Affiliated Managers Group, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
AMG is a global asset management company that invests in boutique investment management firms serving institutional, mutual fund and high-net-worth clients. The filing covers the fiscal year ended December 31, 2012; quarterly data identifies the fourth quarter as the period ended December 31, 2012.
- Assets under management increased to $431.8 billion at year-end, up 32% from $327.5 billion.
- 2012 growth reflected $47.5 billion of investment performance, $30.1 billion of net client cash flows and $28.0 billion from investments in Veritable and Yacktman.
- AMG completed majority investments in Veritable and Yacktman and an additional minority investment in BlueMountain during 2012.
Financial performance and key metrics
| Metric | 2011 | 2012 | Change |
|---|---|---|---|
| Revenue | $1,704.8 million | $1,805.5 million | +6% |
| Operating income | $486.1 million | $400.4 million | -18% |
| Net income | $359.6 million | $411.4 million | +14% |
| Net income attributable to controlling interest | $164.9 million | $174.0 million | +6% |
| Diluted earnings per share | $3.11 | $3.28 | +5% |
| Economic net income | $351.0 million | $408.8 million | +16% |
| Economic earnings per share | $6.62 | $7.71 | +16% |
| EBITDA | $471.3 million | $543.4 million | +15% |
| Cash flow from operations | $708.5 million | $633.2 million | -11% |
- Revenue by channel was $861.3 million Institutional, $774.4 million Mutual Fund and $169.8 million High Net Worth.
- Total operating expenses increased 15% to $1,405.1 million. Compensation and related expenses increased 9% to $784.7 million, while intangible amortization and impairments increased to $200.0 million.
- Operating margin declined from approximately 28.5% in 2011 to 22.2% in 2012, primarily because of the impairment charge and higher operating expenses.
- The company recognized a $102.2 million impairment of an indefinite-lived intangible asset at a growth-oriented U.S. equity mutual-fund affiliate. The remaining asset was reclassified as definite-lived and became subject to amortization.
- Income from equity method investments increased 78% to $129.7 million, aided by higher affiliate revenue and the additional BlueMountain investment.
- Cash and cash equivalents were $430.4 million at year-end, compared with $449.5 million in 2011.
- Total assets were $6.19 billion and total equity was $3.04 billion at December 31, 2012. Intangible assets were approximately $3.9 billion.
Debt and liquidity
- Year-end debt included $325.0 million of senior bank debt, $340.0 million of senior notes, $450.1 million carrying value of senior convertible securities and $515.5 million of junior convertible trust preferred securities.
- AMG issued $340.0 million of senior notes in 2012: $140.0 million of 5.25% notes due 2022 and $200.0 million of 6.375% notes due 2042. Proceeds were used to repay revolver borrowings.
- The company reported an internal debt-to-EBITDA ratio of 1.7:1. Bank leverage and interest coverage ratios were 1.9 and 8.2, respectively, versus covenant limits of 3.0 and 3.0.
- The credit facility had $750.0 million of remaining capacity at year-end, and management stated that operating cash flow, facility borrowings and forward equity-sale proceeds should meet foreseeable cash needs.
- Investing cash flow was negative $802.3 million, including $797.4 million invested in Affiliates. Financing cash flow was positive $146.2 million.
Material changes versus the prior comparable period
- Assets under management rose 32%, compared with 2% growth in 2011, due to stronger investment performance, positive net flows and new investments.
- Revenue growth slowed to 6% from 26% in 2011, partly because the revenue-to-average-assets ratio declined as asset mix shifted toward lower-fee products.
- Controlling-interest earnings increased only 6%, despite higher revenue, reflecting the $102.2 million impairment, higher interest expense and increased operating expenses.
- Economic earnings grew faster than GAAP earnings because Economic net income excludes specified acquisition-related non-cash expenses.
- Cash flow from operations declined by $75.3 million, primarily because of lower collections of investment advisory fees receivable and other working-capital movements.
- Net income included a $53.8 million gain from revaluation of contingent payment arrangements, $35.8 million of which was attributable to the controlling interest.
Outlook, commentary, risks and unusual items
- Management expects principal cash uses to include investments in new and existing Affiliates, contingent payment settlements, Affiliate partner distributions, debt service and working capital.
- AMG expected approximately $100.0 million of Affiliate equity repurchases and approximately $3.2 million of contingent-payment settlements in 2013.
- Holders could put up to $460.0 million of senior convertible notes to AMG in August 2013. Management indicated that it expected to fund a cash settlement with credit-facility borrowings or potentially common stock.
- Past acquisition agreements created contingent payment obligations of up to $468.2 million through 2017; expected settlement amounts at year-end were $200.8 million, subject to performance targets.
- Key risks include equity-market declines, investment underperformance, client withdrawals, performance-fee volatility, loss of key Affiliate personnel, intense competition, regulatory changes, counterparty risk, foreign exchange movements and limited control over Affiliate day-to-day operations.
- Goodwill impairment testing identified no impairment, but the company remains exposed to substantial intangible-asset impairment risk. Definite-lived client-relationship amortization was expected to be approximately $100 million annually for the next five years, excluding new investments.
- No material adverse legal proceedings were reported, and management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the $102.2 million mutual-fund intangible impairment signals continuing asset declines, client attrition or additional impairment risk.
- The sustainability and quality of 2012 asset growth, especially the contribution from market performance versus recurring net client flows and acquisitions.
- The August 2013 put or conversion outcome for the $460.0 million senior convertible notes and its effect on leverage, interest expense and share dilution.
- Actual 2013 Affiliate equity repurchases and contingent payments compared with management’s estimates.
- The effect of performance fees, asset mix and fee-rate changes on revenue margins.
- Future acquisition spending, financing requirements and compliance with credit-facility covenants.
- Potential effects of regulatory reforms, tax audits, deferred-tax liabilities and the company’s approximately $3.9 billion of intangible assets.