Affiliated Managers Group, Inc. — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, with unaudited fourth-quarter data. AMG is a global asset management company investing in boutique investment managers and providing centralized strategic, distribution, product-development and operational support. At year-end, Affiliates managed $736.0 billion across more than 500 active, return-oriented investment products and employed approximately 4,450 people.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Assets under management | $736.0 billion | $836.3 billion | (12%) |
| Average assets under management | $819.9 billion | $779.2 billion | 5% |
| Aggregate fees | $5,442.4 million | $5,545.8 million | (2%) |
| Consolidated revenue | $2,378.4 million | $2,305.0 million | 3% |
| Net income | $532.3 million | $1,008.7 million | (47%) |
| Net income attributable to controlling interest | $243.6 million | $689.5 million | (65%) |
| Diluted EPS | $4.52 | $12.03 | (62%) |
| Adjusted EBITDA attributable to controlling interest | $961.8 million | $1,116.2 million | (14%) |
| Economic net income attributable to controlling interest | $780.7 million | $824.4 million | (5%) |
| Economic EPS | $14.50 | $14.60 | (1%) |
Margins and earnings drivers: Consolidated revenue increased 3%, while consolidated expenses increased 5% to $1,692.0 million. Equity method income declined from $302.2 million to a loss of $0.2 million, primarily because of lower performance fees and $370.8 million of equity-method intangible amortization and impairment charges. The filing does not present a single consolidated operating-margin measure; based on reported consolidated revenue and expenses, consolidated expenses represented approximately 71% of revenue in 2018 versus approximately 70% in 2017.
Cash flow and liquidity: Operating cash flow was $1,140.6 million, compared with $1,170.4 million in 2017. Investing cash flow was $(18.2) million, and financing cash flow was $(983.1) million. Cash and cash equivalents increased to $565.5 million from $439.5 million. Management stated that operating cash flow, together with revolver availability, should fund normal requirements for the foreseeable future.
Debt and capital structure: Year-end carrying values included $780.0 million of senior bank debt, $746.2 million of senior notes and $312.5 million of convertible securities. Total outstanding senior debt and convertible securities were approximately $2.0 billion. The revolver had $1.45 billion of borrowing capacity and $330.0 million outstanding, leaving approximately $1.0 billion of capacity under the then-existing facility. AMG’s bank leverage ratio was 1.4x versus a 3.25x maximum covenant, and interest coverage was 13.5x versus a 3.00x minimum. The credit facilities were amended on January 18, 2019.
Shareholder returns: AMG paid $1.20 per share in dividends in 2018, compared with $0.80 in 2017. It repurchased 3.3 million shares during 2018 for approximately $489.5 million of cash, and had 5.0 million shares remaining under the January 2018 and January 2019 authorizations as of the January 2019 authorization.
Fourth-Quarter 2018
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Consolidated revenue | $564.4 million | $604.1 million |
| Income before taxes | $(63.6) million | $264.0 million |
| Net income attributable to controlling interest | $(151.3) million | $315.4 million |
| Diluted EPS | $(2.88) | $5.50 |
The fourth-quarter loss reflected impairment charges related to equity-method Affiliates. The prior-year fourth quarter benefited from a one-time U.S. tax-law benefit.
Material Changes Versus 2017
- Year-end AUM declined 12%, driven by market declines, foreign-exchange effects, net client outflows and realizations. Net client cash flows were $(12.5) billion, while market changes reduced AUM by $60.8 billion and foreign exchange reduced AUM by $10.6 billion.
- Aggregate fees declined 2%. Asset-based fees increased 2%, but performance-based fees decreased $213.5 million, or 4%, following weak equity-market performance in the fourth quarter.
- Equity-method earnings declined 26% to $370.6 million before intangible amortization and impairments. Equity-method income, net of those charges, fell to a loss of $0.2 million.
- AMG recorded a $240.0 million non-cash impairment to reduce the value of a non-U.S. alternative Affiliate to fair value and a $33.3 million charge to reduce a U.S. alternative Affiliate investment to zero as that business was liquidated.
- Net income attributable to the controlling interest was also affected by the absence of the $194.1 million one-time net tax benefit recognized in 2017 under U.S. tax-law changes.
- Total assets declined to $8.2 billion from $8.7 billion, principally reflecting the reduction in equity-method investments and intangible assets. Redeemable non-controlling interests increased to $833.7 million.
Outlook, Risks and Unusual Items
- Management expects demand for illiquid alternative and multi-asset strategies to continue and expects global-equity and liquid-alternative demand to improve from the fourth quarter, but the filing provides no quantified earnings or revenue guidance.
- Results remain highly sensitive to market levels, investment performance, client flows, fee rates, product mix and performance-based fees. A proportional 1% change in AUM was estimated to affect annualized asset-based fees by approximately $36.3 million in aggregate.
- Major risks include continued migration toward passive products, fee pressure, loss of key Affiliate personnel, client contract terminations, regulatory and compliance costs, cyber and operational risks, foreign-exchange exposure, counterparty risk and impairment of goodwill, client relationships or Affiliate investments.
- AMG had $131.0 million of unfunded commitments to co-invest in Affiliate-sponsored products. Affiliate equity interests had a $833.7 million current redemption value; management expected approximately $100 million of net Affiliate equity repurchases in 2019.
- A minority owner of a non-U.S. alternative Affiliate could elect to sell a 5% interest to AMG in the first half of 2019; the potential purchase price was not determinable at year-end.
- Contractual obligations totaled $2.8 billion, excluding certain co-investment commitments, uncertain tax positions and potential derivative-related obligations. No pending legal or regulatory matter was identified as expected to have a material adverse effect, although ordinary-course matters remain possible.
- Management and PricewaterhouseCoopers LLP concluded that internal control over financial reporting was effective as of December 31, 2018, and the audit opinion was unqualified.
Investor Verification Checklist
- Reconcile the reported GAAP decline in net income and EPS with the non-cash Affiliate impairment charges and the nonrecurring 2017 tax benefit.
- Review the sustainability and composition of AUM, particularly performance-fee-heavy alternative strategies, global equities and products experiencing outflows.
- Assess debt maturities, covenant headroom, variable-rate exposure and the terms of the January 2019 amended credit facilities.
- Evaluate the timing and magnitude of Affiliate equity repurchase obligations, unfunded co-investments and the potential minority-interest purchase.
- Compare GAAP earnings with Economic net income and Adjusted EBITDA, including the substantial intangible amortization and impairment add-backs.
- Monitor impairment assumptions for equity-method Affiliates and the concentration of value in goodwill, acquired client relationships and Affiliate investments.