Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed this Form 10-K for the fiscal year ended December 31, 2010, with quarterly information for the fourth quarter. AMG invests in boutique investment management firms serving mutual fund, institutional and high-net-worth clients. At year-end, AMG managed approximately $320.0 billion through more than 350 products and had completed investments in Artemis, Aston, Pantheon and Trilogy during 2010.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Assets under management | $320.0 billion | $208.0 billion | 54% |
| Revenue | $1,358.2 million | $841.8 million | 61% |
| Operating income | $374.0 million | $239.8 million | 56% |
| Net income | $287.3 million | $212.9 million | 35% |
| Net income attributable to AMG | $138.6 million | $59.5 million | 133% |
| Diluted EPS | $2.81 | $1.38 | 104% |
| Economic Net Income | $299.1 million | $185.7 million | 61% |
| Economic EPS | $6.09 | $4.37 | 39% |
| EBITDA | $404.4 million | $242.8 million | 67% |
| Cash flow from operations | $480.7 million | $243.2 million | 98% |
Based on reported figures, operating margin was approximately 27.5%, net margin was approximately 21.1%, and net income attributable to AMG represented approximately 10.2% of revenue. Performance fee revenue increased 154% to $58.4 million. Revenue by channel was $578.8 million for Mutual Fund, $649.2 million for Institutional and $130.2 million for High Net Worth.
Year-end cash and cash equivalents were $313.3 million, compared with $259.5 million in 2009. Total assets were $5.29 billion, including approximately $3.6 billion of intangible assets and $0.7 billion of equity investments in Affiliates. Stockholders' equity was $1.80 billion.
Year-end debt included $460.0 million of senior bank debt, $422.1 million carrying value of senior convertible securities and $509.9 million carrying value of junior convertible trust preferred securities. AMG reported an internal debt-to-EBITDA ratio of 1.7x, bank leverage of 2.0x and interest coverage of 7.6x. The company had $290 million of remaining capacity under its $750 million credit facility and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Assets under management increased by $112.0 billion, primarily from $64.5 billion of assets acquired through new Affiliate investments, $39.3 billion of investment performance and $9.4 billion of net client cash inflows.
- Revenue increased $516.4 million, reflecting higher average assets under management, new Affiliates and stronger performance fees.
- Operating expenses increased 63% to $984.2 million. Compensation increased 48%, selling, general and administrative expense increased 124%, and intangible amortization increased 82%, mainly because of acquired businesses and higher revenue.
- Income from equity method investments increased 145% to $77.5 million, principally because of higher performance fees at equity-method Affiliates.
- Income taxes increased to $91.5 million from $32.8 million, and the effective tax rate attributable to controlling interests was 36.7% versus 32.0%.
- Investing cash outflows increased to $973.8 million, including $916.1 million spent on investments in Affiliates. Financing cash flow was positive $545.0 million, supported by debt borrowings and forward equity settlements.
- AMG issued approximately 5.5 million shares through forward equity sales and approximately 1.7 million shares for the Aston investment. The zero-coupon convertible notes were converted into 873,626 common shares.
Fourth-Quarter Results
| Metric | Q4 2010 | Q4 2009 |
|---|---|---|
| Revenue | $420.8 million | $244.7 million |
| Operating income | $114.1 million | $80.1 million |
| Income before taxes | $146.0 million | $83.1 million |
| Net income attributable to AMG | $62.0 million | $24.6 million |
| Diluted EPS | $1.18 | $0.55 |
Guidance, Outlook, Commentary and Risks
Management did not provide formal quantified earnings or revenue guidance in the filing. It expected cash flows from operations, Revolver borrowings and potential forward equity proceeds to support foreseeable cash needs. Principal expected uses included investments in new and existing Affiliates, Affiliate-manager distributions, debt service, working capital and approximately $100 million of Affiliate equity repurchases in 2011. Management also expected approximately $15 million of contingent acquisition payments in 2011.
In January 2011, AMG amended and restated its revolving facility, increasing or maintaining borrowing capacity at $750 million and extending maturity to January 2015. The company also announced planned senior management changes effective after the May 2011 annual meeting.
- Results are highly sensitive to equity markets, asset valuations, investment performance, client flows and performance fees.
- Client investment contracts are generally terminable on short notice, and loss of key Affiliate personnel or clients could materially reduce revenue.
- AMG faces substantial competition in both asset management and acquisitions of investment managers.
- Regulatory reform, including the Dodd-Frank Act and European reforms, may increase compliance costs and constrain operations.
- AMG has significant intangible assets and goodwill; impairment could materially reduce earnings.
- Contingent acquisition payments could total up to $491 million through 2015, and Pantheon-related co-investment commitments totaled approximately $89.2 million at year-end.
- Contractual obligations totaled $3.42 billion, including debt, convertible securities, leases and other liabilities. Additional co-investment commitments and uncertain tax positions were excluded from portions of that table.
- The company does not pay cash dividends and expects to retain earnings for investments, debt repayment, taxes, share repurchases and business development.
Important Facts for Investors to Verify
- Reconcile reported revenue, net income attributable to AMG, Economic Net Income and EBITDA, noting that Economic Net Income and EBITDA are non-GAAP measures.
- Assess how much 2010 growth came from acquisitions versus organic net flows and investment performance.
- Review the sustainability and volatility of performance fee revenue, particularly within the Institutional channel.
- Evaluate debt maturities, convertible security terms, potential dilution and the 2013 put right on the $460 million 2008 convertible notes.
- Review the valuation and impairment sensitivity of approximately $3.6 billion of intangible assets and the $2.13 billion goodwill balance.
- Monitor contingent acquisition payments, Affiliate equity put rights, co-investment commitments and expected 2011 Affiliate equity repurchases.
- Consider the effect of market declines, client redemptions, regulatory changes, foreign currency movements and key-person departures on future cash distributions.
- Confirm that the amended January 2011 credit facility terms, covenant calculations and available capacity remain consistent with the filing disclosures.