Affiliated Managers Group, Inc. — 2015 Form 10-K Summary
Business context and reporting period
AMG is a global asset management company that invests in boutique investment management firms, or Affiliates. Affiliates retain operational autonomy and management ownership, while AMG provides strategic, distribution, marketing, product-development and operational support. The filing covers the fiscal year ended December 31, 2015; fourth-quarter selected results are also presented.
- Year-end assets under management were $611.3 billion, including more than 500 products across Institutional, Mutual Fund and High Net Worth channels.
- Average assets under management increased 6% to $623.9 billion.
- AMG completed majority investments in Baker Street Advisors and myCIO Wealth Partners, and minority investments in Abax Investments and Ivory Investment Management. Subsequent to year-end, AMG invested in Systematica Investments and Baring Private Equity Asia.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $2,484.5 million | $2,510.9 million | (1)% |
| Operating income | $835.0 million | $815.2 million | 2% |
| Net income | $833.7 million | $785.6 million | 6% |
| Net income attributable to controlling interest | $516.0 million | $452.1 million | 14% |
| Diluted EPS | $9.28 | $8.01 | 16% |
| EBITDA attributable to controlling interest | $942.2 million | $900.8 million | 5% |
| Economic net income attributable to controlling interest | $691.2 million | $644.4 million | 7% |
| Economic EPS | $12.55 | $11.45 | 10% |
- Operating margin was approximately 33.6%, compared with approximately 32.5% in 2014.
- Net income attributable to controlling interest margin was approximately 20.8%, compared with approximately 18.0% in 2014.
- Income from equity method investments increased 3% to $288.9 million, despite lower performance and advisory fees at existing Affiliates.
- The effective tax rate attributable to controlling interests increased to 32.8% from 32.1%.
Cash flow, debt and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Cash flow from operating activities | $1,204.8 million | $1,392.2 million |
| Cash flow used in investing activities | $324.5 million | $1,268.1 million |
| Cash flow used in financing activities | $854.1 million | $32.9 million |
| Cash and cash equivalents | $563.8 million | $550.6 million |
| Total debt | Approximately $1.9 billion | Approximately $1.9 billion |
- Operating cash flow declined primarily because of lower payables, accrued liabilities and other liabilities, including increased payments of compensation and distributions.
- Investing cash outflows declined substantially as Affiliate investment spending fell to $297.7 million from $1.245 billion.
- Financing outflows reflected common-stock repurchases, debt repayments, distributions to non-controlling interests and Affiliate equity repurchases.
- At year-end, AMG had $645.0 million of senior bank debt, $944.6 million of senior notes and $305.2 million of convertible securities.
- The company had approximately $1.0 billion of remaining revolver capacity. Bank leverage was 1.6x and interest coverage was 12.4x, and AMG was in compliance with its debt covenants.
- Redeemable non-controlling interests were $612.5 million. AMG expected to repurchase approximately $100 million of Affiliate equity in 2016.
Material changes versus the prior comparable period
- Year-end AUM decreased 1% to $611.3 billion. Market changes reduced AUM by $15.7 billion and foreign exchange reduced it by $11.1 billion; new Affiliate investments added $21.3 billion.
- Net client cash flows were negative $3.0 billion, reflecting negative $11.2 billion in Mutual Fund flows, partly offset by positive Institutional and High Net Worth flows.
- Revenue declined because asset-based fees at existing Affiliates fell $146.5 million, driven by lower average AUM and a less favorable asset mix. New Affiliate investments partially offset the decline with $131.8 million of additional asset-based fees.
- Operating expenses fell 3% to $1.6495 billion. Selling, general and administrative expense declined 9%, while compensation expense was broadly unchanged.
- Interest expense increased 16% to $88.9 million following additional senior-note issuance. A $44.7 million gain from revaluing contingent payment obligations materially reduced non-operating expense; the prior year included an $18.8 million loss related to convertible securities.
- AMG repurchased 1.7 million common shares during 2015 at an average price of $209.39; 2.3 million shares remained authorized for repurchase at year-end.
- Foreign currency translation reduced comprehensive income and decreased stockholders’ equity by $71.0 million during 2015.
Guidance, outlook, commentary and risks
Management expects cash flow from operations, revolver borrowings and potential forward-equity proceeds to fund foreseeable working-capital needs, Affiliate investments, distributions, debt service and share repurchases. The filing does not provide formal numerical earnings or revenue guidance.
- AMG expects continued growth through existing Affiliates and additional investments in boutique asset managers, but transaction timing and financing needs remain uncertain.
- Contingent payment obligations could total up to $252.1 million through 2019 based on specified Affiliate financial targets; expected payments at year-end were $14.0 million, with none expected in 2016.
- Unfunded commitments to investment partnerships were $76.8 million and may be called in future periods.
- Key risks include equity-market declines, client withdrawals, investment underperformance, negative cash flows, changes in investor preferences, fee-rate pressure, foreign exchange movements and dependence on key Affiliate personnel.
- The business is highly regulated globally and faces potential increases in compliance costs, regulatory restrictions, investigations, litigation and reputational damage.
- AMG has substantial goodwill and intangible assets: goodwill was $2.668 billion and acquired client relationships were $1.686 billion at year-end. Annual impairment reviews identified no impairments.
- Third Avenue Management, a consolidated Affiliate, was named in legal actions during the first quarter of 2016 relating to the liquidation of a fund. AMG was not a party to those actions, and management stated that no material accrual was required at December 31, 2015.
- Management and PricewaterhouseCoopers reported effective internal control over financial reporting and issued unqualified audit opinions.
Most important facts for investors to verify
- Whether AUM stabilizes or declines further, particularly in Mutual Fund and Institutional channels.
- Net client flows, investment performance and fee-rate mix at major Affiliates.
- The cash funding requirements and returns associated with announced and future Affiliate acquisitions.
- Debt maturities, variable-rate exposure, covenant headroom and the effect of additional borrowing.
- The timing and amount of Affiliate equity put obligations, contingent purchase payments and unfunded investment commitments.
- Potential impairment of goodwill, acquired client relationships and equity method investments.
- The financial and reputational impact of regulatory developments, tax audits, litigation and the Third Avenue-related proceedings.
- The effect of non-GAAP measures, including EBITDA and Economic net income, relative to GAAP earnings and cash generation.