AGF Management Limited Reports Third Quarter Financial Results
AGF reports earnings per share of $0.11; continued improvement in retail sales
TORONTO, Sept. 25, 2013 /CNW/ - AGF Management Limited (AGF or the Company) today announced financial results for the third quarter ended August 31, 2013, reporting diluted earnings per share (EPS) from continuing operations of $0.11 per share compared to a diluted loss of $0.20 per share for the three months ended August 31, 2012. Excluding one-time charges recorded in the third quarter of 2012, the adjusted diluted EPS for the three months ended August 31, 2012 was $0.11.
Total assets under management (AUM) were $36.4 billion as of August 31, 2013, compared to $41.2 billion as of August 31, 2012. Total retail fund AUM, including retail pooled funds, were $18.9 billion as of August 31, 2013, compared to $20.6 billion as of August 31, 2012. Institutional and sub-advisory AUM were $13.8 billion as of August 31, 2013, compared to $17.3 billion as of August 31, 2012. High-net-worth AUM increased 9.0% to $3.7 billion, compared to $3.4 billion for the corresponding period in 2012.
Retail redemption levels for the quarter continued to improve, declining 15.8% from the second quarter of 2013 and 11.2% lower than 2012 levels. Gross sales were 36.2% higher than 2012 levels, resulting in a 35.4% decline in net redemptions year over year. Contributing to this decline was the strong gross sales performance of AGF Floating Rate Income Fund with $88.0 million in sales during the quarter and over $285.0 million since the fund's launch in August 2012. During the quarter, we launched AGF U.S. AlphaSector Class, a fund that offers clients exposure to U.S. equities with a managed volatility overlay. We also expect to launch our UCITS (Undertakings for Collective Investment in Transferable Securities) platform this fall, a co-mingled pooled fund structure that will allow us to market to the institutional and sub-advisory markets in Europe.
"We continue to focus on our strategic priorities and we are encouraged by the early success of our new products and platforms. With $360.0 million in cash, our balance sheet remains strong. We remain well positioned to take advantage of the improving economic climate and demand for global mandates," said AGF Chairman and Chief Executive Officer Blake C. Goldring.
Revenue from continuing operations was $117.7 million for the three months ended August 31, 2013, compared to $119.8 million for the three months ended August 31, 2012, driven primarily by lower AUM levels. Earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations increased to $38.6 million, compared to $36.3 million in the third quarter of 2012. Adjusted for one-time restructuring and impairment charges incurred in the third quarter of 2012, EBITDA declined 8.5%, reflecting lower revenue levels. For the three months ended August 31, 2013, net income from continuing operations was $10.1 million compared to a loss of $19.3 million for the three months ended August 31, 2012. Considering the one-time charges recorded in the third quarter of 2012, the adjusted net income was $10.7 million for the three months ended August 31, 2012.
In keeping with our commitment to return value to shareholders, dividends paid, including dividends reinvested, on Class A Voting common shares and Class B Non-Voting shares were $23.5 million in the third quarter of 2013. For the three months ended August 31, 2013, AGF declared a 27 cent per share dividend on Class A Voting common shares and Class B Non-Voting shares. During the quarter, under the current normal course issuer bid, 873,400 Class B Non-Voting shares were repurchased for a total consideration of $9.8 million.
CONFERENCE CALL
AGF will host a conference call to review its earnings results today at 11 a.m. ET. The live audio webcast with supporting materials will be available in the Investor Relations section of AGF's website at www.agf.com or at http://www.media-server.com/m/p/djg2e5yy. Alternatively, the call can be accessed toll-free in North America by dialing 1-800-447-0521 (Passcode #: 35617059).A complete archive of this discussion along with supporting materials will be available at the same webcast address within 24 hours of the end of the conference call.
ABOUT AGF MANAGEMENT LIMITED
AGF Management Limited is one of Canada's premier independent investment management firms with offices across Canada and subsidiaries around the world. AGF's products include a diversified family of award-winning mutual funds, mutual fund wrap programs and pooled funds. AGF also manages assets on behalf of institutional investors including pension plans, foundations and endowments as well as for private clients. With over $36 billion in total assets under management, AGF serves more than one million investors. AGF trades on the Toronto Stock Exchange under the symbol AGF.B.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis (MD&A) includes forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as 'expects,' 'anticipates,' 'intends,' 'plans,' 'believes' or negative versions thereof and similar expressions, or future or conditional verbs such as 'may,' 'will,' 'should,' 'would' and 'could.' In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future action on our part, is also a forward-looking statement. Forward-looking statements are based on certain factors and assumptions, including expected growth, results of operations, business prospects, business performance and opportunities. While we consider these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about our operations, economic factors and the financial services industry generally. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by us due to, but not limited to, important risk factors such as level of assets under our management, volume of sales and redemptions of our investment products, performance of our investment funds and of our investment managers and advisors, competitive fee levels for investment management products and administration, and competitive dealer compensation levels and cost efficiency in our investment management operations, as well as interest and foreign-exchange rates, taxation, changes in government regulations, unexpected judicial or regulatory proceedings, and our ability to complete strategic transactions and integrate acquisitions. We caution that the foregoing list is not exhaustive. The reader is cautioned to consider these and other factors carefully and not place undue reliance on forward-looking statements. Other than specifically required by applicable laws, we are under no obligation (and expressly disclaim any such obligation) to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise. For a more complete discussion of the risk factors that may impact actual results, please refer to the 'Risk Factors and Management of Risk' section of the 2012 Annual MD&A.
Dear fellow shareholders,
Global equity markets were mixed during the quarter. U.S. equity markets continued to outperform and European markets performed well as a result of many EU economies showing improvement. Emerging markets' performance significantly lagged as equity and bond outflows put pressure on markets and economic fundamentals further deteriorated. Concerns over the U.S. Federal Reserve Board's tapering of its asset purchase program largely contributed to emerging markets' underperformance and to broad market volatility during the quarter.
In this environment, bond yields continued to climb, which had an adverse effect on bond returns globally. Bond markets in the emerging markets were particularly affected, with lower returns experienced in local currency emerging market debt as a consequence of pronounced currency weakness.
Canadian equity markets slightly outperformed U.S. equity markets during the quarter, supported by the financial and consumer sectors. However, year to date, the Canadian equity market continues to significantly underperform global equity markets, largely as a result of the dramatic underperformance in gold.
Despite this ongoing volatility, optimism has been sustained among equity investors as the S&P 500 continued its rally during our fiscal quarter, driven in part by continued intervention from the U.S. Federal Reserve and better-than-forecast company earnings.
This sustained market optimism contributed to an encouraging third quarter for AGF. AGF Floating Rate Income Fund continued to perform well, generating sales of over $280.0 million thus far. We continued our proud history of innovation with the launch of AGF U.S. AlphaSector Class, which offers a new way to "rethink risk" for retail through exposure to U.S. equities with a managed volatility overlay. In addition, we have secured seed investors and are on plan to launch our UCITS (Undertakings for Collective Investment in Transferable Securities) platform, a co-mingled pooled fund structure for marketing in Europe, during the fourth quarter of 2013.
We have also had encouraging signs in our institutional business. Our pipeline of sales has grown to $965.0 million, which includes seed investors for our UCITS and a $430.0 million commitment from the second quarter that has not yet funded. Net of expected redemptions from institutional clients, the third quarter pipeline stands at $105.0 million.
While each of the past seven months has seen an improvement in our net redemptions when compared to the previous fiscal year, our total assets under management (AUM) as of August 31, 2013 have seen a decline to $36.4 billion, compared to $41.2 billion in 2012. Strong markets and improving investment performance have improved our high-net-worth AUM with an increase of 9.0% to $3.7 billion in the third quarter, compared to $3.4 billion as at August 31, 2012.
AGF's EBITDA from continuing operations increased to $38.6 million, compared to $36.3 million in third quarter of 2012. Diluted earnings per share (EPS) from continuing operations for the three months ended August 31, 2013 remained flat at $0.11 per share, compared to adjusted diluted EPS of $0.11 per share in the third quarter of 2012.
Our balance sheet remains strong with $360.0 million in cash. We continue to deliver value directly to our shareholders through dividend payments and share buybacks. Dividends paid, including dividends reinvested, on Class A Voting common shares and Class B Non-Voting shares were $23.5 million for the three months ended August 31, 2013, compared to $25.8 million for the three months ended August 31, 2012. Under the current normal course issuer bid, 873,400 Class B Non-Voting shares were repurchased for a total consideration of $9.8 million at an average price of $11.26. Over the past four quarters we have repurchased 9% of our outstanding shares.
In closing, I want to thank all of our stakeholders for your continued support and confidence in our business. For over 55 years, our clients and advisors, consultants and investors, friends and partners have seen our independence and global reach as our greatest strengths and we remain dedicated to leveraging both to help investors succeed. We look forward to continuing to grow our business over the balance of 2013 and beyond.
Sincerely,
Blake C. Goldring, M.S.M., CFA
Chairman and Chief Executive Officer
September 25, 2013
Management's Discussion and Analysis of Financial Condition and Results of Operations
For the three and nine months ended August 31, 2013
This Management's Discussion and Analysis (MD&A) is as of September 24, 2013, and presents an analysis of the financial condition of AGF and its subsidiaries for the three- and nine-month period ended August 31, 2013, compared to the three- and nine-month period ended August 31, 2012. The MD&A should be read in conjunction with our unaudited Condensed Consolidated Interim Financial Statements for the three and nine months ended August 31, 2013, and our 2012 Annual Report. The financial statements for the three and nine months ended August 31, 2013, including required comparative information, have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, unless otherwise noted.
We also utilize non-IFRS financial measures to assess our overall performance. Details of non-IFRS measures used are outlined in the 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section, which provides calculations of the non-IFRS measures.
All dollar amounts are in Canadian dollars unless otherwise indicated. Throughout this discussion, percentage changes are calculated based on results rounded to the nearest thousand. Results, except per share information, are presented in millions of dollars. Percentage changes are calculated using numbers rounded to the decimals that appear in this MD&A.
On August 1, 2012, AGF successfully completed the sale of AGF Trust Company (AGF Trust) to B2B Bank, a subsidiary of Laurentian Bank. The operating results of AGF Trust for the three and nine months ended August 31, 2012 are presented as discontinued operations.
There have been no material changes to the information discussed in the following sections of the 2012 Annual MD&A: 'Risk Factors and Management of Risk,' 'Contractual Obligations,' 'Intercompany and Related Party Transactions' and 'Government Regulations.'
Our Business
AGF Management Limited, with $36.4 billion in AUM as at August 31, 2013, is one of the largest independent Canadian-based investment management firms, with operations and investments in Canada, the United States, the United Kingdom, Ireland and Asia.
The origin of our Company dates back to 1957 with the introduction of the American Growth Fund, the first mutual fund available to Canadians seeking to invest in the United States. As of August 31, 2013, our products and services include a diversified family of award-winning mutual funds, mutual fund wrap programs and pooled funds. AGF also manages assets on behalf of institutional investors including pension plans, foundations, sovereign wealth funds and endowments as well as for high-net-worth clients. Our multi-disciplined investment management teams have expertise across the balanced, fixed income, equity and specialty asset categories and are located in Toronto, Dublin and Singapore.
Our retail business delivers a wide range of products across a number of investment strategies including AGF mutual funds, the AGF Elements portfolios and the Harmony Private Investment Program. Our products are delivered through multiple channels, including advisors, financial planners, banks, life insurance companies and brokers. We have sales organizations located across Canada serving regional advisors and their clients, while our strategic accounts team serves our corporate distribution partners.
Our institutional business offers a variety of investment mandates through pooled funds and segregated accounts. Our global institutional business provides investment management services for a variety of clients including institutions, pension funds, foundations, sovereign wealth funds and endowments. We offer a diverse range of investment strategies and have sales and client service offices in Toronto, London (Ontario), Boston, Dublin and Hong Kong.
Our high-net-worth business delivers investment management and counselling services in local markets. It includes the operations of Cypress Capital Management Limited in Vancouver; Highstreet Asset Management (Highstreet) in London, Ontario; and Doherty & Associates in Ottawa and Montreal.
We hold a 31.7% interest in Smith & Williamson Holdings Limited (S&WHL), a leading independent private client investment management, financial advisory and accounting group based in the U.K. S&WHL is one of the top 10 largest firms of accountants in the U.K. and its investment management business has over £14.1 billion of funds under management and advice as at August 31, 2013. This interest is accounted for using the equity method.
For purposes of this discussion, the operations of AGF and our subsidiary companies are referred to as 'we,' 'us,' 'our,' 'the firm' or 'the Company.'
Key Performance Drivers
AUM levels are critical to our business. The primary sources of revenue for AGF are management and advisory fees. These fees are based on a specific percentage of the average AUM. The amount of management and advisory fees depends on the level and composition of AUM, which in turn is dependent upon investment performance and net sales. These fees are generated from our mutual fund, institutional and sub-advisory accounts and high-net-worth relationships. AUM will fluctuate in value as a result of sales and redemptions, investment performance and acquisitions.
Investment performance, which represents market appreciation (depreciation) of fund portfolios and is shown net of management fees received, is a key driver of the level of AUM and is central to the value proposition that we offer advisors and unitholders. Growth in AUM resulting from investment performance increases the wealth of our unitholders, and, in turn, increases revenues for the firm.
Gross sales and redemptions are monitored separately and the sum of these two amounts comprises net sales (redemptions). Net sales (redemptions) also impact AUM levels. Net sales increase AUM and, in turn, increase revenues for the firm. Net redemptions decrease AUM and, in turn, reduce revenues for the firm.
Acquisitions will also affect the level of AGF's AUM. AGF may consider strategic acquisitions that could supplement existing investment capabilities and fund new product growth.
AGF uses several key performance indicators (KPIs) to measure the success of our business strategies. Refer to the 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section of this MD&A.
Our Strategy and Quarterly Overview
AGF Management Limited is committed to its mission of helping investors succeed. We strive to provide world-class financial solutions to clients in Canada and abroad. We look to expand our business through organic growth supplemented by strategic acquisitions while continuing to focus on our key financial priorities to create long-term value for all our stakeholders.
We provide a diverse suite of investment solutions to retail, institutional and high-net-worth clients. We are focused on delivering strong long-term investment performance and excellence in client service while continuing to build and maintain strong relationships with our distribution partners.
Year-over-year improvement in these measures is expected to result in improved cash flows as well as improved return on equity. Our objective is the return of a fair share of the annual cash flow to shareholders in the form of dividends and through share buybacks, with the remaining cash flow being invested in a manner intended to support future growth.
Our strategy also recognizes that the investment management business will experience cycles related to the global stock markets, credit availability, employment levels and other economic factors. We believe that a successful strategy is founded on the ability of our operations to effectively operate through economic downturns and upturns by controlling cost and maintaining an effective operational infrastructure.
Summary of Key Financial and Operational Results for the Third Quarter of 2013:
- Total AUM were $36.4 billion at August 31, 2013, as compared to $41.2 billion at August 31, 2012.
- Retail fund net redemptions improved to $458.0 million for the three months ended August 31, 2013, compared to net redemptions of $709.0 million for the three months ended August 31, 2012.
- AGF Floating Rate Income Fund continued to generate gross sales, with $88.0 million in sales during the quarter and over $285.0 million since the fund's inception in 2012.
- During the quarter, we launched AGF U.S. AlphaSector Class, which offers our clients exposure to U.S. equities with a managed volatility overlay. Early reception to this product has been positive.
- We expect to launch our UCITS structure in Europe during the fourth quarter of 2013 and have indications of funding of $535.0 million.
- As at the end of the third quarter, we had an institutional pipeline of $105.0 million, which included $430.0 million carried from the second quarter of 2013 and indications of funding related to our UCITS launch, offset by $860.0 million outflows related to redemption notices received during the quarter.
- We received funding related to the Q2 2013 commitment for a $110.0 million mandate with a large bank platform for our Global Dividend strategy.
- High-net-worth AUM increased 9.0% to $3.7 billion compared to $3.4 billion at August 31, 2012.
- We delivered value directly to our shareholders through dividend payments and share buybacks. Dividends paid, including dividends reinvested, on Class A Voting common shares and Class B Non-Voting shares were $23.5 million for the three months ended August 31, 2013, compared to $25.8 million for the three months ended August 31, 2012. Under the current normal course issuer bid, 873,400 Class B Non-Voting shares were repurchased for a total consideration of $9.8 million at an average price of $11.26. Over the past four quarters we have repurchased 9.0% of our total outstanding shares.
- Revenue from continuing operations was $117.7 million compared to $119.8 million in the same period of 2012, reflecting lower AUM levels.
- EBITDA from continuing operations increased to $38.6 million compared to $36.3 million in the third quarter of 2012. EBITDA margin increased to 32.8% compared to 30.3% in the third quarter of 2012. Adjusted for one-time items recognized in the third quarter of 2012, EBITDA decreased 8.5% and EBITDA margin declined to 32.8% from 35.2% in the corresponding period of 2012.
- Diluted EPS from continuing operations for the three months ended August 31, 2013 was $0.11 per share compared to adjusted diluted EPS of $0.11 per share in the third quarter of 2012. Refer to the 'One-time Adjustments' section of this MD&A.
- Our balance sheet remains strong with $360.0 million in cash.
- For the one-year period ended August 31, 2013, 20% of ranked AUM performed above median, compared to 35% in the third quarter of 2012. For the three-year period ended August 31, 2013, 22% of ranked AUM performed above median, compared to 24% in the third quarter of 2012.
Update on the Canada Revenue Agency (CRA) Transfer Pricing Audit:
- During the quarter, there were no changes in the status of the CRA transfer pricing audit.
Assets Under Management
The following table illustrates the composition of the changes in total AUM during the three and nine months ended August 31, 2013 and 2012:
| Three months ended August 31, | |||||||||
| ($ millions) | 2013 | 2012 | % change | ||||||
| Retail fund AUM (including retail pooled funds), beginning of period | $ | 19,476 | $ | 20,846 | (6.6%) | ||||
| Gross sales | 493 | 362 | 36.2% | ||||||
| Redemptions | (951) | (1,071) | (11.2%) | ||||||
| Net redemptions | (458) | (709) | (35.4%) | ||||||
| Market appreciation (depreciation) of fund portfolios | (100) | 465 | n/m | ||||||
| Retail fund AUM (including retail pooled funds), end of period | $ | 18,918 | $ | 20,602 | (8.2%) | ||||
| Average daily retail fund AUM for the period | $ | 19,042 | $ | 20,754 | (8.2%) | ||||
| Institutional and sub-advisory accounts AUM, beginning of period | $ | 14,402 | $ | 19,039 | (24.4%) | ||||
| Net change in institutional and sub-advisory accounts, including market performance | (573) | (1,753) | (67.3%) | ||||||
| Institutional and sub-advisory accounts AUM, end of period | $ | 13,829 | $ | 17,286 | (20.0%) | ||||
| High-net-worth AUM | $ | 3,658 | $ | 3,357 | 9.0% | ||||
| Total AUM, end of period | $ | 36,405 | $ | 41,245 | (11.7%) | ||||
| Nine months ended August 31, | |||||||||
| ($ millions) | 2013 | 2012 | % change | ||||||
| Retail fund AUM (including retail pooled funds), beginning of period | $ | 20,096 | $ | 22,703 | (11.5%) | ||||
| Gross sales | 1,550 | 1,447 | 7.1% | ||||||
| Redemptions | (3,340) | (3,565) | (6.3%) | ||||||
| Net redemptions | (1,790) | (2,118) | (15.5%) | ||||||
| Market appreciation of fund portfolios | 612 | 17 | 3,500.0% | ||||||
| Retail fund AUM (including retail pooled funds), end of period | $ | 18,918 | $ | 20,602 | (8.2%) | ||||
| Average daily retail fund AUM for the period | $ | 19,623 | $ | 21,808 | (10.0%) | ||||
| Institutional and sub-advisory accounts AUM, beginning of period | $ | 15,677 | $ | 20,119 | (22.1%) | ||||
| Net change in institutional and sub-advisory accounts, including market performance | (1,848) | (2,833) | (34.8%) | ||||||
| Institutional and sub-advisory accounts AUM, end of period | $ | 13,829 | $ | 17,286 | (20.0%) | ||||
| High-net-worth AUM | $ | 3,658 | $ | 3,357 | 9.0% | ||||
| Total AUM, end of period | $ | 36,405 | $ | 41,245 | (11.7%) | ||||
Redemptions resulted in a decrease in retail fund AUM, including retail pooled funds, of 8.2% to $18.9 billion, from $20.6 billion as at August 31, 2012. Retail fund net redemptions, including retail pooled funds, decreased to $458.0 million from $709.0 million for the three months ended August 31, 2013, compared to the same period in the prior year. The average daily retail fund AUM for the three months ended August 31, 2013 decreased to $19.0 billion, compared to $20.8 billion in the corresponding period in 2012. Our institutional and sub-advisory accounts AUM decreased to $13.8 billion as at August 31, 2013, compared to $17.3 billion as at August 31, 2012. The decline in institutional AUM was primarily due to client redemptions. Our high-net-worth AUM increased 9.0% to $3.7 billion at August 31, 2013, compared to $3.4 billion at August 31, 2012. Overall, total AUM decreased to $36.4 billion, compared to $41.2 billion as at August 31, 2012.
Stock market performance influences our AUM levels. Returns for the three and nine months ended August 31, 2013 are as follows:
| Stock market performance | Three months ended August 31, 2013 |
Nine months ended August 31, 2013 |
|||
| AGF Retail Fund Portfolios | (0.5%) | 3.1% | |||
| MSCI Emerging Markets | (5.4%) | 0.1% | |||
| S&P 5001 | 2.3% | 24.2% | |||
| NASDAQ1 | 5.5% | 26.4% | |||
| S&P/TSX Composite | 0.9% | 5.9% | |||
| MSCI | 2.2% | 21.2% | |||
| 1 Canadian dollar adjusted. |
Consolidated Operating Results
The table below summarizes our consolidated operating results for the three and nine months ended August 31, 2013 and 2012:
| Three months ended August 31, | Nine months ended August 31, | ||||||||||||||||
| ($ millions, except per share data) | 2013 | 2012 | % change | 2013 | 2012 | % change | |||||||||||
| Revenue | |||||||||||||||||
| Management and advisory fees | $ | 108.9 | $ | 116.5 | (6.5%) | $ | 337.3 | $ | 369.5 | (8.7%) | |||||||
| Deferred sales charges | 4.1 | 4.8 | (14.6%) | 13.1 | 16.1 | (18.6%) | |||||||||||
| Share of profit of associated company | 2.0 | (1.4) | n/m | 6.7 | 2.1 | 219.0% | |||||||||||
| Fair value adjustments and other income (loss) | 2.7 | (0.1) | n/m | 10.0 | (2.5) | n/m | |||||||||||
| 117.7 | 119.8 | (1.8%) | 367.1 | 385.2 | (4.7%) | ||||||||||||
| Expenses | |||||||||||||||||
| Selling, general and administrative | 47.2 | 49.8 | (5.2%) | 139.2 | 139.9 | (0.5%) | |||||||||||
| Trailing commissions | 30.7 | 32.2 | (4.7%) | 93.9 | 100.6 | (6.7%) | |||||||||||
| Investment advisory fees | 1.2 | 1.5 | (20.0%) | 4.0 | 5.6 | (28.6%) | |||||||||||
| 79.1 | 83.5 | (5.3%) | 237.1 | 246.1 | (3.7%) | ||||||||||||
| EBITDA from continuing operations1 | 38.6 | 36.3 | 6.3% | 130.0 | 139.1 | (6.5%) | |||||||||||
| Amortization, derecognition and depreciation | 21.7 | 25.4 | (14.6%) | 65.1 | 74.6 | (12.7%) | |||||||||||
| Interest expense | 2.8 | 3.4 | (17.6%) | 8.6 | 9.3 | (7.5%) | |||||||||||
| Impairment of goodwill, management contracts and investment | - | 20.0 | (100.0%) | - | 20.0 | (100.0%) | |||||||||||
| Income before taxes | 14.1 | (12.5) | n/m | 56.3 | 35.2 | 59.9% | |||||||||||
| Income taxes | 4.0 | 6.8 | (41.2%) | 41.0 | 20.4 | 101.0% | |||||||||||
| Net income (loss) from continuing operations | 10.1 | (19.3) | n/m | 15.3 | 14.8 | 3.4% | |||||||||||
| Net income from discontinued operations | - | 6.0 | n/m | - | 21.9 | n/m | |||||||||||
| Net income attributable to non-controlling interest | - | - | n/m | - | 0.1 | n/m | |||||||||||
| Net income (loss) attributable to equity owners of the Company |
$ | 10.1 | $ | (13.3) | n/m | $ | 15.3 | $ | 36.6 | (58.2%) | |||||||
| Diluted earnings (loss) per share | |||||||||||||||||
| From continuing operations | $ | 0.11 | $ | (0.20) | n/m | $ | 0.17 | $ | 0.15 | 13.3% | |||||||
| From discontinued operations | - | 0.06 | n/m | - | 0.23 | n/m | |||||||||||
| From net income (loss) for the period | $ | 0.11 | $ | (0.14) | n/m | $ | 0.17 | $ | 0.38 | (55.3%) | |||||||
| 1 For the definition of EBITDA, see the 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section. The items required to reconcile EBITDA to net income from continuing operations, a defined term under IFRS, are detailed above. |
Revenue
For the three and nine months ended August 31, 2013, revenue decreased by 1.8% and 4.7% over the previous periods, with changes in the categories as follows:
Management and Advisory Fees
Management and advisory fees are directly related to our AUM levels. The 8.2% and 10.0% decrease in average daily retail fund AUM for the three and nine months ended August 31, 2013, combined with a decrease in institutional and sub-advisory accounts AUM at August 31, 2013, contributed to a 6.5% and 8.7% decrease in management and advisory fees revenue compared to 2012.
Deferred Sales Charges (DSC)
We receive deferred sales charges upon redemption of securities sold on the contingent DSC or low-load commission basis for which we finance the selling commissions paid to the dealer. The DSC ranges from 1.5% to 5.5%, depending on the commission option of the original subscription price of the funds purchased if the funds are redeemed within the first two years and declines to zero after three or seven years. DSC revenue fluctuates based on the level of redemptions, the age of the assets being redeemed and the proportion of redemptions composed of back-end assets. DSC revenues decreased by 14.6% and 18.6% for the three and nine months ended August 31, 2013 as compared to 2012, reflecting the redemption of a larger proportion of older, lower-yielding DSC assets.
Share of Profit (Loss) of Associated Company
Share of profit of associated company increased to $2.0 million and $6.7 million for the three and nine months ended August 31, 2013, compared to a loss of $1.4 million and a profit of $2.1 million during the same periods in 2012. During the three and nine months ended August 31, 2012, the Company recognized a $2.1 million charge related to a goodwill impairment recognized by S&WHL.
Fair Value Adjustments and Other Income
The following table illustrates the fair value adjustments and other income for the three and nine months ended August 31, 2013 and 2012:
| Three months ended August 31, | |||||||
| ($ millions) | 2013 | 2012 | |||||
| Fair value adjustment related to investment in AGF mutual funds | $ | 1.4 | $ | 0.5 | |||
| Fair value adjustment related to acquisition consideration payable | (0.3) | (0.2) | |||||
| Fair value adjustment related to put agreement with non-controlling shareholders | - | (0.9) | |||||
| Interest income and other | 1.6 | 0.5 | |||||
| $ | 2.7 | $ | (0.1) | ||||
| Nine months ended August 31, | |||||||
| ($ millions) | 2013 | 2012 | |||||
| Fair value adjustment related to investment in AGF mutual funds | $ | 2.1 | $ | (0.1) | |||
| Fair value adjustment related to acquisition consideration payable | (1.1) | (0.2) | |||||
| Fair value adjustment related to put agreement with non-controlling shareholders | 0.7 | (3.5) | |||||
| Interest income and other | 8.3 | 1.3 | |||||
| $ | 10.0 | $ | (2.5) | ||||
The fair value adjustment related to the put agreement with non-controlling shareholders was nil and $0.7 million for the three and nine months ended August 31, 2013 (2012 - loss of $0.9 million and $3.5 million), reflecting the settlement of the put liability in the second quarter of 2013.
Interest income and other was $1.6 million and $8.3 million for the three and nine months ended August 31, 2013 (2012 - $0.5 million and $1.3 million), reflecting increased cash levels and $3.7 million of one-time other income recognized during the second quarter of 2013.
Expenses
For the three and nine months ended August 31, 2013, expenses decreased 5.3% and 3.7% from the previous year. Changes in specific categories are described in the discussion that follows:
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses decreased by $2.6 million and $0.7 million for the three months and nine months ended August 31, 2013, compared to the same periods in 2012. A breakdown of the increase is as follows:
| Three months ended | Nine months ended | |||||||||||
| ($ millions) | August 31, 2013 | August 31, 2013 | ||||||||||
| Decrease in salaries and benefits expenses | $ | (0.4) | $ | (2.2) | ||||||||
| Increase in stock-based compensation expenses | 2.3 | 7.4 | ||||||||||
| Decrease in restructuring expenses and lease termination fee | (3.8) | (3.8) | ||||||||||
| Decrease in fund absorption expenses and other fund costs | (1.9) | (4.3) | ||||||||||
| Increase in fund administration related to change | ||||||||||||
| in accounting presentation | 1.2 | 4.3 | ||||||||||
| Decrease in other expenses | - | (2.1) | ||||||||||
| $ | (2.6) | $ | (0.7) | |||||||||
The following explains expense changes in the three and nine months ended August 31, 2013, compared to the same periods in the prior year:
- Salaries and benefits expenses decreased $0.4 million and $2.2 million for the three and nine months ended August 31, 2013, compared to the prior year, as a result of lower compensation costs reflecting lower staff levels.
- Stock-based compensation increased $2.3 million and $7.4 million for the three and nine months ended August 31, 2013, compared to the same period in 2012. This increase is mainly attributable to the Restricted Share Units, which are marked to market according to the Class B Non-Voting share price, and reflects the impact of an increasing share price in 2013 versus a declining share price in 2012, combined with an increase in units outstanding.
- There were no restructuring charges in the three and nine months ended August 31, 2013, compared to $3.8 million in the three and nine months ended August 31, 2012. The $3.8 million restructuring charge was comprised of $3.0 million related to salaries and benefits expense and a $0.8 million lease termination fee.
- Absorption and other fund costs decreased $1.9 million and $4.3 million for the three and nine months ended August 31, 2013, reflecting lower fund merger costs, reduced project costs associated with the funds and lower expected absorption costs.
- Fund administration expenses increased $1.2 million and $4.3 million for the three and nine months ended August 31, 2013, related to a change in accounting presentation due to a change in an agreement.
- Other expenses remained flat for the three months ended August 31, 2013, and decreased $2.1 million for the nine months ended August 31, 2013, due to lower facility costs partially offset by higher professional fees.
Trailing Commissions
Trailing commissions paid to distributors depend on total AUM, the proportion of mutual fund AUM sold on a front-end versus back-end commission basis and the proportion of equity fund AUM versus fixed-income fund AUM. Annualized trailing commissions as a percentage of average daily retail fund AUM increased to 0.65% and 0.64% for the three and nine months ended August 31, 2013, compared to 0.62% and 0.62% in the same periods of 2012, reflecting a change in the weighting of trailer-paying assets to total retail AUM over the comparative periods.
Investment Advisory Fees
External investment advisory fees decreased 20.0% and 28.6% for the three and nine months ended August 31, 2013, as compared to the three and nine months ended August 31, 2012, reflecting lower AUM levels and the repatriation of certain funds' management in-house.
EBITDA, EBITDA Margin and EBITDA per Share
EBITDA from continuing operations were $38.6 million and $130.0 million for the three and nine months ended August 31, 2013, a 6.3% increase and a 6.5% decrease from $36.3 million and $139.1 million for the same periods of 2012. EBITDA margin was 32.8% and 35.4% for the three and nine months ended August 31, 2013, compared to 30.3% and 36.1% in the corresponding periods in 2012. Diluted EBITDA per share from continuing operations for the three and nine months ended August 31, 2013 was $0.44 and $1.46, compared to $0.38 and $1.45 for the three and nine months ended August 31, 2012. Adjusted for one-time items in the third quarter of 2012, EBITDA from continuing operations for the three and nine months ended August 31, 2013 decreased 8.5% and 10.3% compared to prior year. Adjusted diluted EBITDA per share for the three and nine months ended August 31, 2012 was $0.45 and $1.51. Refer to the 'One-time Adjustments' section of this MD&A.
Amortization and Interest Expense
The category represents amortization of deferred selling commissions, customer contracts, other intangible assets, property, equipment, and computer software and interest expense. Deferred selling commissions amortization represents the most significant category of amortization. We internally finance all selling commissions paid. These selling commissions are capitalized and amortized on a straight-line basis over a period that corresponds with their applicable DSC schedule. Unamortized deferred selling commissions related to units redeemed prior to the end of the schedule are immediately expensed. Amortization expense related to deferred selling commissions was $15.5 million and $45.2 million for the three and nine months ended August 31, 2013, compared to $18.0 million and $51.6 million for the same periods of 2012. During the three and nine months ended August 31, 2013, we paid $7.9 million and $28.7 million in selling commissions, compared to $7.0 million and $28.3 million in the same periods of 2012, reflecting stable sales. As at August 31, 2013, the unamortized balance of deferred selling commissions financed was $120.3 million (November 30, 2012 - $136.8 million).
Customer contracts amortization decreased $2.6 million and $7.5 million for the three and nine months ended August 31, 2013, as a result of fewer redemptions and a lower net book value. Customer contracts are immediately expensed upon redemption of the AUM. Interest expense increased as a result of higher interest rates.
Other intangibles amortization increased $1.1 million and $3.7 million for the three and nine months ended August 31, 2013, as a result of the determination that certain management contracts and other intangibles no longer have an indefinite life. As a result, these intangibles are being amortized over their remaining expected life of five years.
Income Tax Expense
Income tax expense for the three and nine months ended August 31, 2013 was $4.0 million and $41.0 million as compared to $6.8 million and $20.4 million in the corresponding periods in 2012. The estimated effective tax rate for the nine months ended August 31, 2013 was 72.9% (2012 - 58.0%). During the three months ended August 31, 2012, tax legislation was substantively enacted to freeze the Ontario general corporate tax rate at 11.5% to replace a scheduled tax rate reduction to 10.0%, which resulted in approximately $8.0 million deferred income tax expense for the Company during the third quarter of 2012. Excluding the tax contingencies recorded for the CRA transfer pricing audit, and the tax rate change recorded in the nine months ended August 31, 2012, the estimated effective tax rate for the first nine months of fiscal 2013 was 25.5% (2012 - 24.6%, based on net income adjusted for a non-tax recoverable impairment). For additional detail, refer to 'Our Strategy and Quarterly Overview' section.
Pre-tax Profit Margin
Pre-tax profit margin increased to 12.0% and 15.3% for the three and nine months ended August 31, 2013, compared to a negative 10.4% margin and a positive 9.1% margin in the corresponding periods in 2012, as a result of the one-time charges recorded in the prior year.
Net Income (Loss)
The impact of the above revenue and expense items resulted in a net income from continuing operations of $10.1 million for the three months ended August 31, 2013 and net income of $15.3 million for the nine months ended August 31, 2013, as compared to net loss from continuing operations of $19.3 million and net income of $14.8 million in the corresponding periods in 2012. Adjusted for one-time items, net income from continuing operations decreased 5.6% and 10.0% to $10.1 million and $40.3 million for the three and nine months ended August 31, 2013, compared to $10.7 million and $44.8 million for the same periods in 2012. Refer to the 'One-time Adjustments' section of this MD&A.
Earnings (Loss) per Share
Diluted earnings per share from continuing operations was $0.11 per share and $0.17 per share for the three and nine months ended August 31, 2013, as compared to a loss of $0.20 and earnings of $0.15 per share in the corresponding periods of 2012. Adjusted for one-time items, diluted EPS from continuing operations were $0.11 and $0.45 for the three and nine months ended August 31, 2013, compared to $0.11 and $0.47 for the same periods in 2012. Refer to the 'One-time Adjustments' section of this MD&A.
One-time Adjustments
The table below summarizes one-time adjustments for the three and nine months ended August 31, 2013 and 2012:
| Three months ended August 31, | Nine months ended August 31, | ||||||||||||||||
| ($ millions, except per share data) | 2013 | 2012 | % change | 2013 | 2012 | % change | |||||||||||
| EBITDA from continuing operations | $ | 38.6 | $ | 36.3 | 6.3% | $ | 130.0 | $ | 139.1 | (6.5%) | |||||||
| Add: | |||||||||||||||||
| Lease termination fee | - | 0.8 | n/m | - | 0.8 | n/m | |||||||||||
| Restructure charge | - | 3.0 | n/m | - | 3.0 | n/m | |||||||||||
| S&WHL goodwill impairment | - | 2.1 | n/m | - | 2.1 | n/m | |||||||||||
| Adjusted EBITDA from continuing operations | $ | 38.6 | $ | 42.2 | (8.5%) | $ | 130.0 | $ | 145.0 | (10.3%) | |||||||
| Net income (loss) from continuing operations | $ | 10.1 | $ | (19.3) | n/m | $ | 15.3 | $ | 14.8 | 3.4% | |||||||
| Add: | |||||||||||||||||
| Adjustments to EBITDA from above | - | 5.9 | n/m | - | 5.9 | n/m | |||||||||||
| Impairment charges - Highstreet | - | 20.0 | n/m | - | 20.0 | n/m | |||||||||||
| Additional tax provision for the CRA audit | - | - | n/m | 25.0 | - | n/m | |||||||||||
| Tax rate change | - | 8.0 | n/m | - | 8.0 | n/m | |||||||||||
| Tax impact on the adjustments above (excluding tax | |||||||||||||||||
| rate change and tax provision for the CRA audit) | - | (3.9) | n/m | - | (3.9) | n/m | |||||||||||
| Adjusted net income from continuing operations | $ | 10.1 | $ | 10.7 | (5.6%) | $ | 40.3 | $ | 44.8 | (10.0%) | |||||||
| Adjusted diluted EPS from continuing operations | $ | 0.11 | $ | 0.11 | 1.5% | $ | 0.45 | $ | 0.47 | (3.0%) | |||||||
Liquidity and Capital Resources
Free cash flow generated from continuing operating activities was $25.4 million and $77.5 million for the three and nine months ended August 31, 2013, compared to $17.6 million and $71.0 million in the prior year. The primary uses of cash for the three and nine months ended August 31, 2013 were as follows:
- During the nine months ended August 31, 2013, we repurchased a total of 2,381,965 shares for $26.9 million.
- We paid $22.9 million and $69.8 million in dividends for the three and nine months ended August 31, 2013, compared to $25.1 million and $75.5 million in 2012.
Consolidated cash and cash equivalents of $360.0 million decreased by $11.3 million from November 30, 2012.
Total long-term debt outstanding at August 31, 2013 was $308.7 million (November 30, 2012 - $308.4 million). We also have a four-year prime rate-based revolving term loan facility to a maximum of $200.0 million, of which $194.9 million was available to be drawn as at August 31, 2013. The loan facility will be available to meet future operational and investment needs. We anticipate that cash balances and cash flow from operations, together with the available loan facility, will be sufficient in the foreseeable future to implement our business plan, finance selling commissions, satisfy regulatory requirements, service debt repayment obligations, meet capital spending needs, pay quarterly dividends, and fund any future share buybacks and fund any potential advance deposit related to the NOR expected to be received from the CRA.
Capital Management Activities from Continuing Operations
We actively manage our capital to maintain a strong and efficient capital base to maximize risk-adjusted returns to shareholders, to invest in future growth opportunities, including acquisitions, and to ensure that the regulatory capital requirements are met for each of our subsidiary companies.
AGF capital consists of shareholders' equity and long-term debt. On an annual basis, AGF prepares a three-year plan detailing projected operating budgets and capital requirements. AGF is required to prepare and submit a three-year operating plan and budget to AGF's Finance Committee for approval prior to seeking Board approval. AGF's Finance Committee consists of the Chairman and CEO, the Vice-Chairman, Executive Vice-President and CFO, and the Executive Vice-President and Chief Operating Officer. Once approved by the Finance Committee, the three-year plans are reviewed and approved by AGF's Board of Directors. These plans become the basis for the payment of dividends to shareholders, the repurchase of Class B Non-Voting shares and, combined with the reasonable use of leverage, the source of funds for acquisitions.
A significant objective of the Capital Management program is to ensure regulatory requirements are met for capital. Our Investment Management businesses, in general, are not subject to significant regulatory capital requirements in each of the jurisdictions in which they are registered and operate. The cumulative amount of minimum regulatory capital across all of our Investment Management Operations is approximately $6.0 million.
Normal Course Issuer Bid
AGF has obtained applicable regulatory approval to purchase for cancellation, from time to time, certain of its Class B Non-Voting shares through the facilities of the Toronto Stock Exchange (TSX). AGF relies on an automatic purchase plan during the normal course issuer bid. The automatic purchase plan allows for purchases by AGF of its Class B Non-Voting shares during certain pre-determined black-out periods, subject to certain parameters. Outside of these pre-determined black-out periods, shares will be purchased in accordance with management's discretion. Under its normal course issuer bid, the Class B Non-Voting shares may be repurchased from time to time at prevailing market prices or such other price as may be permitted by the TSX. AGF may purchase up to 6,729,228 Class B Non-Voting shares, or 10% of the public float for such shares, through the facilities of the TSX (or as otherwise permitted by the TSX) between February 1, 2013 and January 31, 2014.
During the three months ended August 31, 2013, under the current normal course issuer bid, 873,400 Class B Non-Voting shares were repurchased for a total consideration of $9.8 million at an average price of $11.26.
During the nine months ended August 31, 2013, under the current normal course issuer bid, 2,381,965 Class B Non-Voting shares were repurchased for a total consideration of $26.9 million at an average price of $11.29.
Dividends
The holders of Class B Non-Voting and Class A Voting common shares are entitled to receive cash dividends. Dividends are paid in equal amounts per share on all the Class B Non-Voting shares and all the Class A Voting common shares at the time outstanding without preference or priority of one share over another. No dividends may be declared in the event that there is a default of a condition of our revolving loan or acquisition facilities or where such payment of dividends would create a default.
Our Board of Directors may determine that Class B Non-Voting shareholders shall have the right to elect to receive part or all of such dividend in the form of a stock dividend. They also determine whether a dividend in Class B Non-Voting shares is substantially equal to a cash dividend. This determination is based on the weighted average price at which the Class B Non-Voting shares traded on the TSX during the 10 trading days immediately preceding the record date applicable to such dividend.
The following table sets forth the dividends paid by AGF on Class B Non-Voting shares and Class A Voting common shares for the years indicated:
| Years ended November 30 | 20131 | 2012 | 2011 | 2010 | 2009 | ||||||||||
| Per share | $ | 1.08 | $ | 1.08 | $ | 1.07 | $ | 1.04 | $ | 1.00 | |||||
| Percentage increase | - | 1% | 3% | 4% | 5% |
| 1 Represents the total dividends paid in January 2013, April 2013 and July 2013 and to be paid in October 2013. |
We review our dividend distribution policy on a quarterly basis, taking into account our financial position, profitability, cash flow and other factors considered relevant by our Board of Directors. The quarterly dividend paid on July 19, 2013 was $0.27 per share.
Outstanding Share Data
Set out below is our outstanding share data as at August 31, 2013 and 2012. For additional detail, see Note 8 and Note 12 of the Condensed Consolidated Interim Financial Statements.
| As at August 31, | ||||||||||||
| 2013 | 2012 | |||||||||||
| Shares | ||||||||||||
| Class A Voting common shares | 57,600 | 57,600 | ||||||||||
| Class B Non-Voting shares | 87,220,655 | 92,453,391 | ||||||||||
| Stock Options1 | ||||||||||||
| Outstanding options (including discontinued operations) | 5,280,721 | 4,987,274 | ||||||||||
| Exercisable options (including discontinued operations) | 2,607,670 | 3,286,213 | ||||||||||
| 1 2012 includes stock options outstanding related to AGF Trust. |
Key Performance Indicators, Additional IFRS and Non-IFRS Measures
We measure the success of our business strategies using a number of KPIs, which are outlined below. With the exception of revenue, the following KPIs are non-IFRS measures, which are not defined under IFRS. They should not be considered as an alternative to net income attributable to equity owners of the Company or any other measure of performance under IFRS.
Consolidated Continuing Operations
Revenue
Revenue is a measurement defined by IFRS and is recorded net of fee rebates, sales taxes and distribution fees paid to limited partnerships. Revenue is indicative of our potential to deliver cash flow.
We derive our revenue principally from a combination of:
- management and advisory fees based on AUM
- DSC earned from investors when mutual fund securities sold on a DSC basis are redeemed
- 31.7% equity interest in S&WHL
EBITDA
We define EBITDA from continuing operations as earnings before interest, taxes, depreciation and amortization and impairment of goodwill and management contracts. EBITDA is a standard measure used in the mutual fund industry by management, investors and investment analysts to understand and compare results. We believe this is an important measure as it allows us to assess our investment management businesses without the impact of non-operational items.
Please see the Consolidated Operating Results section on page 10 of this MD&A for a schedule showing how EBITDA reconciles to our IFRS financial statements.
Free Cash Flow
We define free cash flow from continuing operations as cash flow from operations before net changes in non-cash balances related to operations less interest paid. This is a relevant measure in the investment management business since a substantial amount of cash is spent on upfront commission payments. Free cash flow from continuing operations represents cash available for distribution to our shareholders, share buybacks and general corporate purposes.
| Three months ended August 31, | Nine months ended August 31, | |||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | ||||||||
| Net cash provided by continuing operating activities | $ | 32.5 | $ | 34.6 | $ | 77.4 | $ | 71.1 | ||||
| Adjusted for: | ||||||||||||
| Net changes in non-cash working capital balances | ||||||||||||
| related to continuing operations | (4.2) | (14.1) | 8.8 | 8.4 | ||||||||
| Interest paid | (2.9) | (2.9) | (8.7) | (8.5) | ||||||||
| Free cash flow | $ | 25.4 | $ | 17.6 | $ | 77.5 | $ | 71.0 | ||||
EBITDA Margin
EBITDA margin provides useful information to management and investors as an indicator of our overall operating performance. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
| Three months ended August 31, | Nine months ended August 31, | ||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | |||||||
| EBITDA | $ | 38.6 | $ | 36.3 | $ | 130.0 | $ | 139.1 | |||
| Divided by revenue | 117.7 | 119.8 | 367.1 | 385.2 | |||||||
| EBITDA margin | 32.8% | 30.3% | 35.4% | 36.1% | |||||||
Pre-tax Profit Margin
Pre-tax profit margin provides useful information to management and investors as an indicator of our overall operating performance. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes to revenue.
| Three months ended August 31, | Nine months ended August 31, | ||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | |||||||
| Net income (loss) from continuing operations | $ | 10.1 | $ | (19.3) | $ | 15.3 | $ | 14.8 | |||
| Add: income taxes | 4.0 | 6.8 | 41.0 | 20.4 | |||||||
| Income before taxes | $ | 14.1 | $ | (12.5) | $ | 56.3 | $ | 35.2 | |||
| Divided by revenue | 117.7 | 119.8 | 367.1 | 385.2 | |||||||
| Pre-tax profit margin | 12.0% | (10.4)% | 15.3% | 9.1% | |||||||
Return on Equity (ROE)
We monitor ROE to assess the profitability of the consolidated Company on an annual basis. We calculate ROE by dividing net income (loss) attributable to equity owners of the Company by average shareholders' equity.
| Three months ended August 31, | |||||||||||
| ($ millions) | 2013 | 2012 | |||||||||
| Net income (loss) from continuing operations (annualized) | $ | 40.4 | $ | (77.2) | |||||||
| Divided by average shareholders' equity | 1,017.2 | 1,142.3 | |||||||||
| Return on equity | 4.0% | (6.8)% | |||||||||
Long-term Debt to EBITDA Ratio
Long-term debt to EBITDA ratio provides useful information to management and investors as an indicator of our ability to service our long-term debt. We define long-term debt to EBITDA ratio as long-term debt at the end of the period divided by annualized EBITDA for the period.
| Three months ended August 31, | |||||||||||
| ($ millions) | 2013 | 2012 | |||||||||
| Long-term debt1 | $ | 308.7 | $ | 312.3 | |||||||
| Divided by EBITDA (annualized) | 154.4 | 145.2 | |||||||||
| Long-term debt to EBITDA ratio | 199.9% | 215.1 | |||||||||
| 1 Includes deferred cash consideration related to the Acuity acquisition. |
Assets Under Management
The amount of AUM and the related fee rates are important to our business as these are the drivers of our revenue from our mutual fund, institutional and sub-advisory accounts and high-net-worth relationships. AUM will fluctuate in value as a result of investment performance, sales and redemptions. Mutual fund sales and AUM determine a significant portion of our expenses because we pay upfront commissions on gross sales and trailing commissions to financial advisors as well as investment advisory fees based on the value of AUM.
Investment Performance
Investment performance, which represents market appreciation (depreciation) of fund portfolios and is shown net of management fees received, is a key driver of the level of AUM and is central to the value proposition that we offer advisors and unitholders. Growth in AUM resulting from investment performance increases the wealth of our unitholders, and, in turn, we benefit from higher revenues. Alternatively, poor investment performance will reduce our AUM levels and result in lower management fee revenues. Strong relative investment performance may also contribute to growth in gross sales or reduced levels of redemptions. Conversely, poor relative investment performance may result in lower gross sales and higher levels of redemptions. Refer to the 'Risk Factors and Management of Risk' section of this report for further information.
Net Sales (Redemptions)
Gross sales and redemptions are monitored separately and the sum of these two amounts comprises net sales (redemptions). Net sales (redemptions), together with investment performance and fund expenses, determine the level of average daily retail fund AUM, which is the basis on which management fees are charged. The average daily retail fund AUM is equal to the aggregate average daily net asset value of the AGF retail funds. We monitor AUM in our institutional, sub-advisory and high-net-worth businesses separately. We do not compute an average daily retail fund AUM figure for them.
EBITDA Margin (Excluding Share of Profit of Associated Company)
EBITDA margin provides useful information to management and investors as an indicator of our operating performance in our Investment Management Operations, excluding share of profit of associated company. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
| Three months ended August 31, | Nine months ended August 31, | ||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | |||||||
| EBITDA | $ | 36.6 | $ | 37.7 | $ | 123.3 | $ | 137.0 | |||
| Divided by revenue | 115.7 | 121.2 | 360.4 | 383.1 | |||||||
| EBITDA margin | 31.6% | 31.1% | 34.2% | 35.8% | |||||||
Pre-tax Profit Margin (Excluding Share of Profit of Associated Company)
Pre-tax profit margin provides useful information to management and investors as an indicator of our operating performance in our Investment Management Operations, excluding share of profit of associated company. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes and non-segmented items to revenue.
| Three months ended August 31, | Nine months ended August 31, | ||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | |||||||
| Income before taxes and non-segmented items | $ | 12.1 | $ | (11.1) | $ | 49.6 | $ | 33.1 | |||
| Divided by revenue | 115.7 | 121.2 | 360.4 | 383.1 | |||||||
| Pre-tax profit margin | 10.5% | (9.2)% | 13.8% | 8.6% | |||||||
Managing Risk
AGF is subject to a number of company and non-company specific risk factors that may impact our operating and financial performance. These risks and the management of these risks are detailed in our 2012 Annual MD&A in the section entitled 'Risk Factors and Management of Risk.' The Company has not identified any material changes to the risk factors affecting its business or in the management of these risks.
Internal Control Over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer have designed or caused the design of the Internal Control Over Financial Reporting (ICFR) and Disclosure Controls and Procedures. There have been no changes to AGF's internal controls for the quarter ended August 31, 2013 that have materially affected or are reasonably likely to materially affect the internal controls over financial reporting.
Selected Quarterly Information
| ($ millions, except per share amounts) | Aug. 31, | May 31, | Feb. 28, | Nov. 30, | ||||||
| For the three-month period ended | 2013 | 2013 | 2013 | 2012 | ||||||
| Revenue (continuing operations) | $ | 117.7 | $ | 126.9 | $ | 122.5 | $ | 125.0 | ||
| Free cash flow1 | 25.4 | 27.7 | 24.4 | 24.9 | ||||||
| EBITDA (continuing operations)1 | 38.6 | 46.1 | 45.3 | 50.0 | ||||||
| Pre-tax income (loss) (continuing operations) | 14.1 | 20.5 | 21.8 | 23.4 | ||||||
| Net income (loss) attributable to equity owners | ||||||||||
| of the Company | 10.1 | (10.4) | 15.6 | 15.7 | ||||||
| Net income (loss) (continuing operations) | 10.1 | (10.4) | 15.6 | 13.0 | ||||||
| EBITDA per share (continuing operations) | ||||||||||
| Basic | $ | 0.44 | $ | 0.52 | $ | 0.51 | $ | 0.55 | ||
| Diluted | $ | 0.44 | $ | 0.52 | $ | 0.51 | $ | 0.55 | ||
| Earnings (loss) per share attributable to | ||||||||||
| equity owners of the Company | ||||||||||
| Basic (continuing operations) | $ | 0.12 | $ | (0.12) | $ | 0.18 | $ | 0.14 | ||
| Diluted (continuing operations) | $ | 0.11 | $ | (0.12) | $ | 0.17 | $ | 0.14 | ||
| Basic | $ | 0.12 | $ | (0.12) | $ | 0.18 | $ | 0.17 | ||
| Diluted | $ | 0.11 | $ | (0.12) | $ | 0.17 | $ | 0.17 | ||
| Weighted average basic shares | 87,411,167 | 88,880,598 | 89,229,202 | 90,329,013 | ||||||
| Weighted average fully diluted shares | 88,026,012 | 89,395,236 | 89,538,278 | 90,594,421 | ||||||
| ($ millions, except per share amounts) | Aug. 31, | May 31, | Feb. 29, | Nov. 30, | ||||||
| For the three-month period ended | 2012 | 2012 | 2012 | 2011 | ||||||
| Revenue (continuing operations) | $ | 119.8 | $ | 133.5 | $ | 132.0 | $ | 138.2 | ||
| Free cash flow1 | 17.6 | 29.0 | 24.3 | 43.2 | ||||||
| EBITDA (continuing operations)1 | 36.3 | 50.3 | 52.5 | 56.3 | ||||||
| Pre-tax income (loss) (continuing operations) | (12.5) | 22.7 | 25.0 | 28.1 | ||||||
| Net income (loss) attributable to equity owners | ||||||||||
| of the Company | (13.3) | 23.8 | 26.1 | 25.1 | ||||||
| Net income (loss) (continuing operations) | (19.3) | 16.8 | 17.3 | 18.0 | ||||||
| EBITDA per share (continuing operations) | ||||||||||
| Basic | $ | 0.38 | $ | 0.52 | $ | 0.55 | $ | 0.59 | ||
| Diluted | $ | 0.38 | $ | 0.52 | $ | 0.54 | $ | 0.59 | ||
| Earnings (loss) per share attributable to | ||||||||||
| equity owners of the Company | ||||||||||
| Basic (continuing operations) | $ | (0.20) | $ | 0.17 | $ | 0.18 | $ | 0.19 | ||
| Diluted (continuing operations) | $ | (0.20) | $ | 0.17 | $ | 0.18 | $ | 0.19 | ||
| Basic | $ | (0.14) | $ | 0.25 | $ | 0.27 | $ | 0.26 | ||
| Diluted | $ | (0.14) | $ | 0.25 | $ | 0.27 | $ | 0.26 | ||
| Weighted average basic shares | 94,311,520 | 96,143,964 | 95,662,657 | 95,230,703 | ||||||
| Weighted average fully diluted shares | 94,687,056 | 96,735,309 | 96,372,419 | 95,932,850 | ||||||
| 1 As previously defined, see 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section. |
Additional Information
Additional information relating to the Company can be found in the Company's Condensed Consolidated Interim Financial Statements and accompanying notes for the three and nine months ended August 31, 2013, the Company's 2012 Annual Information Form (AIF) and other documents filed with applicable securities regulators in Canada and may be accessed at www.sedar.com.
AGF Management Limited
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended August 31, 2013
| AGF Management Limited Consolidated Interim Statement of Financial Position |
||||||||||
| (unaudited) | August 31, | November 30, | ||||||||
| (in thousands of Canadian dollars) | Note | 2013 | 2012 | |||||||
| Assets | ||||||||||
| Current Assets | ||||||||||
| Cash and cash equivalents | $ | 360,013 | $ | 371,299 | ||||||
| Investments | 3 | 8,319 | 30,177 | |||||||
| Accounts receivable, prepaid expenses and other assets | 40,822 | 58,135 | ||||||||
| 409,154 | 459,611 | |||||||||
| Investment in associated company | 3 | 82,099 | 74,362 | |||||||
| Management contracts | 689,759 | 704,842 | ||||||||
| Customer contracts, net of accumulated amortization and derecognition | 12,952 | 18,692 | ||||||||
| Goodwill | 244,549 | 244,549 | ||||||||
| Other intangibles, net of accumulated amortization and derecognition | 23,627 | 17,285 | ||||||||
| Deferred selling commissions, net of accumulated amortization and derecognition | 120,286 | 136,787 | ||||||||
| Property, equipment and computer software, net of accumulated depreciation | 12,221 | 13,556 | ||||||||
| Deferred income tax assets | 4,123 | 4,624 | ||||||||
| Other assets | 4 | 6,065 | 11,123 | |||||||
| Total assets | $ | 1,604,835 | $ | 1,685,431 | ||||||
| Liabilities | ||||||||||
| Current Liabilities | ||||||||||
| Accounts payable and accrued liabilities | $ | 60,496 | $ | 85,969 | ||||||
| Income tax liability | 13, 17 | 49,270 | 23,159 | |||||||
| Provision for Elements Advantage | 1,757 | 2,557 | ||||||||
| Acquisition consideration payable | 5 | 6,344 | 3,652 | |||||||
| Derivative financial instrument | 7 | 1,530 | 1,603 | |||||||
| 119,397 | 116,940 | |||||||||
| Long-term debt | 7 | 308,670 | 308,401 | |||||||
| Acquisition consideration payable | 5 | - | 5,150 | |||||||
| Deferred income tax liabilities | 183,412 | 188,156 | ||||||||
| Derivative financial instrument | 7 | 1,006 | 2,784 | |||||||
| Provision for Elements Advantage | 1,827 | 1,780 | ||||||||
| Other long-term liabilities | 10,903 | 6,898 | ||||||||
| Total liabilities | 625,215 | 630,109 | ||||||||
| Equity | ||||||||||
| Equity attributable to owners of the Company | ||||||||||
| Capital stock | 8 | 524,800 | 533,684 | |||||||
| Contributed surplus | 28,089 | 26,677 | ||||||||
| Retained earnings | 424,608 | 495,323 | ||||||||
| Accumulated other comprehensive income (loss) | 9 | 2,123 | (852) | |||||||
| 979,620 | 1,054,832 | |||||||||
| Non-controlling interest | - | 490 | ||||||||
| Total equity | 979,620 | 1,055,322 | ||||||||
| Total liabilities and equity | $ | 1,604,835 | $ | 1,685,431 | ||||||
| Contingencies (Note 17) | ||||||||||
| (The accompanying notes are an integral part of these condensed consolidated interim financial statements.) | ||||||||||
| AGF Management Limited |
|||||||||
| (unaudited) | Three months ended | ||||||||
| August 31, | August 31, | ||||||||
| (in thousands of Canadian dollars, except per share data) | Note | 2013 | 2012 | ||||||
| Revenue | |||||||||
| Management and advisory fees | $ | 108,896 | $ | 116,461 | |||||
| Deferred sales charges | 4,068 | 4,788 | |||||||
| Share of profit (loss) of associated company | 3 | 2,005 | (1,376) | ||||||
| Fair value adjustments and other income (loss) | 10 | 2,727 | (45) | ||||||
| Total revenue | 117,696 | 119,828 | |||||||
| Expenses | |||||||||
| Selling, general and administrative | 11 | 47,208 | 49,773 | ||||||
| Trailing commissions | 30,713 | 32,163 | |||||||
| Investment advisory fees | 1,236 | 1,519 | |||||||
| Amortization and derecognition of deferred selling commissions | 15,511 | 17,973 | |||||||
| Amortization and derecognition of customer contracts | 1,635 | 4,205 | |||||||
| Amortization and derecognition of other intangibles | 3,343 | 2,260 | |||||||
| Depreciation of property, equipment and computer software | 1,206 | 989 | |||||||
| Interest expense | 2,756 | 3,422 | |||||||
| Impairment of goodwill and management contracts | 6 | - | 20,013 | ||||||
| 103,608 | 132,317 | ||||||||
| Income (loss) before income taxes | 14,088 | (12,489) | |||||||
| Income tax expense (benefit) | |||||||||
| Current | 13 | 5,152 | 10,140 | ||||||
| Deferred | 13 | (1,169) | (3,357) | ||||||
| 3,983 | 6,783 | ||||||||
| Income (loss) from continuing operations, net of tax | 10,105 | (19,272) | |||||||
| Income from discontinued operations, net of tax | 4 | - | 6,006 | ||||||
| Net income (loss) for the period | $ | 10,105 | $ | (13,266) | |||||
| Net income (loss) attributable to: | |||||||||
| Equity owners of the Company | $ | 10,105 | $ | (13,304) | |||||
| Non-controlling interest | - | 38 | |||||||
| $ | 10,105 | $ | (13,266) | ||||||
| Earnings (loss) per share for the period attributable to the equity owners of the Company |
|||||||||
| Basic earnings (loss) per share | |||||||||
| Continuing operations | 14 | $ | 0.12 | $ | (0.20) | ||||
| Discontinued operations | 14 | - | 0.06 | ||||||
| $ | 0.12 | $ | (0.14) | ||||||
| Diluted earnings (loss) per share | |||||||||
| Continuing operations | 14 | $ | 0.11 | $ | (0.20) | ||||
| Discontinued operations | 14 | - | 0.06 | ||||||
| $ | 0.11 | $ | (0.14) | ||||||
| (The accompanying notes are an integral part of these condensed consolidated interim financial statements.) | |||||||||
| AGF Management Limited Consolidated Interim Statement of Income |
|||||||||
| (unaudited) | Nine months ended | ||||||||
| August 31, | August 31, | ||||||||
| (in thousands of Canadian dollars, except per share data) | Note | 2013 | 2012 | ||||||
| Revenue | |||||||||
| Management and advisory fees | $ | 337,298 | $ | 369,527 | |||||
| Deferred sales charges | 13,100 | 16,059 | |||||||
| Share of profit of associated company | 3 | 6,707 | 2,098 | ||||||
| Fair value adjustments and other income (loss) | 10 | 10,044 | (2,454) | ||||||
| Total revenue | 367,149 | 385,230 | |||||||
| Expenses | |||||||||
| Selling, general and administrative | 11 | 139,248 | 139,869 | ||||||
| Trailing commissions | 93,928 | 100,647 | |||||||
| Investment advisory fees | 4,028 | 5,591 | |||||||
| Amortization and derecognition of deferred selling commissions | 45,202 | 51,631 | |||||||
| Amortization and derecognition of customer contracts | 5,740 | 13,272 | |||||||
| Amortization and derecognition of other intangibles | 10,676 | 6,990 | |||||||
| Depreciation of property, equipment and computer software | 3,524 | 2,747 | |||||||
| Interest expense | 8,470 | 9,236 | |||||||
| Impairment of goodwill and management contracts | 6 | - | 20,013 | ||||||
| 310,816 | 349,996 | ||||||||
| Income before income taxes | 56,333 | 35,234 | |||||||
| Income tax expense (benefit) | |||||||||
| Current | 13 | 45,741 | 26,330 | ||||||
| Deferred | 13 | (4,676) | (5,915) | ||||||
| 41,065 | 20,415 | ||||||||
| Income from continuing operations, net of tax | 15,268 | 14,819 | |||||||
| Income from discontinued operations, net of tax | 4 | - | 21,925 | ||||||
| Net income for the period | $ | 15,268 | $ | 36,744 | |||||
| Net income (loss) attributable to: | |||||||||
| Equity owners of the Company | $ | 15,301 | $ | 36,602 | |||||
| Non-controlling interest | (33) | 142 | |||||||
| $ | 15,268 | $ | 36,744 | ||||||
| Earnings per share for the period attributable to the equity owners of the Company | |||||||||
| Basic earnings per share | |||||||||
| Continuing operations | 14 | $ | 0.17 | $ | 0.15 | ||||
| Discontinued operations | 14 | - | 0.23 | ||||||
| $ | 0.17 | $ | 0.38 | ||||||
| Diluted earnings per share | |||||||||
| Continuing operations | 14 | $ | 0.17 | $ | 0.15 | ||||
| Discontinued operations | 14 | - | 0.23 | ||||||
| $ | 0.17 | $ | 0.38 | ||||||
| The accompanying notes are an integral part of these condensed consolidated interim financial statements.) | |||||||||
| AGF Management Limited Consolidated Interim Statement of Comprehensive Income (Loss) |
||||||||||||
| (unaudited) | Three months ended August 31, | Nine months ended August 31, | ||||||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | 2013 | 2012 | ||||||||
| Net income (loss) for the period | $ | 10,105 | $ | (13,266) | $ | 15,268 | $ | 36,744 | ||||
| Other comprehensive income (loss), net of tax | ||||||||||||
| Cumulative translation adjustment | ||||||||||||
| Foreign currency translation adjustments related to net investments in foreign operations |
2,803 | (1,573) | 2,049 | (1,459) | ||||||||
| 2,803 | (1,573) | 2,049 | (1,459) | |||||||||
| Net unrealized gains (losses) on investments | ||||||||||||
| Unrealized gains (losses) | 14 | 37 | 1,268 | 56 | ||||||||
| Reclassification of realized gain to earnings | (1,293) | - | (1,703) | - | ||||||||
| (1,279) | 37 | (435) | 56 | |||||||||
| Net unrealized gains (losses) on cash flow hedge | ||||||||||||
| Unrealized gains (losses) | 372 | 448 | 596 | (35) | ||||||||
| Reclassification of realized losses to earnings | 256 | 238 | 765 | 761 | ||||||||
| 628 | 686 | 1,361 | 726 | |||||||||
| Total other comprehensive income (loss) from continuing operations, net of tax | $ | 2,152 | $ | (850) | $ | 2,975 | $ | (677) | ||||
| Total other comprehensive loss from discontinued operations, net of tax | $ | - | $ | (94) | $ | - | $ | (2,875) | ||||
| Recycling of unrealized gain on available for sale securities related to the sale of AGF Trust | $ | - | $ | (6,699) | $ | - | $ | (6,699) | ||||
| Comprehensive income (loss) | $ | 12,257 | $ | (20,909) | $ | 18,243 | $ | 26,493 | ||||
| Comprehensive income (loss) attributable to: | ||||||||||||
| Equity holders of the Company | $ | 12,257 | $ | (20,947) | $ | 18,276 | $ | 26,351 | ||||
| Non-controlling interest | - | 38 | (33) | 142 | ||||||||
| $ | 12,257 | $ | (20,909) | $ | 18,243 | $ | 26,493 | |||||
| All items presented in other comprehensive income (loss) will be reclassified to the consolidated statement of income (loss) in subsequent periods. | ||||||||||||
| (The accompanying notes are an integral part of these condensed consolidated interim financial statements.) | ||||||||||||
| AGF Management Limited Consolidated Interim Statement of Changes in Equity |
||||||||||||||
| (unaudited) | Total equity | |||||||||||||
| (in thousands of Canadian dollars) | Capital stock |
Contributed surplus | Retained earnings | Accumulated other comprehensive income (loss) |
Attributable to equity owners of the Company |
Non- controlling interest |
||||||||
| Balance, December 1, 2011 | $ | 560,838 | $ | 24,797 | $ | 589,765 | $ | 8,860 | $ | 1,184,260 | $ | 472 | $ | 1,184,732 |
| Net income for the period | - | - | 36,602 | - | 36,602 | 142 | 36,744 | |||||||
| Other comprehensive loss (net of tax) | - | - | - | (10,251) | (10,251) | - | (10,251) | |||||||
| Comprehensive income (loss) for the period | - | - | 36,602 | (10,251) | 26,351 | 142 | 26,493 | |||||||
| Issued through dividend reinvestment plan | 2,102 | - | - | - | 2,102 | - | 2,102 | |||||||
| Stock options | 1,274 | 1,678 | - | - | 2,952 | - | 2,952 | |||||||
| AGF Class B Non-Voting shares repurchased for cancellation |
(24,305) | - | (23,278) | - | (47,583) | - | (47,583) | |||||||
| AGF Class B Non-Voting shares issued on acquisition of Acuity | 13,322 | - | - | - | 13,322 | - | 13,322 | |||||||
| Dividends on AGF Class A Voting common shares and AGF Class B Non-Voting shares, including tax of $2.6 million |
- | - | (80,120) | - | (80,120) | - | (80,120) | |||||||
| Increase in ownership interest in Highstreet Partners Limited | - | - | (1,031) | - | (1,031) | - | (1,031) | |||||||
| Dividends to non-controlling interest | - | - | - | - | - | (143) | (143) | |||||||
| Balance, August 31, 2012 | $ | 553,231 | $ | 26,475 | $ | 521,938 | $ | (1,391) | $ | 1,100,253 | $ | 471 | $ | 1,100,724 |
| Balance, December 1, 2012 | $ | 533,684 | $ | 26,677 | $ | 495,323 | $ | (852) | $ | 1,054,832 | $ | 490 | $ | 1,055,322 |
| Net income (loss) for the period | - | - | 15,301 | - | 15,301 | (33) | 15,268 | |||||||
| Other comprehensive income (net of tax) | 2,975 | 2,975 | 2,975 | |||||||||||
| Comprehensive income (loss) for the period | - | - | 15,301 | 2,975 | 18,276 | (33) | 18,243 | |||||||
| Issued through dividend reinvestment plan | 1,910 | - | - | 1,910 | - | 1,910 | ||||||||
| Stock options | 2,287 | 1,412 | - | - | 3,699 | - | 3,699 | |||||||
| AGF Class B Non-Voting shares repurchased for cancellation |
(14,312) | - | (12,588) | - | (26,900) | - | (26,900) | |||||||
| AGF Class B Non-Voting shares issued on acquisition of Acuity |
1,231 | - | - | - | 1,231 | - | 1,231 | |||||||
| Dividends on AGF Class A Voting common shares and AGF Class B Non-Voting shares, including tax of $0.7 million |
- | - | (72,430) | - | (72,430) | - | (72,430) | |||||||
| Increase in ownership interest in Highstreet Partners Limited | - | - | (998) | - | (998) | (454) | (1,452) | |||||||
| Dividends to non-controlling interest | - | - | - | - | - | (3) | (3) | |||||||
| Balance, August 31, 2013 | $ | 524,800 | $ | 28,089 | $ | 424,608 | $ | 2,123 | $ | 979,620 | $ | - | $ | 979,620 |
| (The accompanying notes are an integral part of these condensed consolidated interim financial statements.) | ||||||||||||||
| AGF Management Limited Consolidated Interim Statement of Cash Flow |
|||||||||
| (unaudited) | Nine months ended | ||||||||
| August 31, | August 31, | ||||||||
| (in thousands of Canadian dollars) | Note | 2013 | 2012 | ||||||
| Operating Activities | |||||||||
| Net income for the period | $ | 15,268 | $ | 36,744 | |||||
| Adjustments for | |||||||||
| Net income from discontinued operations | - | (21,925) | |||||||
| Amortization, derecognition and depreciation | 65,142 | 74,640 | |||||||
| Impairment of goodwill and management contracts | - | 20,013 | |||||||
| Interest expense | 8,470 | 9,236 | |||||||
| Income tax expense | 13 | 41,065 | 20,415 | ||||||
| Income taxes paid | (20,345) | (38,068) | |||||||
| Stock-based compensation | 12 | 9,270 | 1,864 | ||||||
| Share of profit of associated company | 3 | (6,707) | (2,098) | ||||||
| Dividends from associated company | 3 | 1,242 | 4,151 | ||||||
| Deferred selling commissions paid | (28,701) | (28,328) | |||||||
| Other | 1,442 | 2,883 | |||||||
| 86,146 | 79,527 | ||||||||
| Net change in non-cash working capital balances related to operations | |||||||||
| Accounts receivable, prepaid expenses and other assets | 17,313 | 16,370 | |||||||
| Other assets | (3,287) | (1,617) | |||||||
| Accounts payable and accrued liabilities | (25,591) | (13,415) | |||||||
| Other liabilities | 2,815 | (9,722) | |||||||
| (8,750) | (8,384) | ||||||||
| Net cash provided by continuing operating activities | 77,396 | 71,143 | |||||||
| Net cash used in discontinued operating activities | 4 | - | (214,306) | ||||||
| Net cash provided by (used in) operating activities | 77,396 | (143,163) | |||||||
| Financing Activities | |||||||||
| Repurchase of Class B Non-Voting shares for cancellation | (26,900) | (47,583) | |||||||
| Issue of Class B Non-Voting shares | 2,138 | 1,191 | |||||||
| Dividends paid | (69,809) | (75,467) | |||||||
| Interest paid | (8,684) | (8,540) | |||||||
| Net cash used in continuing financing activities | (103,255) | (130,399) | |||||||
| Net cash provided by discontinued financing activities | 4 | - | 464,359 | ||||||
| Net cash provided by (used in) financing activities | (103,255) | 333,960 | |||||||
| Investing Activities | |||||||||
| Increase in ownership interest in Highstreet Partners Limited | 5 | (4,423) | (2,417) | ||||||
| Acquisition of Acuity Funds Ltd. and Acuity Investment Management Inc. | 5 | (2,713) | (20,976) | ||||||
| Acquisition of Robitaille Asset Management Inc. | - | (1,200) | |||||||
| Proceeds from sale of discontinued operations, net of AGF Trust cash | 4 | - | 8,850 | ||||||
| Purchase of property, equipment and computer software | (2,189) | (4,440) | |||||||
| Purchase of investments | 3 | (757) | (15,735) | ||||||
| Proceeds from sale of investments | 3 | 24,655 | 7,408 | ||||||
| Net cash provided by (used in) continuing investing activities | 14,573 | (28,510) | |||||||
| Net cash used in discontinued investing activities | 4 | - | (166) | ||||||
| Net cash provided by (used in) investing activities | 14,573 | (28,676) | |||||||
| Increase (decrease) in cash and cash equivalents during the period | (11,286) | 162,121 | |||||||
| Balance of cash and cash equivalents, beginning of period | 371,299 | 246,634 | |||||||
| Balance of cash and cash equivalents, end of period | $ | 360,013 | $ | 408,755 | |||||
| (The accompanying notes are an integral part of these condensed consolidated interim financial statements.) | |||||||||
Notes to Condensed Consolidated Interim Financial Statements
For the three and nine months ended August 31, 2013 (unaudited)
Note 1: General Information
AGF Management Limited (AGF or the Company) is a limited liability company incorporated and domiciled in Canada under the Business Corporations Act (Ontario). The address of its registered office and principal place of business is Toronto-Dominion Bank Tower, 66 Wellington Street West, Toronto, Ontario.
The Company is an integrated, global wealth management corporation whose principal subsidiaries provide investment management for mutual funds, institutions and corporations, as well as high-net-worth clients. The Company conducts the management and distribution of mutual funds in Canada under the brand names AGF, Acuity, Elements and Harmony (collectively, AGF Investments).
These condensed consolidated interim financial statements were authorized for issue by the Board of Directors on September 24, 2013.
Note 2: Basis of Preparation
These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting. The accounting policies in these condensed consolidated interim financial statements are consistent with those disclosed in the Company's annual consolidated financial statements for the year ended November 30, 2012. The condensed consolidated interim financial statements should be read in conjunction with the Company's annual consolidated financial statements for the year ended November 30, 2012, which have been prepared in accordance with IFRS as issued by the IASB.
Note 3: Investments and Investment in Associated Company
(a) The following table presents a breakdown of investments:
| August 31, | November 30, | |||||||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | ||||||||||
| Fair value through profit or loss | ||||||||||||
| AGF mutual funds and other | $ | 6,884 | $ | 25,269 | ||||||||
| Equity securities | 472 | 1,612 | ||||||||||
| 7,356 | 26,881 | |||||||||||
| Available for sale | ||||||||||||
| Equity securities | 659 | 2,995 | ||||||||||
| Loans and receivables | ||||||||||||
| Canadian government debt - Federal | 304 | 301 | ||||||||||
| $ | 8,319 | $ | 30,177 | |||||||||
AGF mutual funds and other are primarily composed of seed capital, which has been repatriated during the nine months of fiscal 2013. The investment in Canadian government debt is composed of a fixed-rate Treasury bond with a maturity date within one year and a credit rating of AAA.
(b) The Company holds a 31.7% investment in Smith & Williamson Holdings Limited (S&WHL), which is accounted for using the equity method. At August 31, 2013, the carrying value was $82.1 million (November 30, 2012 - $74.4 million). During the three and nine months ended August 31, 2013, the Company recognized earnings of $2.0 million and $6.7 million (2012 - $1.4 million loss and $2.1 million earnings) and received nil and $1.2 million in dividends (2012 - nil and $4.2 million) from S&WHL. During the three and nine months ended August 31, 2012, the Company recognized a one-time charge of $2.1 million related to a goodwill impairment recorded by S&WHL.
Note 4: Discontinued Operations
On August 1, 2012, the Company completed its sale of 100% of the shares of AGF Trust Company (AGF Trust) to B2B Bank, a subsidiary of Laurentian Bank, for cash consideration corresponding to the net book value of AGF Trust at closing of $246.3 million. The transaction also caused AGF Trust to repay subordinated indebtedness owed to AGF and redeem preferred shares held by AGF for an additional consideration of $173.5 million.
In addition, the agreement includes a contingent consideration to a maximum of $20.0 million over five years if the credit performance of AGF Trust's loan portfolio meets certain thresholds. Accordingly, a contingent consideration receivable of $5.9 million was recorded on the sale of AGF Trust. As at August 31, 2013, the contingent consideration receivable was $6.1 million and was included in other assets on the consolidated interim statement of financial position, representing management's best estimate of the fair value thereof.
For the three and nine months ended August 31, 2012, the operating performance of AGF Trust has been included in the Company's consolidated statement of income (loss) as discontinued operations as follows:
| Three months ended | Nine months ended | ||||||
| (in thousands of Canadian dollars) | August 31, 2012 | August 31, 2012 | |||||
| Revenue | |||||||
| RSP loan securitization income, net of impairment | $ | - | $ | 1,263 | |||
| Other income | 741 | 3,713 | |||||
| AGF Trust net interest income1 | 13,028 | 53,744 | |||||
| Total revenue | 13,769 | 58,720 | |||||
| Expenses | |||||||
| Selling, general and administrative | 9,718 | 28,721 | |||||
| Amortization of property, equipment and computer software | 140 | 563 | |||||
| Provision for AGF Trust loan losses | 1,428 | 4,195 | |||||
| 11,286 | 33,479 | ||||||
| Income before income taxes | 2,483 | 25,241 | |||||
| Income tax expense | |||||||
| Current1 | 172 | 8,398 | |||||
| Deferred | 1,029 | (1,328) | |||||
| 1,201 | 7,070 | ||||||
| Net income related to AGF Trust | $ | 1,282 | $ | 18,171 | |||
| Net income attributable to: | |||||||
| Equity owners of the Company | $ | 1,282 | $ | 18,171 | |||
| Non-controlling interest | - | - | |||||
| $ | 1,282 | $ | 18,171 | ||||
| 1 Adjusted for interest on inter-company subordinated debt classified as discontinued operations. | |||||||
For the three and nine months ended August 31, 2012, the Company recorded a gain on disposal of $4.7 million and $3.7 million related to the sale of AGF Trust.
The change in stock options related to AGF Trust during the nine months ended August 31, 2013 and 2012 is summarized as follows:
| Nine months ended | August 31, 2013 | August 31, 2012 | ||||||||
| Weighted | Weighted | |||||||||
| average | average | |||||||||
| Options | exercise price | Options | exercise price | |||||||
| Class B Non-Voting share options related to AGF Trust | ||||||||||
| Balance, beginning of the period | 393,505 | $ | 17.63 | 456,750 | $ | 17.93 | ||||
| Options granted | - | - | 31,505 | 15.87 | ||||||
| Options expired | (299,905) | 20.53 | (10,000) | 17.12 | ||||||
| Options exercised | (93,600) | 8.24 | (4,750) | 8.24 | ||||||
| Balance, end of the period | - | $ | - | 473,505 | $ | 17.91 | ||||
As at August 31, 2013 and 2012, AGF Trust employees did not hold any Restricted Share Units (RSU).
Note 5: Acquisitions
(a) Acquisition of Acuity Funds Ltd. and Acuity Investment Management Inc.
On February 1, 2011, the Company completed its acquisition of 100% of the shares of Acuity Funds Ltd. and Acuity Investment Management Inc. (Acuity) for a purchase price of $335.5 million.
The remaining outstanding deferred cash payment and Class E exchangeable preferred shares are subject to an adjustment based on Acuity's net sales of institutional AUM between the date of acquisition and the deferred cash payment date and the redemption date of these preferred shares. As at August 31, 2013, the maximum adjustment to the acquisition consideration payable related to Acuity's net sales of institutional AUM would be an increase of $3.4 million and a decrease of nil. The Class E exchangeable preferred shares are to be settled by the issuance of a variable number of AGF Class B Non-Voting shares, the number of which is determined by reference to a fixed exchange ratio. The outstanding deferred cash payments and Class E exchangeable preferred shares are accounted for as contingently returnable consideration carried at fair value and have been classified on the consolidated interim statement of financial position as acquisition consideration payable.
As part of the consideration paid, the remaining Class B Non-Voting shares held in escrow will be released to the Acuity vendors on February 1, 2014. Dividends declared on the Class B Non-Voting shares are paid to the vendors during the escrow period. During the three months ended August 31, 2013, no Class B Non-Voting shares were released from escrow. During the nine months ended August 31, 2013, 185,117 Class B Non-Voting shares were released from escrow. As at August 31, 2013, 185,119 Class B Non-Voting shares continue to be held in escrow.
On February 1, 2013, $3.9 million was paid to the Acuity vendors, consisting of $2.7 million in cash and a settlement of the Class D exchangeable preferred shares through the issuance of 107,138 Class B Non-Voting shares valued at $1.2 million. On February 1, 2012, $34.3 million was paid to the Acuity vendors, consisting of $21.0 million in cash and a settlement of the Class B and C exchangeable preferred shares through the issuance of 828,452 Class B Non-Voting shares valued at $13.3 million.
The following is a summary of the fair values of contingently returnable consideration as at August 31, 2013 and November 30, 2012:
| August 31, | November 30, | |||||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | ||||||||
| Cash payments due February 1, 2013 | $ | - | $ | 2,718 | ||||||
| Cash payments due February 1, 2014 | 4,212 | 3,908 | ||||||||
| Issuance of Class D exchangeable preferred shares, redeemable February 1, 2013 | - | 934 | ||||||||
| Issuance of Class E exchangeable preferred shares, redeemable February 1, 2014 | 2,132 | 1,242 | ||||||||
| $ | 6,344 | $ | 8,802 | |||||||
| Less: current portion | 6,344 | 3,652 | ||||||||
| $ | - | $ | 5,150 | |||||||
During the three and nine months ended August 31, 2013, $0.4 million and $1.5 million in charges (2012 - $0.3 million and $1.1 million in charges) were recognized related to the fair value adjustment on the acquisition consideration payable.
(b) Acquisition of Highstreet Partners Ltd.
During the nine months ended August 31, 2013, the Company increased its ownership interest in Highstreet Partners Ltd. (Highstreet) to 100.0% from 89.4%. The Company paid cash consideration of $4.4 million and extinguished receivables of $3.2 million. The payments were recorded as an adjustment to the non-controlling interest balance on the consolidated interim statement of financial position of $0.5 million, and to the liability for the put obligation of $6.0 million, with the remaining difference of $0.9 million and $0.2 million charged to retained earnings and income, respectively. Refer to Note 12 for details regarding the put agreement.
In connection with the purchase of the remaining non-controlling interest, the Company determined that certain Highstreet management contracts and other intangibles no longer have an indefinite life. As a result, as of the second quarter of 2013, these assets are now being amortized over their remaining expected useful lives, which have been estimated at five years. The net book values of the management contracts and other intangibles prior to the commencement of amortization were $15.1 million and $1.9 million, respectively. The Company recorded $0.9 million and $2.6 million related to amortization expense during the three and nine months ended August 31, 2013.
Note 6: Intangible Assets
During the nine months ended August 31, 2013, in accordance with its accounting policies, the Company completed its annual impairment test on its indefinite life intangibles. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units, or CGUs). Substantially all of the management contracts are in the retail and institutional CGUs.
To determine whether an impairment loss should be recognized, the carrying value of the assets and liabilities of the CGU is compared to its recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs to sell and its value in use. Fair value less costs to sell is the best estimate obtainable from the sale of a CGU in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. Accordingly, the Company determined the recoverability of each of its CGUs based on an analysis of the underlying AUM associated with the CGU and available AUM multiples from recent transactions for similar assets within the same industry. Based on the test, the Company concluded that no intangible assets were impaired for the nine months ended August 31, 2013 (2012 - $20.0 million). Management continues to regularly monitor its intangibles for triggers of impairment.
Note 7: Long-term Debt
| August 31, | November 30, | |||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | ||||||
| Revolving term loans1 | ||||||||
| Facility 1 | $ | - | $ | - | ||||
| Facility 2 | 124,398 | 124,300 | ||||||
| Acquisition facility1 | 184,272 | 184,101 | ||||||
| $ | 308,670 | $ | 308,401 | |||||
| 1 Net of transaction costs. | ||||||||
(a) Revolving Term Loans
Facility 1 is a syndicated revolving term loan with two Canadian chartered banks and with a maximum aggregate principal of $200.0 million (November 30, 2012 - $200.0 million). Advances under Facility 1 are made available by prime-rate loans in U.S. or Canadian dollars, under banker's acceptances (BAs) or by issuance of letters of credit. Facility 1, if not renewed, is due in full on January 28, 2015. As at August 31, 2013, AGF had not drawn against Facility 1 (November 30, 2012 - nil).
Facility 2 is a five-year revolving term loan with a maximum aggregate principal of $125.0 million (November 30, 2012 - $125.0 million). Advances under Facility 2 are made available by prime-rate loans in U.S. or Canadian dollars, under BAs or by issuance of letters of credit. Facility 2, if not renewed, is due in full on August 31, 2016. As at August 31, 2013, AGF had drawn down $125.0 million (November 30, 2012 - $125.0 million) against Facility 2 in the form of a one-month BA at an effective average interest rate of 3.0% per annum (November 30, 2012 - 3.2%).
To hedge the Company's exposure to fluctuating interest rates on its long-term debt, AGF has entered into an interest rate swap transaction with a Canadian chartered bank. The swap transaction expires in July 2016 and involves the exchange of the one-month BA rate, plus 150 basis points, to pay a fixed interest rate of 3.8%. The swap contract is designated as a cash flow hedging instrument and is used to mitigate interest expense volatility on Facility 2. As at August 31, 2013, the notional amount of the swap was $125.0 million (November 30, 2012 - $125.0 million).
As at August 31, 2013, the fair value of the derivative used to manage interest rate exposure on long-term debt was $2.5 million (November 30, 2012 - $4.4 million) and is recorded as a liability on the consolidated interim statement of financial position.
(b) Acquisition Facility
The acquisition facility was originally arranged on January 28, 2011, to partially fund the acquisition of Acuity, and consists of a one-time drawdown of $185.0 million. The facility must be fully repaid by January 28, 2015, and is not renewable. Advances under the facility are made available by way of Canadian-dollar prime-rate loans or Canadian-dollar BAs. As at August 31, 2013, AGF had drawn $185.0 million (November 30, 2012 - $185.0 million) against the facility in the form of a one-month BA at an effective average interest rate of 3.0% per annum (November 30, 2012 - 3.2%).
Note 8: Capital Stock
(a) Authorized Capital
The authorized capital of AGF consists of an unlimited number of AGF Class B Non-Voting shares and an unlimited number of AGF Class A Voting common shares. The Class B Non-Voting shares are listed for trading on the Toronto Stock Exchange (TSX).
(b) Changes During the Period
The change in capital stock is summarized as follows:
| Nine months ended | August 31, 2013 | August 31, 2012 | ||||||||||
| (in thousands of Canadian dollars, except share amounts) | Shares | Stated value | Shares | Stated value | ||||||||
| Class A Voting common shares | 57,600 | $ | - | 57,600 | $ | - | ||||||
| Class B Non-Voting shares | ||||||||||||
| Balance, beginning of the period | 89,057,691 | $ | 533,684 | 95,406,796 | $ | 560,838 | ||||||
| Issued through dividend reinvestment plan | 178,341 | 1,910 | 153,365 | 2,102 | ||||||||
| Stock options exercised | 259,450 | 2,287 | 144,600 | 1,274 | ||||||||
| Issued on acquisition of Acuity (Note 5) | 107,138 | 1,231 | 828,452 | 13,322 | ||||||||
| Repurchased for cancellation | (2,381,965) | (14,312) | (4,079,822) | (24,305) | ||||||||
| Balance, end of the period | 87,220,655 | $ | 524,800 | 92,453,391 | $ | 553,231 | ||||||
(c) Class B Non-Voting Shares Purchased for Cancellation
AGF has obtained applicable regulatory approval to purchase for cancellation, from time to time, certain of its Class B Non-Voting shares through the facilities of the TSX (or as otherwise permitted by the TSX). AGF relies on an automatic purchase plan during the normal course issuer bid. The automatic purchase plan allows for purchases by AGF of its Class B Non-Voting shares during certain pre-determined black-out periods, subject to certain parameters. Outside of these pre-determined black-out periods, shares will be purchased in accordance with management's discretion. Under its normal course issuer bid, AGF may purchase up to 10% of the public float outstanding on the date of the receipt of regulatory approval or up to 6,729,228 shares through to January 31, 2014. During the three months ended August 31, 2013, 873,400 Class B Non-Voting shares were repurchased at a cost of $9.8 million and the excess paid of $4.6 million over the recorded capital stock value of the shares repurchased for cancellation was charged to retained earnings. During the nine months ended August 31, 2013, 2,381,965 Class B Non-Voting shares were repurchased at a cost of $26.9 million and the excess paid of $12.6 million over the recorded capital stock value of the shares repurchased for cancellation was charged to retained earnings. During the three months ended August 31, 2012, 3,817,582 Class B Non-Voting shares were repurchased at a cost of $43.5 million and the excess paid of $20.7 million over the recorded capital stock value of the shares repurchased for cancellation was charged to retained earnings. During the nine months ended August 31, 2012, 4,079,822 Class B Non-Voting shares were repurchased at a cost of $47.6 million and the excess paid of $23.3 million over the recorded capital stock value of the shares repurchased for cancellation was charged to retained earnings.
Note 9: Accumulated Other Comprehensive Income (Loss)
| Foreign | Available | ||||||||||||||
| currency | for sale | Cash flow | Discontinued | ||||||||||||
| (in thousands of Canadian dollars) | translation | securities | hedge | operations | Total | ||||||||||
| Opening composition of accumulated other | |||||||||||||||
| comprehensive income at November 30, 2011 | |||||||||||||||
| Accumulated other comprehensive income (loss) | $ | 50 | $ | 3,306 | $ | (4,772) | $ | 13,635 | $ | 12,219 | |||||
| Income taxes | (6) | (485) | 1,193 | (4,061) | (3,359) | ||||||||||
| Balance, November 30, 2011 | 44 | 2,821 | (3,579) | 9,574 | 8,860 | ||||||||||
| Transactions during the year ended November 30, 2012 |
|||||||||||||||
| Other comprehensive income (loss) | (723) | (41) | 674 | (13,635) | (13,725) | ||||||||||
| Income tax recovery (expense) | 6 | 53 | (107) | 4,061 | 4,013 | ||||||||||
| Balance, November 30, 2012 | (673) | 2,833 | (3,012) | - | (852) | ||||||||||
| Transactions during the period ended August 31, 2013 |
|||||||||||||||
| Other comprehensive income (loss) | 2,049 | (494) | 1,852 | - | 3,407 | ||||||||||
| Income tax recovery (expense) | - | 59 | (491) | - | (432) | ||||||||||
| Balance, August 31, 2013 | $ | 1,376 | $ | 2,398 | $ | (1,651) | $ | - | $ | 2,123 | |||||
| All items presented in other comprehensive income (loss) will be reclassified to the consolidated statement of income (loss) in subsequent periods. | |||||||||||||||
Note 10: Fair Value Adjustments and Other Income (Loss)
| Three months ended August 31, | ||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | ||||
| Fair value adjustment related to investment in AGF mutual funds (Note 3) | $ | 1,467 | $ | 479 | ||
| Fair value adjustment related to acquisition consideration payable (Note 5(a)) | (337) | (171) | ||||
| Fair value adjustment related to put agreement with non-controlling shareholders (Note 12(c)) | - | (866) | ||||
| Interest income and other | 1,597 | 513 | ||||
| $ | 2,727 | $ | (45) | |||
| Nine months ended August 31, | ||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | ||||
| Fair value adjustment related to investment in AGF mutual funds (Note 3) | $ | 2,135 | $ | (94) | ||
| Fair value adjustment related to acquisition consideration payable (Note 5(a)) | (1,137) | (196) | ||||
| Fair value adjustment related to put agreement with non-controlling shareholders (Note 12(c)) | 677 | (3,490) | ||||
| Interest income and other | 8,369 | 1,326 | ||||
| $ | 10,044 | $ | (2,454) | |||
During the nine months ended August 31, 2013, $3.7 million of one-time other income was recognized in interest income and other.
Note 11: Expenses by Nature
| Three months ended August 31, | |||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | |||||
| Selling, general and administrative | |||||||
| Employee benefit expense | $ | 27,463 | $ | 28,593 | |||
| Sales and marketing | 2,954 | 3,191 | |||||
| Information technology and facilities | 5,629 | 6,370 | |||||
| Professional fees | 5,133 | 4,903 | |||||
| Fund absorption and other fund costs | 4,247 | 4,924 | |||||
| Other | 1,782 | 1,792 | |||||
| $ | 47,208 | $ | 49,773 | ||||
| Nine months ended August 31, | |||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | |||||
| Selling, general and administrative | |||||||
| Employee benefit expense | $ | 82,118 | $ | 79,907 | |||
| Sales and marketing | 8,772 | 8,936 | |||||
| Information technology and facilities | 17,134 | 18,036 | |||||
| Professional fees | 13,050 | 14,398 | |||||
| Fund absorption and other fund costs | 14,843 | 14,796 | |||||
| Other | 3,331 | 3,796 | |||||
| $ | 139,248 | $ | 139,869 | ||||
Note 12: Stock-based Compensation and Other Stock-based Payments
(a) Stock Option Plans
AGF has established stock option plans for senior employees. Under the plans, an additional maximum of 3,440,774 Class B Non-Voting shares could have been granted as at August 31, 2013 (2012 - 4,458,926). The stock options are issued at a price not less than the market price of the Class B Non-Voting shares immediately prior to the grant date. Stock options are vested to the extent of 25% to 33% of the individual's entitlement per annum, or in some instances, vest at the end of the term of the option.
The change in stock options, excluding those related to AGF Trust (refer to Note 4), during the nine months ended August 31, 2013 and 2012 is summarized as follows:
| Nine months ended | August 31, 2013 | August 31, 2012 | ||||||||||
| Weighted | Weighted | |||||||||||
| average | average | |||||||||||
| Options | exercise price | Options | exercise price | |||||||||
| Class B Non-Voting share options, excluding AGF Trust | ||||||||||||
| Balance, beginning of the period | 4,933,339 | $ | 15.33 | 4,942,679 | $ | 17.47 | ||||||
| Options granted | 649,061 | 11.38 | 469,750 | 15.87 | ||||||||
| Options forfeited | (135,829) | 24.74 | (252,910) | 20.26 | ||||||||
| Options expired | - | - | (505,900) | 17.08 | ||||||||
| Options exercised | (165,850) | 8.24 | (139,850) | 8.24 | ||||||||
| Balance, end of the period | 5,280,721 | $ | 14.85 | 4,513,769 | $ | 17.48 | ||||||
During the three months ended August 31, 2013, nil stock options were granted (2012 - nil) and compensation expense and contributed surplus of $0.4 million (2012 - $0.4 million) was recorded. During the nine months ended August 31, 2013, 649,061 stock options were granted (2012 - 469,750) and compensation expense and contributed surplus of $1.2 million (2012 - $1.1 million) were recorded. The fair value of options granted during the nine months ended August 31, 2013 has been estimated at $1.64 per option (2012 - $3.10) using the Black-Scholes option-pricing model. The following assumptions were used to determine the fair value of the options granted during the nine months ended August 31, 2013 and 2012:
| Nine months ended | August 31, 2013 | August 31, 2012 | |||||||
| Risk-free interest rate | 1.5% | 1.3% | |||||||
| Expected dividend yield | 9.6% | 6.8% | |||||||
| Five-year historical-based expected share price volatility | 41.9% | 41.8% | |||||||
| Option term | 5.0 years | 5.0 years |
(b) Other Stock-based Compensation
Other stock-based compensation includes RSU, Performance Share Units (PSU), Deferred Share Units (DSU), and Partners Incentive Plan (PIP). Compensation expense for the three and nine months ended August 31, 2013 related to these share units was $3.2 million and $8.1 million (2012 - $0.9 million and $0.8 million). As at August 31, 2013, the Company has recorded a $13.2 million (2012 - $8.6 million) liability related to other stock-based compensation.
The change in share units of RSU and PSU, excluding those related to AGF Trust (refer to Note 4), during the nine months ended August 31, 2013 and 2012 is as follows:
| Nine months ended | August 31, 2013 | August 31, 2012 | ||||||||
| Number of share units | Number of share units | |||||||||
| Outstanding, beginning of the period | ||||||||||
| Non-vested | 822,105 | 319,799 | ||||||||
| Issued | ||||||||||
| Initial grant | 548,055 | 605,099 | ||||||||
| In lieu of dividends | 89,147 | 41,527 | ||||||||
| Settled in cash | (16,200) | (5,032) | ||||||||
| Forfeited and cancelled | (23,421) | (125,676) | ||||||||
| Outstanding, end of the period | 1,419,686 | 835,717 | ||||||||
(c) Put Agreement with Non-controlling Shareholders
During the nine months ended August 31, 2013, the Company settled the liability related to the put agreement with non-controlling shareholders of one of its subsidiaries in connection with the purchase of the remaining non-controlling interest. As at November 30, 2012, the put liability was $6.7 million. Prior to the final settlement of the liability, in the three and nine months ended August 31, 2013, the Company recorded nil and a gain of $0.7 million, respectively (2012 - loss of $0.9 million and $3.5 million) related to the change in the fair value of the put agreement. Refer to Note 5 for details regarding the acquisition.
Note 13: Income Taxes
Income tax expense is recognized based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated effective tax rate for the nine months ended August 31, 2013 was 72.9% (2012 - 58.0%). During the three months ended August 31, 2012, tax legislation was substantively enacted to freeze the Ontario general corporate tax rate at 11.5% to replace a scheduled tax rate reduction to 10.0%, which resulted in approximately $8.0 million deferred income tax expense for the Company during the third quarter of 2012. Excluding the tax contingencies recorded for the Canada Revenue Agency (CRA) transfer pricing audit discussed in Note 17, and the tax rate change recorded in the nine months ended August 31, 2012, the estimated effective tax rate for the nine months ended August 31, 2013 was 25.5% (2012 - 24.6%, based on net income adjusted for a non-tax recoverable impairment).
The income tax expense related to income from discontinued operations for the nine months ended August 31, 2012 was $7.4 million.
Note 14: Earnings per Share
| Three months ended August 31, | Nine months ended August 31, | ||||||||||||
| (in thousands of Canadian dollars, except per share amounts) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Numerator | |||||||||||||
| Net income (loss) for the period from continuing operations attributable to the equity owners of the Company |
$ | 10,105 | $ | (19,310) | $ | 15,301 | $ | 14,677 | |||||
| Net income for the period from discontinued operations attributable to the equity owners of the Company |
- | 6,006 | - | 21,925 | |||||||||
| Net income (loss) for the period attributable to the equity owners of the Company |
10,105 | (13,304) | 15,301 | 36,602 | |||||||||
| Denominator | |||||||||||||
| Weighted average number of shares - basic | 87,411,167 | 94,311,520 | 88,501,722 | 95,371,661 | |||||||||
| Dilutive effect of employee stock options | 614,845 | 375,536 | 460,224 | 538,252 | |||||||||
| Weighted average number of shares - diluted | 88,026,012 | 94,687,056 | 88,961,946 | 95,909,913 | |||||||||
| Basic earnings (loss) per share | |||||||||||||
| Continuing operations | $ | 0.12 | $ | (0.20) | $ | 0.17 | $ | 0.15 | |||||
| Discontinued operations | - | 0.06 | - | 0.23 | |||||||||
| $ | 0.12 | $ | (0.14) | $ | 0.17 | $ | 0.38 | ||||||
| Diluted earnings (loss) per share | |||||||||||||
| Continuing operations | $ | 0.11 | $ | (0.20) | $ | 0.17 | $ | 0.15 | |||||
| Discontinued operations | - | 0.06 | - | 0.23 | |||||||||
| $ | 0.11 | $ | (0.14) | $ | 0.17 | $ | 0.38 | ||||||
Note 15: Dividends
The dividends paid, including dividends reinvested, in the three and nine months ended August 31, 2013 were $23.5 million and $71.7 million, compared to $25.8 million and $77.6 million in 2012. On September 24, 2013, the Board of Directors of AGF declared a quarterly dividend on both the Class A Voting common shares and Class B Non-Voting shares of the Company of $0.27 per share in respect of the three months ended August 31, 2013, amounting to a total dividend of approximately $23.6 million. These condensed consolidated interim financial statements do not reflect this dividend payable.
Note 16: Related Party Transactions
The Company is controlled by Blake C. Goldring, Chairman and Chief Executive Officer of AGF, through his indirect ownership of all the voting shares of Goldring Capital Corporation, which owns 80% of the Company's Class A Voting common shares. The remaining 20% of the Class A Voting common shares are held by the Vice-Chairman of AGF, who is also a Director.
The remuneration of Directors and other key management personnel of AGF is as follows:
| Three months ended August 31, | Nine months ended August 31, | ||||||||||
| (in thousands of Canadian dollars) | 2013 | 2012 | 2013 | 2012 | |||||||
| Salaries and other short-term employee benefits | $ | 1,289 | $ | 1,046 | $ | 3,784 | $ | 3,913 | |||
| Share-based payments | 940 | 542 | 2,663 | 1,556 | |||||||
| $ | 2,229 | $ | 1,588 | $ | 6,447 | $ | 5,469 | ||||
Note 17: Contingencies
In February 2013, the Company received a proposal letter from the CRA relating to the transfer pricing and allocation of income between one of the Company's Canadian legal entities and a foreign subsidiary, which proposed to increase the Company's taxes payable for its 2005, 2006 and 2007 fiscal years, respectively.
Subsequent to receiving the proposal letter, the Company has had discussions with the CRA and has been informed about a forthcoming Notice of Reassessment (NOR) to be issued. Although the NOR has not yet been received, it is estimated that the NOR will increase the Company's taxes payable by $10.0 million, $10.5 million and $15.3 million (before the application of any interest or transfer pricing penalties) for its 2005, 2006 and 2007 fiscal years, respectively.
The Company strongly disagrees with the CRA's position and will object to any forthcoming NOR with which it does not agree. The Company is advised by external advisors that its tax filing positions continue to be reasonable based on its transfer pricing methodology, and the Company is contesting the CRA's position and any related transfer pricing penalty. However, to reflect the uncertainties of the CRA's appeals process, and based on the information provided by the CRA to date and the imminent receipt of the NOR, the Company has recorded a tax provision of $26.7 million related to this matter during the nine months ended August 31, 2013 (of which $0.5 million was recorded in the third quarter of 2013). The Company believes it is likely that the CRA will reassess its tax returns for subsequent years on a similar basis and that this may result in future cash payments on receipt of the reassessments. Upon receipt of the NOR, any decision to contest the NOR will result in the Company being required to pay 50% of the federal amount reassessed although the ultimate outcome may differ from the amount reassessed. The amount of tax liability recorded on the Consolidated Interim Statement of Financial Position reflects management's best estimate of the ultimate resolution on this matter and includes estimated interest and penalties and an estimate for reassessments for the 2005 to 2013 fiscal years. The final result of the audit and appeals process may vary compared to the estimates and assumptions used by management in determining the Company's consolidated income tax provision and in valuing its income tax assets and liabilities. Depending on the ultimate outcome of any such audit and appeals process, there may be a material impact on the Company's financial position, results of operations and cash flows.
The Company has been accepted by the CRA into a Bilateral Advance Pricing Arrangement (BAPA) program between Canada and the relevant tax authorities to establish the appropriate transfer pricing methodologies for the tax years 2009 through 2016.
This report contains forward-looking statements with respect to AGF, including its business operations, strategy, financial performance and condition. Although management believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially include, among other things, general economic and market factors including interest rates, business competition, changes in government regulations or in tax laws, and other factors discussed in materials filed with applicable securities regulatory authorities from time to time.
SOURCE: AGF
AGF Management Limited shareholders, analysts and media, please contact:
Robert J. Bogart
Executive Vice-President and Chief Financial Officer
416-865-4264, [email protected]
Adrian Basaraba
Senior Vice-President, Finance
416-865-4203, [email protected]
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