AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: AMG is an asset management company with equity investments in a diverse group of boutique investment management firms ("Affiliates"). As of June 30, 2009, the company managed approximately $173.8 billion in assets across three distribution channels: Mutual Fund, Institutional, and High Net Worth.

Key Financial Metrics

Note: Operating margins are not explicitly stated as a percentage in the text, but operating income represents approximately 24.7% of revenue for the three months ended June 30, 2009.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 35% ($107.8 million) for the three months and 41% ($264.3 million) for the six months ended June 30, 2009, compared to the same periods in 2008. This was primarily driven by a 33% to 35% decrease in average assets under management due to global equity market declines and negative net client cash flows.
• Profitability Drop: Net Income attributable to the controlling interest fell 68% for the quarter and 74% year-to-date compared to 2008, mirroring the revenue decline.
• Expense Reduction: Total operating expenses decreased 26% for the quarter and 33% year-to-date. Compensation and related expenses dropped 27% and 36%, respectively, largely due to the revenue-sharing structure of Affiliates which ties expenses to revenue.
• Debt Repayment: The company repaid the entire outstanding balance of its $233.5 million Term Loan in the first quarter of 2009. As of June 30, 2009, there were no outstanding borrowings under the senior bank debt facility.
• Assets Under Management (AUM): Ending AUM was $173.8 billion, a 2% increase from year-end 2008, despite negative net flows of $6.0 billion year-to-date, offset by positive investment performance of $14.4 billion.

Guidance, Outlook, and Risks

• Acquisition Activity: On July 29, 2009, AMG announced an agreement to acquire a majority interest in Harding Loevner LLC, expected to close in the third quarter of 2009. The company expects to make approximately $150 million in payments in 2009 related to this acquisition and contingent obligations from past agreements.
• Liquidity and Capital: The company maintains a $770 million revolving credit facility with no outstanding borrowings. Management expects to repurchase approximately $50 million of Affiliate equity in the next twelve months. The internal leverage ratio (debt to EBITDA) was 0.5:1 as of June 30, 2009.
• Forward Equity Sales: AMG entered into a new forward equity sale agreement in July 2009 to sell up to $200 million of common stock. A previous agreement from May 2009 for $200 million had been fully sold but not yet settled.
• Risks: Performance is directly affected by global financial market conditions. A decline in equity markets reduces advisory fees and performance fees. The company also faces risks related to the success of new investments and the ability to raise capital on acceptable terms.
• Accounting Changes: The company adopted several new accounting standards in 2009 (including APB 14-1 and FAS 160), which affected the presentation of convertible debt, non-controlling interests, and income tax provisions.

Key Facts for Investor Verification

• Revenue Sensitivity: Verify the correlation between the 35% drop in average AUM and the 41% drop in revenue, noting that performance fees (which are volatile) comprised only 3% of revenue in the first half of 2009 compared to 6% in 2008.
• Debt Structure: Confirm the status of the $451 million in Senior Convertible Securities and $506 million in Junior Convertible Trust Preferred Securities, noting that while senior bank debt was retired, these long-term obligations remain.
• Non-GAAP Measures: Review the "Cash Net Income" metric ($42.4 million for the quarter, $80.1 million for six months), which adds back amortization and deferred taxes, to understand management's view of operating performance versus GAAP Net Income.
• Contingent Liabilities: Assess the potential cash outflow of up to $234 million through 2012 related to contingent payments on past acquisitions, with approximately $150 million expected in 2009.
• Equity Method Investments: Note that income from equity method investments (unconsolidated Affiliates) decreased 50% year-to-date, representing a significant portion of the company's total earnings profile.