AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: AMG is an asset management holding company with equity investments in a diverse group of mid-sized investment management firms ("Affiliates"). As of December 31, 2005, Affiliates managed approximately $184.3 billion in assets across three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. The company pursues a growth strategy through internal growth and acquisitions of mid-sized firms.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 39% to $916.5 million, driven primarily by a 51% increase in average assets under management. This growth resulted from new investments in 2004 and 2005, positive investment performance, and net client cash flows.
• Profitability: Net Income increased 54% to $119.1 million. EBITDA rose 44% to $267.5 million.
• Segment Performance:
  • Mutual Fund: Revenue up 53% to $400.3 million; Net Income up 50% to $56.8 million.
  • Institutional: Revenue up 47% to $384.5 million; Net Income up 90% to $51.2 million.
  • High Net Worth: Revenue decreased 3% to $131.7 million; Net Income decreased 10% to $11.1 million, despite a 1% increase in average AUM.
• Acquisitions: In July 2005, AMG completed the acquisition of First Asset Management Inc. (renamed AMG Canada Corp.), adding six Canadian asset management firms. In January 2005, the company acquired the mutual fund business of Fremont Investment Advisors.
• Expense Increases: Total operating expenses increased 48% to $581.4 million. Compensation expenses rose 51% due to revenue-sharing arrangements with Affiliates and new investments. Amortization of intangible assets increased 36% due to new acquisitions.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects industry growth to continue at a compound annual rate of 7% to 9% over the next five years, driven by market-related increases in AUM and demographic trends. AMG anticipates continued opportunities to invest in mid-sized firms as founders approach retirement.
• Liquidity and Capital Resources:
  • AMG maintains a senior revolving credit facility of up to $550 million (expandable to $650 million), with $175.5 million outstanding as of year-end 2005.
  • The company has significant contingent obligations to purchase additional equity interests from Affiliate managers, estimated at approximately $1.02 billion if all triggering events occurred immediately.
  • Debt instruments include zero-coupon senior convertible notes (due 2021), floating rate senior convertible securities (due 2033), and mandatory convertible securities (2004 PRIDES).
• Risk Factors:
  • Market Risk: Revenue is directly tied to equity market performance; declines in markets reduce AUM and fees.
  • Regulatory Risk: Affiliates are subject to extensive regulation by U.S. and foreign authorities. Changes in laws or enforcement actions could materially impact operations.
  • Key Personnel: The business relies heavily on the services of key principals at Affiliates; their departure could cause loss of client accounts.
  • Intangible Assets: Approximately $1.6 billion of total assets are intangibles. Impairment charges could adversely affect results.
• Unusual Items: The company adopted EITF 04-08 in 2004, which required the "if-converted" method for diluted EPS, reducing reported EPS by $0.15 in 2005. The company also adopted FAS 123(R) in Q1 2006, which will impact future compensation expense recognition.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and integration progress of the newly acquired Canadian Affiliates (AMG Canada) and Fremont Investment Advisors.
• Intangible Asset Valuation: Review the assumptions used for the annual impairment testing of goodwill and indefinite-lived acquired client relationships, given that intangibles comprise the majority of the balance sheet.
• Debt Obligations: Assess the company's ability to meet future repurchase obligations for convertible notes and mandatory convertible securities, as well as potential cash outflows for purchasing Affiliate manager equity interests.
• Revenue Concentration: Analyze the stability of the Institutional and Mutual Fund segments, which generated the majority of revenue growth, versus the stagnation in the High Net Worth segment.
• Regulatory Environment: Monitor ongoing regulatory investigations in the mutual fund industry and potential impacts on AMG's Affiliates.