Affiliated Managers Group, Inc. — Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company with equity investments in boutique investment management firms. It operates through Institutional, Mutual Fund, and High Net Worth distribution channels. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Assets under management increased 29% year over year to $606.8 billion at June 30, 2014, driven by $80.2 billion of investment performance, $29.5 billion from new investments, and $29.5 billion of net client cash flows.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | |
| Revenue | $541.0 million | $636.3 million | $1,043.3 million | $1,229.4 million |
| Operating income | $161.4 million | $198.4 million | $311.9 million | $392.4 million |
| Operating margin | 29.8% | 31.2% | 29.9% | 31.9% |
| Net income | $134.2 million | $179.0 million | $264.0 million | $338.4 million |
| Net income attributable to controlling interest | $64.7 million | $100.1 million | $127.1 million | $177.2 million |
| Diluted EPS | $1.18 | $1.77 | $2.33 | $3.17 |
| Economic net income | $121.1 million | $149.8 million | $245.4 million | $287.7 million |
| EBITDA attributable to controlling interest | $173.0 million | $211.9 million | $348.0 million | $403.8 million |
- Revenue increased 18% in both the quarter and first half, primarily from higher average assets under management at consolidated Affiliates.
- Quarterly controlling-interest net income increased 55%; first-half controlling-interest net income increased 39%. Diluted EPS increased 50% and 36%, respectively.
- Operating expenses increased 15% in the quarter and 14% year to date. Compensation increased 16% and 13%, while selling, general and administrative expense increased 23% and 28%, respectively.
- Income from equity method investments increased 56% in the quarter and 18% year to date. First-half growth was moderated by lower performance fees compared with 2013.
- Cash flow from operating activities was $625.9 million for the first half, compared with $464.8 million in 2013. Investing cash flow was $(545.5) million, principally reflecting $534.0 million invested in Affiliates. Financing cash flow was $(179.0) million.
- Cash and cash equivalents declined from $469.6 million at December 31, 2013 to $374.2 million at June 30, 2014.
Balance sheet, debt, and liquidity
- Total assets were $6.730 billion at June 30, 2014, up from $6.319 billion at December 31, 2013. Goodwill increased to $2.491 billion and acquired client relationships increased to $1.610 billion, primarily from new Affiliate investments.
- Reported debt included $300.0 million of senior bank debt, $736.6 million of senior notes, and $302.2 million of convertible securities. The debt balances reflect refinancing and conversion activity during the period.
- AMG had a $1.25 billion senior unsecured revolving credit facility maturing in April 2018. Outstanding borrowings under the facility were $50.0 million at June 30, 2014, and the company also had a $250.0 million five-year senior unsecured term loan. Management stated that the company was in compliance with its debt covenants and could borrow approximately $1.2 billion under the revolving facility while remaining compliant.
- AMG issued $400.0 million of 4.25% senior notes due 2024 and used the proceeds primarily to repay existing borrowings and for general corporate purposes.
- Operating cash flow and additional borrowing capacity were identified as the principal sources of liquidity. Expected uses include Affiliate investments, distributions to Affiliate partners, debt service, potential Affiliate equity repurchases, and working capital.
Material changes versus the prior comparable period
- AMG completed majority investments in SouthernSun Asset Management and River Road Asset Management and an equity investment in EIG Global Energy Partners. These transactions had a provisional enterprise value of $356.9 million and added $150.0 million of goodwill and $195.9 million of acquired client relationships.
- New Affiliate investments contributed $12.5 million of revenue and $1.2 million of earnings during the first six months of 2014.
- AMG announced a planned majority investment in Veritas Asset Management LLP, expected to close in the third quarter of 2014.
- The company issued 1.9 million common shares when substantially all holders converted the 2006 junior convertible securities. AMG recorded an $18.8 million expense related to the settlement during the first quarter.
- Interest expense declined 18% in the quarter and 22% year to date, primarily because of the settlement of prior convertible securities, partly offset by interest on the new 2024 senior notes.
- Intangible amortization and impairments declined 14% in the quarter and 15% year to date, although future amortization remains significant; annual consolidated amortization was estimated at approximately $120.0 million for each of the next five years.
Outlook, risks, contingencies, and unusual items
- Management expects cash flows from operations, revolver borrowings, and potential forward equity transactions to support foreseeable cash requirements. No formal earnings guidance was provided.
- Management expects to repurchase approximately $75.0 million of Affiliate equity during 2014; no such payments were expected for contingent arrangements in 2014.
- Unfunded co-investment commitments were $70.9 million at June 30, 2014, with a contractual reimbursement right for $26.6 million from a prior owner if specified commitments are called.
- AMG may be required to make contingent payments of up to $524.1 million through 2017 upon achievement of specified financial targets. The company reported expected payments of $75.0 million related to consolidated Affiliates, with a $55.1 million net present value.
- The business is exposed to global financial-market and equity-market conditions, which can affect assets under management, advisory fees, performance fees, earnings, and cash distributions from Affiliates.
- Other risks include execution risk from new Affiliate investments, financing and dilution risk, regulatory and tax changes, performance-fee variability, foreign currency exposure, and valuation uncertainty for Level 3 investments and contingent obligations.
- The purchase price allocations for SouthernSun, River Road, and EIG were provisional and may change based on final valuations, market performance, client flows, and discount-rate assumptions.
- Management stated that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether assets under management, net client flows, investment performance, and performance fees remain strong enough to support revenue growth.
- The final purchase price allocations and contribution from SouthernSun, River Road, EIG, and the pending Veritas transaction.
- Debt maturities, interest-rate exposure, covenant compliance, and the effects of the 2024 senior notes and term loan on future interest expense.
- The timing and cash impact of Affiliate equity repurchases, contingent payments, co-investment commitments, and other non-controlling-interest distributions.
- The sustainability of reported GAAP earnings versus non-GAAP Economic net income and EBITDA, including the effect of amortization, deferred taxes, contingent arrangements, and equity-based compensation.
- Potential changes in the valuation of goodwill, acquired client relationships, Level 3 investments, and related-party obligations.