Affiliated Managers Group, Inc. — Fiscal 2013 Form 10-K Summary
Business Context and Reporting Period
AMG is a global asset management company that invests in boutique investment management firms and operates through Institutional, Mutual Fund, and High Net Worth distribution channels. The filing covers the fiscal year ended December 31, 2013, with fourth-quarter information also disclosed. Assets under management increased to $537.3 billion at year-end, including approximately $544 billion on a pro forma basis for the pending SouthernSun investment.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $2,188.8 million | $1,805.5 million | +21% |
| Operating income | $634.1 million | $400.4 million | +58% |
| Net income | $669.6 million | $411.4 million | +63% |
| Net income attributable to controlling interest | $360.5 million | $174.0 million | +107% |
| Diluted EPS | $6.55 | $3.28 | +100% |
| Economic net income | $570.1 million | $408.8 million | +39% |
| Economic EPS | $10.31 | $7.71 | +34% |
| Operating cash flow | $957.1 million | $633.2 million | +51% |
| EBITDA | $819.9 million | $543.4 million | +51% |
| Assets under management | $537.3 billion | $431.8 billion | +24% |
Approximate 2013 margins were 29.0% for operating income, 37.5% for EBITDA, and 16.5% for net income attributable to controlling interest. Average assets under management increased 27% to $483.8 billion. Growth in year-end assets under management included $64.4 billion from investment performance and $40.7 billion from net client cash flows.
Revenue by channel was $948.7 million for Institutional, $1,023.0 million for Mutual Fund, and $217.1 million for High Net Worth. Revenue growth was strongest in Mutual Fund, which increased 32%.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $469.6 million at December 31, 2013, compared with $430.4 million in 2012.
- Total assets were $6.3 billion, including $3.8 billion of intangible assets and $1.1 billion of equity investments in Affiliates.
- Debt included $525.0 million of senior bank debt, $340.0 million of senior notes, and $730.8 million of junior convertible trust preferred securities at principal value.
- The $1.25 billion unsecured revolving credit facility matures in April 2018; $725.0 million remained available at year-end.
- Bank leverage and interest coverage ratios were 1.1 and 11.6, respectively, versus covenant limits of 3.0 and a minimum of 3.0. AMG reported compliance with all credit facility covenants.
- Financing cash flow was negative $869.1 million, primarily reflecting debt and convertible-security repayments, Affiliate distributions, and Affiliate equity repurchases.
- Total equity was $3.1 billion, while redeemable non-controlling interests increased to $641.9 million from $477.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher average assets under management, positive investment performance, net client inflows, and the full-year contribution of 2012 Affiliate investments.
- Income from equity method investments increased 137% to $307.8 million, driven by higher Affiliate revenue, performance fees, and the full-year effect of an additional 2012 investment.
- Operating expenses increased 11% to $1.55 billion. Compensation increased 21% and selling, general and administrative expense increased 16%, while intangible amortization and impairments declined 36% because the $102.2 million impairment recorded in 2012 did not recur.
- 2013 included a $10.3 million loss from revaluation of contingent payment arrangements, compared with a $53.8 million gain in 2012. This negatively affected the year-over-year comparison.
- AMG settled $460.0 million principal amount of 2008 senior convertible notes for $641.3 million, retiring the securities.
- AMG repurchased approximately 0.1 million common shares for $15.7 million during 2013 and had approximately 2.2 million shares remaining under authorized repurchase programs.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal financial guidance. Management expects cash flows from operations, credit-facility borrowings, and potential forward-equity settlements to support foreseeable cash needs. AMG expected to repurchase approximately $50.0 million of Affiliate equity during 2014 and did not expect contingent payment settlements in 2014 under specified arrangements.
- In December 2013, AMG announced a planned majority investment in SouthernSun Asset Management, which had approximately $6 billion of assets under management. Closing was expected in the first quarter of 2014, subject to customary conditions and approvals.
- AMG announced a $400.0 million issuance of 4.25% senior notes due 2024 in February 2014, using proceeds to repay credit-facility borrowings.
- AMG delivered notice in February 2014 to redeem its $300.0 million principal amount of 2006 junior convertible trust preferred securities; redemption was scheduled for March 31, 2014, subject to holder conversion rights.
- Contingent payment obligations could total up to $474.1 million through 2017. The company also disclosed $62.9 million of unfunded co-investment commitments and expected payments of up to $151.0 million related to equity-method investments.
- Key risks include sensitivity of fee revenue to equity-market performance, investment performance and client cash flows; reliance on key Affiliate personnel; competition for clients and acquisitions; extensive global regulation; foreign exchange exposure; cybersecurity and operational risks; potential impairment of substantial intangible assets; and the liquidity demands of Affiliate put rights and other purchase obligations.
- A 1% change in the value of fee-paying assets under management, excluding committed-capital products, was estimated to change annualized revenue by approximately $21.0 million.
- Management reported effective internal control over financial reporting, and PricewaterhouseCoopers LLP issued an unqualified audit opinion.
Investor Verification Checklist
- Verify the sustainability of 2013’s unusually strong investment performance, net inflows, and performance-fee contribution.
- Assess the effect of Mutual Fund revenue growth and lower fee-rate product mix on future revenue margins.
- Review the cash requirements and timing for Affiliate equity repurchases, redeemable non-controlling interests, contingent payments, and co-investment commitments.
- Evaluate leverage and liquidity after the 2014 senior-notes issuance, repayment of credit-facility borrowings, and redemption or conversion of the 2006 junior convertible securities.
- Monitor the SouthernSun acquisition and the announced rebranding and Aston-related retail distribution transaction, including closing conditions and integration effects.
- Consider the valuation and impairment sensitivity of $3.8 billion of intangible assets and $1.1 billion of Affiliate equity investments.
- Reconcile GAAP earnings and diluted EPS with AMG’s non-GAAP Economic net income and Economic EPS, particularly the effects of amortization, deferred taxes, convertible securities, and contingent payment revaluations.