Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is a global asset management company that invests in boutique investment management firms and reports across Mutual Fund, Institutional, and High Net Worth distribution channels. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, with comparisons to the same periods in 2011. AMG reported $416.1 billion of assets under management at quarter-end, up 36% year over year.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $467.3 million | $413.8 million | $1,314.5 million | $1,302.4 million |
| Operating income | $139.7 million | $126.0 million | $273.5 million | $390.9 million |
| Operating margin | 29.9% | 30.5% | 20.8% | 30.0% |
| Net income | $118.1 million | $80.1 million | $272.0 million | $270.5 million |
| Net income attributable to controlling interest | $54.9 million | $40.1 million | $98.9 million | $124.6 million |
| Diluted EPS | $1.04 | $0.76 | $1.87 | $2.34 |
| Economic net income | $101.2 million | $82.1 million | $272.3 million | $258.5 million |
| Economic EPS | $1.91 | $1.55 | $5.15 | $4.86 |
| Operating cash flow | $211.1 million | $242.2 million | $447.1 million | $549.9 million |
Q3 controlling-interest net margin was approximately 11.7%, compared with 9.7% in Q3 2011. Nine-month controlling-interest net margin was approximately 7.5%, compared with 9.6% in the prior-year period. EBITDA was $133.5 million in Q3 and $361.2 million for the first nine months, compared with $112.9 million and $355.0 million, respectively, in the comparable periods.
- Revenue growth in Q3 was driven by higher average assets under management, investment performance, and new Affiliate investments, partly offset by lower average fee rates.
- Q3 revenue increased 13%; nine-month revenue increased 1%.
- Q3 operating expenses increased 14% to $327.6 million. Nine-month operating expenses increased 14% to $1,041.0 million.
- Income from equity method investments increased to $19.4 million in Q3 and $47.3 million for nine months, from $9.8 million and $40.1 million, respectively.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $372.6 million at September 30, 2012, down from $449.5 million at December 31, 2011.
- Nine-month operating cash flow was $447.1 million. Investing cash flow used $747.9 million, primarily for $755.3 million of investments in Affiliates. Financing cash flow provided $220.5 million.
- Senior bank debt increased to $445.0 million from $250.0 million at year-end. Senior notes totaled $200.0 million, and carrying values of senior and junior convertible securities were $446.5 million and $514.8 million, respectively.
- AMG had a $1.075 billion senior unsecured credit facility, with $630.0 million of remaining capacity at September 30, 2012. The company stated that approximately $580.0 million could be borrowed while remaining in compliance with its credit agreement.
- Internal and bank leverage ratios were 2.0:1, and bank interest coverage was 7.7x, versus covenant limits of 3.0x and a minimum of 3.0x. AMG was in compliance with its covenants.
- In October 2012, AMG issued $140.0 million of 5.25% Senior Notes due 2022 and used proceeds from the 2022 and 2042 Senior Notes to repay revolver borrowings.
Material Changes Versus Prior Comparable Period
- Q3 revenue increased $53.5 million, or 13%, while operating income increased 11% to $139.7 million. Q3 diluted EPS increased 37% to $1.04.
- Nine-month controlling-interest net income declined 21% and diluted EPS declined 20%, primarily because of a $102.2 million impairment of an indefinite-lived intangible asset recognized in the first half of 2012.
- The nine-month results also benefited from a $57.3 million gain from reducing estimated contingent payment obligations, including $39.6 million attributable to the controlling interest.
- Excluding the intangible impairment and contingent-payment valuation adjustment, management reported nine-month controlling-interest net income of $137.8 million and diluted EPS of $2.61.
- AMG completed majority investments in Veritable and Yacktman in June 2012 and an additional minority investment in BlueMountain in July 2012. New Affiliate investments contributed $43.2 million of revenue and $7.0 million of earnings for the nine months.
- Assets under management increased from $327.5 billion at December 31, 2011 to $416.1 billion at September 30, 2012, reflecting new investments, investment performance, and net client cash flows of $25.1 billion.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects principal future cash uses to include new and existing Affiliate investments, contingent payment settlements, distributions to Affiliate partners, debt service, and working capital.
- Management stated that operating cash flow, credit-facility borrowings, and proceeds from forward equity contracts are expected to be sufficient for foreseeable cash needs; no formal earnings guidance was provided.
- AMG expects approximately $85.4 million of contingent-payment settlements and approximately $100.0 million of Affiliate equity repurchases during 2012.
- Past acquisition agreements could require contingent payments of up to $755.5 million through 2017. Expected settlement amounts were $279.5 million at September 30, 2012, including $85.4 million expected in the fourth quarter.
- AMG had $75.1 million of unfunded co-investment commitments related to Pantheon Ventures; the former owner was obligated to reimburse $39.5 million if called.
- The 2008 senior convertible notes have a potential holder put right in August 2013 for $460.0 million of principal. The company stated it expects to fund such obligations with credit-facility borrowings if necessary.
- Forward equity contracts totaling $136.8 million at an average share price of $121.19 remained outstanding at quarter-end; an additional $10.4 million was contracted in October 2012.
- Key risks include exposure to global and equity-market conditions, changes in assets under management and fee rates, investment performance, difficulty executing additional Affiliate investments, financing availability, leverage, contingent obligations, and potential future intangible impairments.
- AMG’s BBB- ratings from Standard & Poor’s and Fitch remained in effect. Interest-rate swaps covered a portion of floating-rate debt, with a $4.3 million unrealized loss at quarter-end.
Investor Verification Checklist
- Verify the sustainability of the 36% assets-under-management growth and the impact of market performance versus acquisitions and organic flows.
- Assess normalized earnings excluding the $102.2 million intangible impairment and $57.3 million contingent-payment gain.
- Review fee-rate compression and the effect of changing product mix on future revenue margins.
- Monitor leverage, revolver repayment following the October 2022 and 2042 note issuances, and the August 2013 convertible-note put right.
- Evaluate the timing and ultimate amount of contingent acquisition payments, Affiliate equity repurchases, co-investment commitments, and forward equity settlements.
- Review the valuation assumptions supporting indefinite-lived intangible assets, contingent payment obligations, and Level 3 investments.