Affiliated Managers Group, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
AMG is a global asset management company that invests in independent boutique investment managers and provides centralized strategic, distribution, marketing, and product-development capabilities. The filing covers the fiscal year ended December 31, 2019; it is an annual report rather than a standalone fourth-quarter filing. AMG reported approximately $722.5 billion of assets under management at year-end, or approximately $726 billion pro forma for the subsequent Comvest investment.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Assets under management | $722.5 billion | $736.0 billion | Down 2% |
| Average assets under management | $758.1 billion | $819.9 billion | Down 8% |
| Aggregate fees | $4,962.7 million | $5,442.4 million | Down 9% |
| Consolidated revenue | $2,239.6 million | $2,378.4 million | Down 6% |
| Net income | $305.1 million | $532.3 million | Down 43% |
| Net income attributable to controlling interest | $15.7 million | $243.6 million | Down 94% |
| Diluted EPS | $0.31 | $4.52 | Down 93% |
| Adjusted EBITDA attributable to controlling interest | $841.6 million | $961.8 million | Down 12% |
| Economic net income attributable to controlling interest | $720.2 million | $780.7 million | Down 8% |
| Operating cash flow | $929.1 million | $1,140.6 million | Down 19% |
| Cash and cash equivalents | $539.6 million | $565.5 million | Down 5% |
| Debt | $1,793.8 million | $1,829.6 million | Down 2% |
Reported profit was heavily affected by non-cash intangible amortization and impairment charges. Total intangible amortization and impairments attributable to the controlling interest were $745.8 million, including $485.0 million related to equity-method Affiliates and $51.1 million related to consolidated client relationships. The effective tax rate attributable to the controlling interest was negative 137.0%, reflecting tax benefits associated with the reduced earnings base, Affiliate divestment, and other items.
Year-end total assets were $7.65 billion, including $2.65 billion of goodwill, $1.18 billion of acquired client relationships, and $2.20 billion of equity-method investments in Affiliates. Redeemable non-controlling interests were $916.7 million.
Material changes versus the prior comparable period
- Average assets under management declined 8%, and aggregate fees declined 9%, primarily because of lower average assets in alternative and global-equity strategies and a 2% decline in the asset-based fee ratio.
- Net client cash flows were negative $53.5 billion, partially offset by $98.8 billion of favorable market changes, $5.9 billion of foreign-exchange effects, and $4.0 billion from new investments.
- Alternative-strategy assets declined to $241.2 billion from $293.5 billion, while global-equity assets increased to $274.9 billion from $243.8 billion. Multi-asset and fixed-income assets increased to $106.4 billion from $101.1 billion.
- Equity-method income shifted from a loss of $0.2 million in 2018 to a loss of $338.0 million in 2019. Equity-method earnings fell 22% to $289.4 million, while equity-method impairment and amortization charges increased 69% to $627.4 million.
- AMG completed its investment in Garda Capital Partners in July 2019 and accounted for it under the equity method. The Company completed its investment in Comvest Partners on February 18, 2020; results are to be reported one quarter in arrears.
- AMG issued $300 million of 5.875% junior subordinated notes due 2059, primarily using proceeds to repay revolver borrowings. It ended the year with no revolver borrowings and $450 million outstanding under its term loan.
- AMG repurchased 4.1 million common shares for an average price of $88.73 and paid $1.28 per share in dividends. Approximately 6.9 million shares remained available under outstanding repurchase programs at year-end.
Guidance, outlook, commentary, risks, and unusual items
Management expects operating cash flow and available revolver capacity to support normal working-capital needs, investments, Affiliate equity repurchases, debt service, dividends, and share repurchases. Management also stated that debt and equity capital markets remain potential sources of funding. No specific earnings or revenue guidance is provided in the filing.
Management cited continuing demand for illiquid alternatives and multi-asset and fixed-income strategies, while noting outflows in global equities and quantitative liquid alternatives. Industry-wide fee pressure, investor migration toward passive products, investment performance, client retention, market levels, and the mix of assets remain central drivers of results.
- AMG recorded $415.0 million of equity-method impairment expense in the first quarter, $10.0 million in the third quarter, and $60.0 million in the fourth quarter. These charges reflected weaker asset growth expectations, client redemptions, underperformance, and reduced projected fees at certain Affiliates.
- A $35.0 million impairment was recorded for an indefinite-lived acquired client relationship, and $16.1 million was recorded after the closure of certain retail investment products.
- AMG had $1.9 billion of outstanding debt, investment-grade ratings of A3 from Moody’s and BBB+ from S&P, and was in compliance with its credit covenants. The bank leverage ratio was 1.3x versus a 3.25x maximum, and interest coverage was 10.8x versus a 3.00x minimum.
- Contractual obligations totaled $3.44 billion, including debt, interest, leases, and Affiliate equity repurchase obligations. The Company expected approximately $190 million of Affiliate equity repurchases in 2020.
- Unfunded commitments to co-invest in Affiliate-sponsored products were $127.2 million. Contingent payment obligations had a maximum settlement amount of $150.0 million through 2021 and $40.0 million through 2022; expected payments were approximately $25 million, with none expected in 2020.
- A minority owner elected to sell an additional 5% interest in an Affiliate, expected to close in the first half of 2020; the amount payable was not yet determinable.
- Key risks include market declines, fee compression, client withdrawals, investment underperformance, Affiliate concentration and key-person risk, impairment of goodwill and client relationships, regulatory and legal exposure, cyber risk, foreign exchange, interest rates, LIBOR transition, and the need to fund Affiliate equity repurchases and strategic investments.
Management reported effective disclosure controls and internal control over financial reporting. PricewaterhouseCoopers LLP issued unqualified opinions on the financial statements and internal control. The critical audit matter was the impairment evaluation of equity-method investments in Affiliates, which involved significant assumptions regarding asset growth, client attrition, fee rates, expenses, and discount rates.
Most important facts for investors to verify
- Whether assets under management and net client flows stabilized after the 2019 declines, particularly in alternatives and global equities.
- Whether the significant 2019 Affiliate impairments represent a completed reset or indicate further impairment risk.
- The sustainability of economic earnings of $14.22 per share versus GAAP diluted EPS of $0.31, including the treatment of recurring versus non-recurring intangible charges.
- Cash-flow availability after dividends, share repurchases, Affiliate equity repurchases, debt service, co-investment commitments, and the expected 2020 Affiliate purchase obligations.
- Debt maturities, refinancing requirements, covenant compliance, interest-rate exposure, and the effect of any LIBOR replacement.
- The financial contribution and integration effects of Garda and the subsequent Comvest investment.
- Potential additional client, regulatory, tax, legal, cyber, or operational liabilities at AMG or its Affiliates.