Affiliated Managers Group, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2021, compared with the three months ended March 31, 2020. AMG partners with independent active investment management firms and reported approximately $738.0 billion of aggregate assets under management at quarter-end, up from $599.9 billion.
During the quarter, AMG completed a minority investment in Boston Common Asset Management LLC. On April 30, 2021, after quarter-end, AMG completed a minority investment in OCP Asia Limited.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2021 | Change |
|---|---|---|---|
| Consolidated revenue | $507.3 million | $559.1 million | 10% |
| Income before taxes | $42.2 million | $264.6 million | Significant increase |
| Net income | $40.0 million | $214.1 million | Significant increase |
| Net income attributable to controlling interest | $(15.6) million | $149.9 million | Improved by $165.5 million |
| Diluted EPS | $(0.33) | $3.41 | Improved |
| Adjusted EBITDA attributable to controlling interest | $200.4 million | $246.8 million | 23% |
| Economic net income attributable to controlling interest | $151.3 million | $184.8 million | 22% |
| Economic EPS | $3.16 | $4.28 | 36% |
| Operating cash flow | $85.6 million | $188.9 million | Increase of $103.3 million |
Aggregate fees increased 13% to $1.414 billion, driven primarily by a $143.3 million increase in performance-based fees and an $18.0 million increase in asset-based fees. Average aggregate assets under management increased 11% to $733.6 billion. Net client cash flows were negative $7.5 billion, offset by $24.4 billion of market gains, $4.0 billion of new investments, and $1.4 billion of foreign-exchange effects.
Consolidated expenses increased 7% to $378.5 million. Compensation and related expenses increased 19% to $246.9 million, while selling, general and administrative expenses decreased 13% to $78.8 million. Intangible amortization and impairments declined 64% to $7.5 million. Interest expense increased 41% to $27.5 million.
Equity method income increased to $51.7 million from a loss of $113.2 million. The improvement primarily reflected the absence of a $140.0 million other-than-temporary impairment recorded in Q1 2020 and lower equity-method intangible amortization and impairments. Investment and other income increased to $32.3 million from $2.4 million, primarily due to valuation gains on marketable securities and other investments.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $766.2 million at March 31, 2021, down from $1.040 billion at December 31, 2020, principally due to share repurchases and other financing uses.
- Total debt was $2.303 billion, compared with $2.312 billion at year-end 2020. Debt consisted principally of $349.8 million of senior bank debt, $1.092 billion of senior notes, $304.6 million of junior convertible securities, and $556.4 million of junior subordinated notes.
- The company had no borrowings under its $1.25 billion revolving credit facility. The $350.0 million term loan matures in January 2026; the revolver matures in January 2024.
- AMG reported investment-grade ratings of A3 from Moody’s and BBB+ from S&P Global Ratings and stated that cash, operating cash flows, and potential revolver borrowings should support foreseeable cash needs.
- Financing cash flow used $440.9 million, including approximately $313.3 million returned to shareholders, $102.6 million of distributions to non-controlling interests, $15.0 million of net Affiliate equity purchases, and $15.0 million of junior convertible security repurchases.
Material changes versus the prior comparable period
- Controlling-interest results shifted from a $15.6 million loss to $149.9 million of net income, with diluted EPS increasing from $(0.33) to $3.41.
- Adjusted EBITDA increased 23%, and Economic net income increased 22%, indicating improved underlying operating performance in addition to the reported GAAP recovery.
- Performance-based fees increased materially, while net client flows remained negative, particularly in global and U.S. equity strategies.
- The prior-year period included a $140.0 million equity-method impairment and substantially higher equity-method intangible amortization; these effects materially amplified the year-over-year earnings improvement.
- AMG repurchased 1.6 million common shares during the quarter at an average price of $128.84 and had 5.3 million shares remaining under its repurchase authorizations at March 31, 2021.
- AMG paid $15.0 million to repurchase a portion of its junior convertible securities, reducing carrying debt by $10.3 million.
- The term loan was refinanced in January 2021, reducing the marginal rate by 0.075% to 0.950% and extending maturity by three years.
Guidance, outlook, risks and unusual items
The filing does not provide formal quarterly or full-year earnings guidance. Management expects continued demand for illiquid alternatives, multi-asset and fixed-income strategies, while noting outflows in quantitative, liquid-alternative, and certain equity strategies. Management believes AMG remains positioned to invest in independent managers and benefit from demand for partnership solutions.
- AMG expects net purchases of approximately $100 million of Affiliate equity during the remainder of 2021.
- Unfunded commitments to co-invest in Affiliate-sponsored products were $127.7 million at March 31, 2021.
- Contingent payments tied to Affiliate financial targets totaled $118.0 million, although management expected to pay approximately $13 million. The filing indicates that $40.5 million could become payable in 2022 and $77.5 million from 2023 through 2025.
- Redeemable non-controlling interests increased to $730.6 million. Affiliate equity holders generally have conditional put rights, which may require future cash purchases.
- AMG identified prolonged depressed financial markets, COVID-19 effects, client outflows, investment performance, and potential impairment of goodwill or acquired client relationships as risks.
- Market exposure includes interest-rate and foreign-exchange risk. AMG maintained a $250.0 million interest-rate swap, expiring in March 2023, and certain Affiliates use foreign-currency contracts.
- Lease obligations totaled $29.4 million for the remainder of 2021, $66.1 million for 2022–2023, $48.6 million for 2024–2025, and $63.9 million thereafter.
- Management stated that disclosure controls and procedures were effective and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether performance-based fee growth is sustainable and how much future earnings depend on market levels and investment performance.
- The persistence and composition of negative net client cash flows across equity, quantitative, and liquid-alternative strategies.
- The cash impact and timing of Affiliate equity purchases, put rights, contingent payments, and the $127.7 million of unfunded commitments.
- Debt maturities, interest-rate exposure, and the effect of junior convertible securities on diluted share count and future capital requirements.
- Whether future market declines or Affiliate underperformance could trigger impairments of equity-method investments, goodwill, or client-relationship intangibles.
- The reconciliation and comparability of non-GAAP measures, particularly Adjusted EBITDA and Economic net income, with GAAP earnings.