Business Context and Reporting Period
Affiliated Managers Group, Inc. is a global asset management company that invests in boutique investment management firms and provides strategic, marketing, distribution, product development and operational support. At June 30, 2018, assets under management were $824.2 billion across more than 550 investment products. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the same periods in 2017.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2017 | 2018 | 2017 | 2018 | |
| Consolidated revenue | $570.9 million | $600.1 million | $1,115.2 million | $1,212.6 million |
| Net income | $204.4 million | $205.2 million | $398.0 million | $429.3 million |
| Net income attributable to controlling interest | $126.3 million | $117.0 million | $248.8 million | $270.0 million |
| Diluted EPS | $2.22 | $2.16 | $4.35 | $4.92 |
| Adjusted EBITDA attributable to controlling interest | $254.8 million | $246.2 million | $498.6 million | $532.7 million |
| Economic net income attributable to controlling interest | $188.7 million | $195.6 million | $371.9 million | $410.9 million |
| Operating cash flow | Not separately provided for quarter | $444.0 million | $577.3 million |
- Second-quarter consolidated revenue increased 5%; first-half revenue increased 9%.
- Second-quarter net margin was approximately 34.2%, compared with 35.8% in the prior-year quarter. Controlling-interest net margin was approximately 19.5%, compared with 22.1%.
- First-half net margin was approximately 35.4%, compared with 35.7% in 2017. Controlling-interest net margin was approximately 22.3% in both periods.
- Average assets under management increased 9% to $829.8 billion in the quarter and 11% to $834.7 billion for the six-month period.
- Aggregate fees increased 5% to $1,284.0 million in the quarter and 13% to $2,932.7 million for the six months. Growth reflected higher average assets and performance fees, partly offset by lower fee ratios.
- Cash and cash equivalents declined from $439.5 million at December 31, 2017 to $392.8 million at June 30, 2018.
- At June 30, 2018, senior debt was $1,581.0 million and convertible securities were $311.2 million. Total liabilities were $3,179.6 million.
- The company had approximately $1 billion of remaining revolver capacity and was in compliance with its credit-facility covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher asset-based fees and average assets under management, particularly in alternatives and global equities.
- Second-quarter controlling-interest net income declined 7%, despite higher revenue, primarily because of a $33.3 million expense to reduce the carrying value of an equity-method Affiliate to zero. The after-tax impact was $25.0 million.
- Equity method income declined 53% in the quarter to $35.3 million, principally because of the Affiliate write-down and higher equity-method intangible amortization. For the six months, equity method income declined 18% to $131.6 million.
- Selling, general and administrative expense increased 18% in the quarter and 19% year to date, reflecting higher Affiliate-related and distribution-related expenses, including presentation effects from the new revenue-recognition standard.
- Interest expense declined 7% in the quarter and 6% year to date because of lower borrowing costs following the 2017 redemption of senior notes and the 2018 term-loan refinancing.
- The effective tax rate attributable to the controlling interest declined to 21.3% in the quarter and 25.5% year to date, compared with 32.5% and 32.3%, respectively, primarily reflecting U.S. tax-law changes enacted in December 2017.
- Operating cash flow increased $133.3 million to $577.3 million for the six months, primarily due to increased distributions from equity-method investments.
- Financing cash outflows increased to $595.8 million, including $323.9 million of common-stock repurchases and $205.3 million of distributions to non-controlling interests.
Outlook, Risks, Contingencies and Unusual Items
- Management expects cash flows from operations, revolver borrowings and potential equity-distribution-program proceeds to fund foreseeable cash needs, including debt repayments, Affiliate investments, equity repurchases, distributions and dividends.
- Management reported continued demand for alternatives, multi-asset and global-equity strategies, but noted industry-wide pressure and outflows in U.S. equity strategies and fee-rate reductions at certain products.
- The company expects to repurchase approximately $125.0 million of Affiliate equity during 2018. The current redemption value of Affiliate equity was $953.5 million at June 30, 2018.
- Unfunded commitments to co-invest in Affiliate-sponsored investment products were $122.8 million and may be called in future periods.
- Expected payments under contingent arrangements for consolidated Affiliates were $4.5 million, including $2.5 million expected in 2018; maximum potential payments for equity-method Affiliates were $170.0 million, although no payments were expected.
- A minority owner of an equity-method Affiliate has a right to sell a portion of its interest to the company annually beginning in the fourth quarter of 2018 at fair market value.
- On July 13, 2018, the company converted its $385.0 million term loan to a £290.0 million sterling-denominated facility after a $1.5 million repayment. The loan was designated as a net investment hedge.
- The company remains exposed to market performance, client cash flows, fee compression, foreign exchange, performance-fee variability, Affiliate valuation and investment losses. A 1% change in pound sterling and Canadian dollar exchange rates was estimated to affect stockholders’ equity by approximately $12 million and $2 million, respectively.
- The company adopted revenue-recognition and financial-instrument standards in 2018 without a significant reported financial-statement impact. It is evaluating the future lease and derivative-accounting standards.
Investor Verification Items
- Verify the sustainability of asset growth and net client cash flows, particularly in alternatives and global equities, versus continuing U.S. equity outflows.
- Assess the recurring earnings impact of the $33.3 million Affiliate write-down and elevated intangible amortization.
- Reconcile GAAP controlling-interest earnings with Adjusted EBITDA and Economic net Income, both of which are non-GAAP measures.
- Monitor fee-rate compression, distribution spending and other expense growth relative to assets under management and aggregate fees.
- Review debt maturities, covenant compliance, revolver availability and the effect of sterling-denominated debt and foreign-exchange movements.
- Evaluate potential cash requirements from Affiliate equity redemptions, the $122.8 million of unfunded commitments, contingent payments and the minority-owner put right.
- Confirm the final accounting impact of the 2017 U.S. tax-law changes, which management expected to complete by the fourth quarter of 2018.