Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. AMG is a global asset management company that invests in boutique investment management firms and operates through Mutual Fund, Institutional, and High Net Worth distribution channels. Assets under management were $384.6 billion at June 30, 2012, up 10% from June 30, 2011.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2011 | 2012 | 2011 | 2012 | |
| Revenue | $462.3 million | $429.6 million | $888.5 million | $847.2 million |
| Operating income | $140.0 million | $25.0 million | $264.9 million | $133.8 million |
| Operating margin | 30.3% | 5.8% | 29.8% | 15.8% |
| Net income | $101.0 million | $60.9 million | $190.4 million | $153.9 million |
| Net income attributable to controlling interest | $45.5 million | $6.6 million | $84.5 million | $44.0 million |
| Diluted EPS | $0.85 | $0.12 | $1.59 | $0.83 |
| Economic net income | $91.3 million | $87.6 million | $176.3 million | $171.1 million |
| EBITDA | $123.8 million | $113.7 million | $242.0 million | $227.8 million |
| Operating cash flow | $179.4 million | $183.4 million | $307.7 million | $236.0 million |
Revenue declined 7% in the second quarter and 5% year to date. Management attributed the decline primarily to lower average assets under management at consolidated Affiliates, lower average fee rates, and reduced performance fees. Economic net income declined only 4% in the quarter and 3% year to date, excluding specified non-cash acquisition-related items.
Cash and cash equivalents declined from $449.5 million at December 31, 2011 to $311.0 million at June 30, 2012. Six-month investing cash flow was negative $393.9 million, principally reflecting $405.3 million invested in Affiliates. Financing cash flow was positive $18.2 million, including $195.0 million of senior bank debt borrowings, $60.9 million of common-stock repurchases, and $119.6 million of distributions to non-controlling interests.
At June 30, 2012, total assets were $5.615 billion, total liabilities were $2.396 billion, and total equity was $2.737 billion. Senior bank debt was $445.0 million; senior convertible securities had a carrying value of $442.8 million, and junior convertible trust preferred securities had a carrying value of $514.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $32.7 million, or 7%, in the quarter and $41.3 million, or 5%, for the first six months.
- Operating expenses increased 26% in the quarter and 14% year to date, primarily because of a $93.5 million second-quarter and $102.2 million year-to-date impairment and reclassification of an indefinite-lived intangible asset.
- Controlling-interest net income decreased 85% in the quarter and 48% year to date. Excluding the intangible impairment and gains from reduced contingent payment estimates, management reported controlling-interest net income of $43.1 million for the quarter and $82.9 million year to date.
- AMG recognized gains of $47.4 million in the quarter and $57.3 million year to date from lowering estimated contingent acquisition payments. The controlling-interest portions were $34.6 million and $39.6 million, respectively.
- AMG completed majority investments in Veritable and Yacktman on June 29, 2012, for consideration paid of $116.8 million and $301.0 million, respectively. The investments added approximately $28.0 billion of assets under management but contributed no significant revenue or earnings during the quarter.
- AMG repurchased 0.6 million common shares for $60.9 million during the first six months, at an average price of $107.47 per share. Approximately 2.3 million shares remained authorized for repurchase at June 30.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expects principal future cash uses to include investments in new and existing Affiliates, distributions to Affiliate partners, debt service, contingent acquisition payments, Affiliate equity repurchases, and working capital. Management expected approximately $43.2 million of contingent payment settlements and approximately $50.0 million of Affiliate equity repurchases during 2012.
Management stated that operating cash flow, borrowings under the credit facility, proceeds from the subsequent senior-notes offering, and any future forward-equity proceeds should be sufficient to support foreseeable cash needs. No formal earnings guidance was provided.
At June 30, AMG had a $1.0 billion senior unsecured credit facility, $555.0 million of remaining capacity, and was in compliance with all covenants. The bank leverage ratio was 1.8 versus a maximum of 3.0, and the bank interest-coverage ratio was 7.7 versus a minimum of 3.0. In July 2012, the revolver commitment increased by $75.0 million to $825.0 million.
Subsequent to quarter-end, AMG completed an investment in BlueMountain Capital Management, issued $200.0 million of 6.375% senior notes due 2042, and amended its forward-equity sale agreement to permit sales of up to $400.0 million. No forward-equity sales had occurred as of August 7, 2012. The senior-notes proceeds were intended primarily to repay revolver borrowings.
- Results remain sensitive to global financial markets, investment performance, assets under management, client cash flows, fee rates, and performance fees.
- The impaired mutual-fund intangible asset was valued using Level 3 discounted-cash-flow assumptions, including approximately 10% annual asset declines and a 15% discount rate. Further impairments are possible if projected cash flows deteriorate.
- Acquisition-related contingent payment obligations had a maximum potential settlement of approximately $568.1 million through 2017; expected payments were $95.8 million, with a present value of $65.7 million at June 30, 2012.
- AMG had $73.0 million of unfunded co-investment commitments related to Pantheon Ventures, although Russell Investments was contractually obligated to reimburse $39.8 million if called.
- The 2008 senior convertible notes include a holder put right in August 2013 for $460.0 million of principal.
- The company reported $27.1 million of liabilities for uncertain tax positions and stated that tax examinations and settlements remain uncertain.
Facts Investors Should Verify
- Reconcile GAAP controlling-interest earnings and EPS with management’s non-GAAP Economic net income and adjusted earnings figures.
- Review the assumptions supporting the $102.2 million intangible impairment and assess the risk of additional impairments.
- Monitor assets under management, consolidated average assets, net client flows, fee rates, and performance-fee trends, particularly in the Mutual Fund channel.
- Confirm the effect of the Veritable, Yacktman, and BlueMountain investments on future revenue, cash flow, leverage, and non-controlling interests.
- Assess liquidity after the Affiliate acquisitions, share repurchases, distributions, contingent payments, and subsequent debt issuance.
- Review the August 2013 put and conversion provisions of the senior convertible notes and the company’s plans for refinancing or settlement.
- Verify future contingent acquisition payments, Affiliate equity repurchase requirements, tax contingencies, and the Pantheon co-investment commitment.