Business Context and Reporting Period
Affiliated Managers Group, Inc. is a global asset management company that invests in boutique investment management firms. Its Affiliates serve mutual fund, institutional and high-net-worth clients through asset-based and performance-based fees. This Form 10-K covers the fiscal year ended December 31, 2011; quarterly data is provided for the fourth quarter but the filing is an annual report.
- Assets under management reached $327.5 billion, up 2% from $320.0 billion at year-end 2010.
- Net client cash flows were $22.9 billion, partially offset by $15.2 billion of negative investment performance.
- Approximately 39% of revenue was attributable to clients domiciled outside the United States.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $1,704.8 million | $1,358.2 million | +26% |
| Operating income | $486.1 million | $374.0 million | +30% |
| Operating margin | 28.5% | 27.5% | +1.0 percentage point |
| Net income | $359.6 million | $287.3 million | +25% |
| Net income attributable to controlling interest | $164.9 million | $138.6 million | +19% |
| Diluted EPS | $3.11 | $2.81 | +11% |
| Economic net income | $351.0 million | $299.1 million | +17% |
| Economic EPS | $6.62 | $6.09 | +9% |
| EBITDA | $471.3 million | $404.4 million | +17% |
| Cash flow from operating activities | $708.5 million | $480.7 million | +47% |
Revenue growth was driven primarily by a 31% increase in average assets under management, including the impact of 2010 Affiliate investments and positive net client flows. Consolidated performance-fee revenue declined 47% to $30.9 million.
- Mutual Fund revenue increased 25% to $723.7 million; controlling-interest net income increased 41% to $65.5 million.
- Institutional revenue increased 30% to $841.4 million; controlling-interest net income increased 16% to $90.2 million.
- High Net Worth revenue increased 7% to $139.7 million; controlling-interest net income declined 37% to $9.2 million.
Operating expenses increased 24% to $1,218.7 million. Compensation and related expenses rose 21% to $718.8 million, selling, general and administrative expenses rose 23% to $350.8 million, and intangible amortization rose 63% to $97.7 million.
Liquidity, Capital Structure and Cash Flow
- Cash and cash equivalents were $449.5 million at December 31, 2011, compared with $313.3 million at year-end 2010.
- Cash flow from investing activities was a use of $67.7 million, including $13.3 million of investments in Affiliates, versus a $973.8 million use in 2010.
- Cash flow from financing activities was a use of $503.8 million, primarily reflecting debt repayments, distributions to non-controlling interests and share repurchases.
- Senior bank debt was $250.0 million; senior convertible securities had a carrying value of $435.6 million; junior convertible trust preferred securities had a carrying value of $512.6 million.
- The amended credit facility provides $750.0 million of revolver capacity and a $250.0 million term loan. Remaining facility capacity was $750.0 million.
- Internal leverage was 1.3:1; bank leverage was 1.5 and bank interest coverage was 8.3, compared with covenant limits of 3.0 and a minimum of 3.0, respectively.
- The 2008 senior convertible notes have a $460.0 million principal amount and may be put to the company in August 2013.
- No cash dividend was declared or anticipated. The company repurchased 0.7 million shares for $61.0 million at an average price of $83.63.
Material Changes Versus the Prior Comparable Period
- Assets under management increased only 2% at year-end despite strong net client inflows, as negative market performance reduced equity-related assets.
- Revenue and operating income grew substantially, but performance fees declined because of weaker investment results.
- Operating cash flow increased $227.8 million, supported by higher net income, improved collections of advisory fees receivable, and greater distributions from equity-method Affiliates.
- Investment spending fell sharply from $916.1 million in 2010 to $13.3 million in 2011, reflecting fewer new Affiliate investments.
- Long-term debt declined from $1,392.0 million to $1,198.2 million, while cash increased.
- Redeemable non-controlling interests increased from $406.3 million to $451.8 million.
- Equity-method investment income declined 6% to $72.7 million, principally because performance fees at those Affiliates decreased.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal earnings or revenue guidance. Management expects operating cash flow, credit-facility borrowings and potential forward-equity-sale proceeds to support foreseeable cash needs. Expected uses include new and existing Affiliate investments, distributions to Affiliate managers, debt service, working capital and approximately $50.0 million of expected Affiliate-equity repurchases during 2012.
- Contingent acquisition-related payments could total up to $491.4 million through 2017; the company expected approximately $80.1 million of payments in 2012 based on year-end estimates.
- A $4.8 million gain was recognized from reducing estimated contingent payment obligations, including $3.1 million attributable to the controlling interest.
- A $9.2 million impairment charge was recorded for an indefinite-lived intangible asset. Management indicated that a further 5% decline in the related assets under management could result in an additional impairment of approximately $10.0 million.
- A cost-method investment was written down to zero, resulting in a $12.8 million expense.
- The company has substantial intangible assets, including approximately $2.1 billion of goodwill and $1.3 billion of acquired client relationships at year-end. Further impairments could materially affect earnings.
- Results remain sensitive to equity-market returns, investment performance, client flows, performance fees, key-person retention, competition, regulatory changes, foreign exchange, interest rates and the ability to receive distributions from Affiliates.
- Affiliate investment-management contracts are generally terminable by clients on short notice, and Affiliate autonomy may limit AMG’s ability to control day-to-day operations.
- Management reported no material legal proceedings, effective disclosure controls and effective internal control over financial reporting. PricewaterhouseCoopers LLP issued an unqualified audit opinion.
Important Facts for Investors to Verify
- Whether positive net client flows can continue to offset market-related asset declines and sustain fee revenue.
- The durability and volatility of performance-fee revenue, particularly in the Institutional channel.
- The timing and amount of the $460.0 million convertible-note put exposure in 2013 and other debt or contingent-payment obligations.
- Future Affiliate-equity repurchases, contingent acquisition payments and the effect on available cash and leverage.
- Potential impairment of goodwill, acquired client relationships and other Affiliate investments if assets under management or cash flows deteriorate.
- The impact of regulatory reforms, international operations, currency movements and key-person departures on Affiliate profitability.
- The comparability of GAAP results with management’s non-GAAP Economic net income and EBITDA measures.