest | $219.3 | $246.2 | $434.8 | $532.7 |
| Economic net income, controlling interest | $170.1 | $195.6 | $339.1 | $410.9 |
| Operating cash flow | Not separately provided | Not separately provided | $309.2 | $577.3 |
Controlling-interest net margin was approximately 18.2% in Q2 2019 versus 19.5% in Q2 2018. The six-month controlling-interest margin was approximately negative 8.2%, compared with 22.3% in the prior-year period. Adjusted EBITDA margin was approximately 37.0% for Q2 and 38.3% year to date; these are non-GAAP measures.
- Aggregate fees declined 9% to $1,163.1 million in Q2 and 18% to $2,415.1 million year to date. The decrease reflected lower average assets, lower asset-based fee ratios and weaker year-to-date performance-based fees.
- Equity method income was $29.4 million in Q2, down 17%; year-to-date equity method income was a loss of $328.8 million, versus income of $131.6 million.
- Cash flow from operations was $309.2 million year to date, down $268.1 million, primarily because distributions received from equity method investments fell by $171.9 million.
- Cash and cash equivalents were $360.0 million at June 30, 2019, versus $565.5 million at December 31, 2018. Net cash decreased $202.9 million during the first six months.
Balance sheet, debt and liquidity
- Total debt was $1,791.4 million at June 30, 2019, comprising approximately $449.7 million of senior bank debt, $743.1 million of senior notes, $309.0 million of junior convertible securities and $289.6 million of junior subordinated notes.
- The amended credit facilities include a $1.25 billion senior unsecured revolving facility maturing in 2024 and a $450.0 million term loan maturing in 2023. The company reported $1.25 billion of available revolver capacity and compliance with its covenants.
- In early 2019, the company issued $300.0 million of 5.875% junior subordinated notes due 2059 and used most proceeds to repay revolver borrowings.
- Management stated that operating cash flow, revolver borrowings and potential debt or equity-market access should be sufficient for foreseeable cash needs. Credit ratings were A3 from Moody’s and A- from S&P.
- Contractual obligations totaled $3.50 billion, including debt, interest, leases and affiliate equity repurchase obligations. This excludes $139.3 million of unfunded co-investment commitments and certain other potential obligations.
Material changes versus the prior comparable period
- Q2 revenue decreased 1%, while year-to-date revenue decreased 6%. Consolidated revenue benefited from higher performance-based fees in Q2, which partly offset lower asset-based fees.
- Q2 controlling-interest net income declined 8%; year-to-date controlling-interest results shifted from $270.0 million of income to a $93.1 million loss.
- Adjusted EBITDA declined 11% in Q2 and 18% year to date, principally because of lower aggregate fees and relatively fixed expense bases at certain equity method Affiliates.
- During the first quarter, the company recorded a $415.0 million pre-tax, non-cash impairment to reduce the carrying value of a U.S. credit alternative Affiliate to fair value. The impairment was driven by underperformance, redemptions and reduced fundraising expectations.
- Cash distributions from equity method investments fell materially, and the company made $141.8 million of net common-stock repurchases, paid $33.4 million of common dividends and distributed $192.7 million to non-controlling interests during the first six months.
- The company adopted the new lease standard, recording a $190.8 million lease liability and a $163.6 million right-of-use asset at January 1, 2019.
Guidance, outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided in the filing.
- Management expects to repurchase approximately $150 million of Affiliate equity during 2019 and identified investments in Affiliates, share repurchases, distributions, debt repayment, dividends and working capital as principal uses of cash.
- Unfunded commitments to co-invest in Affiliate-sponsored investment products were $139.3 million and may be called in future periods.
- The company was contingently liable for a potential $150.0 million payment through 2020 tied to specified Affiliate financial targets, although management expected no payment as of June 30, 2019.
- Affiliate equity holders have conditional put rights, creating potential future repurchase obligations. Reported redeemable non-controlling interests were $727.2 million.
- Key risks include declining assets under management, client outflows, investment performance, fee compression, performance-fee volatility, impairment of Affiliate investments, foreign-exchange exposure, interest-rate and refinancing risk, and valuation uncertainty in equity method Affiliates.
- The company uses pound sterling-denominated forwards and option collars to hedge foreign-currency exposure related to certain Affiliate investments. Derivative arrangements require collateral and could be affected by counterparty or market movements.
- On July 5, 2019, after quarter-end, the company completed a minority investment in Garda Capital Partners LP.
Important facts for investors to verify
- Whether assets under management and net client flows stabilize, particularly in alternatives, global equities and quantitative strategies.
- The sustainability of performance-based fees and the effect of lower fee ratios on future revenue.
- The valuation and operating recovery prospects of the impaired U.S. credit alternative Affiliate, including assumptions used in future impairment testing.
- Cash distributions from equity method Affiliates and the company’s ability to fund repurchases, dividends, Affiliate investments and debt obligations.
- Future Affiliate equity put exercises, co-investment commitments and the potential $150.0 million contingent payment.
- Debt maturities, variable-rate exposure, revolver utilization and the terms of the 5.875% junior subordinated notes.