SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) | ||
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number 001-13459
Affiliated Managers Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 04-3218510 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
600 Hale Street, Prides Crossing, Massachusetts 01965
(Address of principal executive offices)
(617) 747-3300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerý | Accelerated filero | Non-accelerated filero (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
There were 51,097,65952,053,190 shares of the registrant's common stock outstanding on August 3, 2010.May 5, 2011.
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands,millions, except per share data)
(unaudited)
| | For the Three Months Ended June 30, | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2010 | 2009 | 2010 | | 2010 | 2011 | ||||||||||||||
Revenue | Revenue | $ | 201,246 | $ | 332,080 | $ | 379,721 | $ | 583,102 | Revenue | $ | 251.0 | $ | 426.3 | ||||||||
Operating expenses: | Operating expenses: | Operating expenses: | ||||||||||||||||||||
Compensation and related expenses | 103,373 | 142,740 | 187,533 | 261,969 | Compensation and related expenses | 119.2 | 179.5 | |||||||||||||||
Selling, general and administrative | 30,953 | 72,126 | 62,413 | 117,365 | Selling, general and administrative | 45.3 | 87.5 | |||||||||||||||
Amortization of intangible assets | 8,044 | 9,592 | 16,138 | 18,528 | Amortization of intangible assets | 8.9 | 22.1 | |||||||||||||||
Depreciation and other amortization | 3,243 | 3,375 | 6,482 | 6,401 | Depreciation and other amortization | 3.0 | 3.8 | |||||||||||||||
Other operating expenses | 4,736 | 8,416 | 10,486 | 14,470 | Other operating expenses | 6.1 | 8.5 | |||||||||||||||
150,349 | 236,249 | 283,052 | 418,733 | 182.5 | 301.4 | |||||||||||||||||
Operating income | Operating income | 50,897 | 95,831 | 96,669 | 164,369 | Operating income | 68.5 | 124.9 | ||||||||||||||
Non-operating (income) and expenses: | Non-operating (income) and expenses: | Non-operating (income) and expenses: | ||||||||||||||||||||
Investment and other income | (7,191 | ) | (723 | ) | (6,950 | ) | (3,545 | ) | Investment and other income | (2.8 | ) | (8.7 | ) | |||||||||
Income from equity method investments | (7,351 | ) | (9,861 | ) | (13,767 | ) | (19,007 | ) | Income from equity method investments | (9.1 | ) | (10.2 | ) | |||||||||
Investment (income) loss from investments in partnerships | (14,947 | ) | 8,585 | (11,152 | ) | 4,493 | Investment income from investments in partnerships | (4.1 | ) | — | ||||||||||||
Interest expense | 15,828 | 16,315 | 32,404 | 32,428 | Interest expense | 16.0 | 19.4 | |||||||||||||||
Imputed interest expense | 3,365 | 6,374 | 6,737 | 10,112 | Imputed interest expense | 3.8 | 8.3 | |||||||||||||||
(10,296 | ) | 20,690 | 7,272 | 24,481 | 3.8 | 8.8 | ||||||||||||||||
Income before income taxes | Income before income taxes | 61,193 | 75,141 | 89,397 | 139,888 | Income before income taxes | 64.7 | 116.1 | ||||||||||||||
Income taxes | Income taxes | 4,944 | 16,923 | 9,908 | 28,910 | Income taxes | 11.9 | 26.7 | ||||||||||||||
Net income | Net income | 56,249 | 58,218 | 79,489 | 110,978 | Net income | 52.8 | 89.4 | ||||||||||||||
Net income (non-controlling interests) | Net income (non-controlling interests) | (30,671 | ) | (41,411 | ) | (51,549 | ) | (72,697 | ) | Net income (non-controlling interests) | (31.3 | ) | (50.3 | ) | ||||||||
Net (income) loss (non-controlling interests in partnerships) | (14,599 | ) | 8,397 | (10,836 | ) | 4,386 | ||||||||||||||||
Net income (non-controlling interests in partnerships) | Net income (non-controlling interests in partnerships) | (4.0 | ) | — | ||||||||||||||||||
Net Income (controlling interest) | Net Income (controlling interest) | $ | 10,979 | $ | 25,204 | $ | 17,104 | $ | 42,667 | Net Income (controlling interest) | $ | 17.5 | $ | 39.1 | ||||||||
Average shares outstanding—basic | Average shares outstanding—basic | 41,450,659 | 44,610,506 | 40,740,486 | 43,491,622 | Average shares outstanding—basic | 42.4 | 51.8 | ||||||||||||||
Average shares outstanding—diluted | Average shares outstanding—diluted | 43,159,140 | 47,635,230 | 42,082,991 | 46,539,949 | Average shares outstanding—diluted | 45.4 | 53.1 | ||||||||||||||
Earnings per share—basic | Earnings per share—basic | $ | 0.26 | $ | 0.56 | $ | 0.42 | $ | 0.98 | Earnings per share—basic | $ | 0.41 | $ | 0.76 | ||||||||
Earnings per share—diluted | Earnings per share—diluted | $ | 0.26 | $ | 0.53 | $ | 0.41 | $ | 0.92 | Earnings per share—diluted | $ | 0.38 | $ | 0.74 | ||||||||
Supplemental disclosure of total comprehensive income: | Supplemental disclosure of total comprehensive income: | Supplemental disclosure of total comprehensive income: | ||||||||||||||||||||
Net income | Net income | $ | 56,249 | $ | 58,218 | $ | 79,489 | $ | 110,978 | Net income | $ | 52.8 | $ | 89.4 | ||||||||
Other comprehensive income (loss) | 24,676 | (24,189 | ) | 14,804 | 1,203 | |||||||||||||||||
Other comprehensive income | Other comprehensive income | 25.4 | 11.4 | |||||||||||||||||||
Comprehensive income | Comprehensive income | 80,925 | 34,029 | 94,293 | 112,181 | Comprehensive income | 78.2 | 100.8 | ||||||||||||||
Comprehensive income (non-controlling interests) | Comprehensive income (non-controlling interests) | (45,270 | ) | (33,014 | ) | (62,385 | ) | (68,311 | ) | Comprehensive income (non-controlling interests) | (35.3 | ) | (50.3 | ) | ||||||||
Comprehensive income (loss) (controlling interest) | $ | 35,655 | $ | 1,015 | $ | 31,908 | $ | 43,870 | ||||||||||||||
Comprehensive income (controlling interest) | Comprehensive income (controlling interest) | $ | 42.9 | $ | 50.5 | |||||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)millions)
(unaudited)
| | December 31, 2009 | June 30, 2010 | | December 31, 2010 | March 31, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | Assets | Assets | ||||||||||||||||
Current assets: | Current assets: | Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 259,487 | $ | 220,543 | ||||||||||||||
Investment advisory fees receivable | 140,118 | 200,395 | Cash and cash equivalents | $ | 313.3 | $ | 252.8 | |||||||||||
Investments in partnerships | 93,809 | 89,554 | Investment advisory fees receivable | 236.4 | 231.2 | |||||||||||||
Investments in marketable securities | 56,690 | 62,802 | Investments in marketable securities | 116.0 | 110.3 | |||||||||||||
Unsettled fund share receivables | — | 55,817 | Unsettled fund share receivables | 42.0 | 103.8 | |||||||||||||
Prepaid expenses and other current assets | 35,478 | 30,007 | Prepaid expenses and other current assets | 61.7 | 83.5 | |||||||||||||
Total current assets | 585,582 | 659,118 | Total current assets | 769.4 | 781.6 | |||||||||||||
Fixed assets, net | Fixed assets, net | 62,402 | 68,086 | Fixed assets, net | 67.7 | 66.0 | ||||||||||||
Equity investments in Affiliates | Equity investments in Affiliates | 658,332 | 635,321 | Equity investments in Affiliates | 678.9 | 622.7 | ||||||||||||
Acquired client relationships, net | Acquired client relationships, net | 571,573 | 1,397,034 | Acquired client relationships, net | 1,424.2 | 1,409.6 | ||||||||||||
Goodwill | Goodwill | 1,413,217 | 1,983,468 | Goodwill | 2,131.2 | 2,142.6 | ||||||||||||
Other assets | Other assets | 99,800 | 195,426 | Other assets | 219.8 | 236.8 | ||||||||||||
Total assets | $ | 3,390,906 | $ | 4,938,453 | Total assets | $ | 5,291.2 | $ | 5,259.3 | |||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||
Liabilities and Equity | Liabilities and Equity | |||||||||||||||||
Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 117,227 | $ | 194,759 | Accounts payable and accrued liabilities | $ | 252.8 | $ | 207.3 | |||||||||
Unsettled fund share payables | — | 50,446 | Unsettled fund share payables | 39.8 | 95.3 | |||||||||||||
Payables to related party | 109,888 | 90,791 | Payables to related party | 114.8 | 80.5 | |||||||||||||
Total current liabilities | 227,115 | 335,996 | Total current liabilities | 407.4 | 383.1 | |||||||||||||
Senior debt | Senior debt | — | 659,500 | Senior debt | 460.0 | 340.0 | ||||||||||||
Senior convertible securities | Senior convertible securities | 456,976 | 415,856 | Senior convertible securities | 422.1 | 425.5 | ||||||||||||
Junior convertible trust preferred securities | Junior convertible trust preferred securities | 507,358 | 508,588 | Junior convertible trust preferred securities | 509.9 | 510.5 | ||||||||||||
Deferred income taxes | Deferred income taxes | 322,671 | 464,151 | Deferred income taxes | 495.4 | 502.9 | ||||||||||||
Other long-term liabilities | Other long-term liabilities | 26,066 | 174,545 | Other long-term liabilities | 207.8 | 215.0 | ||||||||||||
Total liabilities | 1,540,186 | 2,558,636 | Total liabilities | 2,502.6 | 2,377.0 | |||||||||||||
Redeemable non-controlling interests | Redeemable non-controlling interests | 368,999 | 344,020 | Redeemable non-controlling interests | 406.3 | 531.2 | ||||||||||||
Equity: | Equity: | Equity: | ||||||||||||||||
Common stock | 458 | 508 | Common stock | 0.5 | 0.5 | |||||||||||||
Additional paid-in capital | 612,091 | 880,729 | Additional paid-in capital | 980.5 | 854.6 | |||||||||||||
Accumulated other comprehensive income | 45,958 | 47,161 | Accumulated other comprehensive income | 100.5 | 111.9 | |||||||||||||
Retained earnings | 873,137 | 915,804 | Retained earnings | 1,011.8 | 1,050.9 | |||||||||||||
1,531,644 | 1,844,202 | 2,093.3 | 2,017.9 | |||||||||||||||
Less: treasury stock, at cost | (421,954 | ) | (356,341 | ) | Less: treasury stock, at cost | (293.3 | ) | (256.7 | ) | |||||||||
Total stockholders' equity | 1,109,690 | 1,487,861 | Total equity | 1,800.0 | 1,761.2 | |||||||||||||
Non-controlling interests | 281,946 | 462,015 | Non-controlling interests | 582.3 | 589.9 | |||||||||||||
Non-controlling interests in partnerships | 90,085 | 85,921 | ||||||||||||||||
Total equity | 2,382.3 | 2,351.1 | ||||||||||||||||
Total equity | 1,481,721 | 2,035,797 | ||||||||||||||||
Total liabilities and equity | $ | 5,291.2 | $ | 5,259.3 | ||||||||||||||
Total liabilities and equity | $ | 3,390,906 | $ | 4,938,453 | ||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(dollars in thousands)millions)
(unaudited)
| Total Stockholders' Equity | | | | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Shares at Cost | Non- controlling interests | Non- controlling interests in partnerships | Total Equity | |||||||||||||||||
December 31, 2009 | $ | 458 | $ | 612,091 | $ | 45,958 | $ | 873,137 | $ | (421,954 | ) | $ | 281,946 | $ | 90,085 | $ | 1,481,721 | ||||||||
Stock issued under option and other incentive plans | — | (41,202 | ) | — | — | 65,604 | — | — | 24,402 | ||||||||||||||||
Tax benefit of option exercises | — | 6,795 | — | — | — | — | — | 6,795 | |||||||||||||||||
Issuance costs | — | (228 | ) | — | — | — | — | — | (228 | ) | |||||||||||||||
Changes in Affiliate equity value | — | (1,774 | ) | — | — | — | 394 | — | (1,380 | ) | |||||||||||||||
Settlement of forward equity sale agreement | 24 | 99,980 | — | — | — | — | — | 100,004 | |||||||||||||||||
Conversion of zero coupon convertible notes | 9 | 47,449 | — | — | 9 | — | — | 47,467 | |||||||||||||||||
Share-based payment arrangements | — | 10,730 | — | — | — | — | — | 10,730 | |||||||||||||||||
Distributions to non-controlling interests | — | — | — | — | — | (90,564 | ) | — | (90,564 | ) | |||||||||||||||
Investments in Affiliates | 17 | 146,888 | — | — | — | 197,542 | — | 344,447 | |||||||||||||||||
Other changes in non-controlling interests in partnerships | — | — | — | — | — | — | 222 | 222 | |||||||||||||||||
Net Income | — | — | — | 42,667 | — | 72,697 | (4,386 | ) | 110,978 | ||||||||||||||||
Other comprehensive income | — | — | 1,203 | — | — | — | — | 1,203 | |||||||||||||||||
June 30, 2010 | $ | 508 | $ | 880,729 | $ | 47,161 | $ | 915,804 | $ | (356,341 | ) | $ | 462,015 | $ | 85,921 | $ | 2,035,797 | ||||||||
| Total Stockholders' Equity | | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Shares at Cost | Non- controlling interests | Total Equity | |||||||||||||||
December 31, 2010 | $ | 0.5 | $ | 980.5 | $ | 100.5 | $ | 1,011.8 | $ | (293.3 | ) | $ | 582.3 | $ | 2,382.3 | |||||||
Stock issued under option and other incentive plans | — | (21.5 | ) | — | — | 36.6 | — | 15.1 | ||||||||||||||
Tax benefit of option exercises | — | 5.7 | — | — | — | — | 5.7 | |||||||||||||||
Changes in Affiliate equity | — | (117.6 | ) | — | — | — | 26.8 | (90.8 | ) | |||||||||||||
Share-based payment arrangements | — | 7.5 | — | — | — | — | 7.5 | |||||||||||||||
Distributions to non-controlling interests | — | — | — | — | — | (69.5 | ) | (69.5 | ) | |||||||||||||
Net Income | — | — | — | 39.1 | — | 50.3 | 89.4 | |||||||||||||||
Other comprehensive income | — | — | 11.4 | — | — | — | 11.4 | |||||||||||||||
March 31, 2011 | $ | 0.5 | $ | 854.6 | $ | 111.9 | $ | 1,050.9 | $ | (256.7 | ) | $ | 589.9 | $ | 2,351.1 | |||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)millions)
(unaudited)
| | For the Three Months Ended June 30, | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2010 | 2009 | 2010 | | 2010 | 2011 | ||||||||||||||||
Cash flow from operating activities: | Cash flow from operating activities: | Cash flow from operating activities: | ||||||||||||||||||||||
Net Income | $ | 56,249 | $ | 58,218 | $ | 79,489 | $ | 110,978 | Net income | $ | 52.8 | $ | 89.4 | |||||||||||
Adjustments to reconcile Net Income to net cash flow from operating activities: | ||||||||||||||||||||||||
Adjustments to reconcile Net income to net cash flow from operating activities: | Adjustments to reconcile Net income to net cash flow from operating activities: | |||||||||||||||||||||||
Amortization of intangible assets | 8,044 | 9,592 | 16,138 | 18,528 | Amortization of intangible assets | 8.9 | 22.1 | |||||||||||||||||
Amortization of issuance costs | 1,841 | 1,847 | 3,636 | 3,694 | Amortization of issuance costs | 1.8 | 2.6 | |||||||||||||||||
Depreciation and other amortization | 3,243 | 3,375 | 6,482 | 6,401 | Depreciation and other amortization | 3.0 | 3.8 | |||||||||||||||||
Deferred income tax provision | 4,866 | 8,997 | 16,828 | 17,655 | Deferred income tax provision | 8.6 | 9.6 | |||||||||||||||||
Imputed Interest Expense | 3,365 | 6,374 | 6,737 | 10,112 | Imputed interest expense | 3.8 | 8.3 | |||||||||||||||||
Income from equity method investments, net of amortization | (7,351 | ) | (9,861 | ) | (13,767 | ) | (19,007 | ) | Income from equity method investments, net of amortization | (9.1 | ) | (10.2 | ) | |||||||||||
Distributions received from equity method investments | 9,879 | 13,577 | 28,820 | 36,764 | Distributions received from equity method investments | 23.2 | 64.9 | |||||||||||||||||
Tax benefit from exercise of stock options | 1,459 | 1,802 | 1,459 | 2,076 | Tax benefit from exercise of stock options | 0.3 | 0.8 | |||||||||||||||||
Stock option expense | 1,958 | 3,159 | 3,135 | 6,803 | Stock option expense | 3.6 | 6.1 | |||||||||||||||||
Affiliate equity expense | 3,469 | 3,432 | 6,719 | 6,800 | Affiliate equity expense | 3.4 | 3.5 | |||||||||||||||||
Other adjustments | (21,189 | ) | 13,483 | (18,580 | ) | 9,548 | Other adjustments | (4.0 | ) | (5.6 | ) | |||||||||||||
Changes in assets and liabilities: | Changes in assets and liabilities: | Changes in assets and liabilities: | ||||||||||||||||||||||
(Increase) decrease in investment advisory fees receivable | (11,447 | ) | (24,391 | ) | 17,895 | (25,329 | ) | |||||||||||||||||
(Increase) decrease in investments in partnerships | (648 | ) | (787 | ) | 331 | (504 | ) | (Increase) decrease in investment advisory fees receivable | (0.9 | ) | 3.0 | |||||||||||||
(Increase) decrease in prepaids and other current assets | (9,470 | ) | 9,039 | (9,213 | ) | 19,768 | (Increase) decrease in prepaids and other current assets | 11.0 | (2.5 | ) | ||||||||||||||
(Increase) decrease in other assets | 1,085 | 2,987 | 2,915 | (8,125 | ) | Increase in unsettled fund shares receivable | (98.7 | ) | (60.7 | ) | ||||||||||||||
(Increase) decrease in unsettled fund shares receivable | — | 96,487 | — | (2,224 | ) | Increase in other assets | (11.1 | ) | (2.9 | ) | ||||||||||||||
Increase (decrease) in unsettled fund shares payable | — | (106,089 | ) | — | 2,265 | Decrease in accounts payable, accrued liabilities and other long-term liabilities | (37.0 | ) | (56.5 | ) | ||||||||||||||
Increase (decrease) in accounts payable, accrued liabilities and other long-term liabilities | 26,861 | 23,850 | (61,119 | ) | (13,092 | ) | Increase in unsettled fund shares payable | 108.4 | 54.5 | |||||||||||||||
Cash flow from operating activities | 72,214 | 115,091 | 87,905 | 183,111 | Cash flow from operating activities | 68.0 | 130.2 | |||||||||||||||||
Cash flow used in investing activities: | Cash flow used in investing activities: | Cash flow used in investing activities: | ||||||||||||||||||||||
Investments in Affiliates | (1,411 | ) | (665,368 | ) | (1,411 | ) | (793,036 | ) | Investments in Affiliates | (127.7 | ) | (13.3 | ) | |||||||||||
Purchase of fixed assets | (663 | ) | (2,002 | ) | (1,215 | ) | (3,107 | ) | Purchase of fixed assets | (1.1 | ) | (1.7 | ) | |||||||||||
Purchase of investment securities | (2,911 | ) | (15,484 | ) | (11,747 | ) | (30,403 | ) | Purchase of investment securities | (14.9 | ) | (9.1 | ) | |||||||||||
Sale of investment securities | — | — | 5,720 | 11,784 | Sale of investment securities | 11.8 | 12.0 | |||||||||||||||||
Cash flow used in investing activities | (4,985 | ) | (682,854 | ) | (8,653 | ) | (814,762 | ) | Cash flow used in investing activities | (131.9 | ) | (12.1 | ) | |||||||||||
Cash flow from (used in) financing activities: | Cash flow from (used in) financing activities: | Cash flow from (used in) financing activities: | ||||||||||||||||||||||
Borrowings of senior bank debt | — | 782,500 | — | 1,017,500 | Borrowings of senior bank debt | 235.0 | — | |||||||||||||||||
Repayments of senior bank debt | — | (293,000 | ) | (233,514 | ) | (358,000 | ) | Repayments of senior bank debt | (65.0 | ) | (120.0 | ) | ||||||||||||
Issuance of common stock | 11,622 | 22,959 | 11,622 | 25,414 | Issuance of common stock | 2.5 | 15.2 | |||||||||||||||||
Issuance costs | — | (147 | ) | (921 | ) | (229 | ) | Issuance costs | (0.1 | ) | (7.7 | ) | ||||||||||||
Excess tax benefit from exercise of stock options | 1,086 | 4,358 | 1,086 | 4,719 | Excess tax benefit from exercise of stock options | 0.4 | 4.9 | |||||||||||||||||
Settlement of forward equity sale agreement | — | 100,004 | 144,258 | 100,004 | Settlement of treasury lock | — | 4.0 | |||||||||||||||||
Note payments | (2,932 | ) | (520 | ) | (4,479 | ) | (25,891 | ) | Note payments | (25.4 | ) | 0.1 | ||||||||||||
Distributions to non-controlling interests | (25,506 | ) | (23,779 | ) | (87,125 | ) | (60,692 | ) | Distributions to non-controlling interests | (37.2 | ) | (69.5 | ) | |||||||||||
Affiliate equity issuances and repurchases | (16,421 | ) | (6,893 | ) | (32,806 | ) | (109,532 | ) | Affiliate equity issuances and repurchases | (102.6 | ) | (7.8 | ) | |||||||||||
Subscriptions (redemptions) of non-controlling interests in partnerships | 508 | 787 | (471 | ) | 503 | |||||||||||||||||||
Cash flow from (used in) financing activities | 7.6 | (180.8 | ) | |||||||||||||||||||||
Cash flow from (used in) financing activities | (31,643 | ) | 586,269 | (202,350 | ) | 593,796 | ||||||||||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | Effect of foreign exchange rate changes on cash and cash equivalents | 1,492 | (1,714 | ) | 1,036 | (1,089 | ) | Effect of foreign exchange rate changes on cash and cash equivalents | 0.6 | 2.2 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 37,078 | 16,792 | (122,062 | ) | (38,944 | ) | ||||||||||||||||||
Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | (55.7 | ) | (60.5 | ) | |||||||||||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 237,291 | 203,751 | 396,431 | 259,487 | Cash and cash equivalents at beginning of period | 259.5 | 313.3 | ||||||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 274,369 | $ | 220,543 | $ | 274,369 | $ | 220,543 | Cash and cash equivalents at end of period | $ | 203.8 | $ | 252.8 | ||||||||||
Supplemental disclosure of non-cash financing activities: | ||||||||||||||||||||||||
Supplemental disclosure of non-cash activities: | Supplemental disclosure of non-cash activities: | |||||||||||||||||||||||
Notes received for Affiliate equity sales | $ | 593 | $ | 1,893 | $ | 4,060 | $ | 7,642 | Notes received for Affiliate equity sales | $ | 5.7 | $ | 9.5 | |||||||||||
Payables recorded for Affiliate equity purchases | 671 | — | 671 | 15,284 | Payables recorded for Affiliate equity purchases | 15.3 | 7.0 | |||||||||||||||||
Stock issued for conversion of zero coupon senior convertible note | — | 47,457 | — | 47,457 | Payables recorded under contingent payment arrangements | 49.0 | — | |||||||||||||||||
Stock issued for Investments in Affiliates | — | 146,906 | — | 146,906 | ||||||||||||||||||||
Stock issued for settlement of forward equity sale agreement | — | 44,450 | — | 44,450 | ||||||||||||||||||||
Payables recorded under contingent payment arrangements | — | 15,283 | — | 64,250 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Affiliated Managers Group, Inc. ("AMG" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair statement of the results have been included. All intercompany balances and transactions have been eliminated. All dollar amounts in these notes (except information that is presented on a per share, per security, per note or per contract basis) are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for any other period or for the full year. The Company's Annual Report on Form 10-K (as amended, the "Annual Report on Form 10-K") for the fiscal year ended December 31, 20092010 includes additional information about AMG, its operations, its financial position and its accounting policies, and should be read in conjunction with this Quarterly Report on Form 10-Q.
All dollar and share amounts in these notes (except information that is presented on a per share, per security, per note or per contract basis) are stated in millions, unless otherwise indicated.
There are no recently issued accounting standards that are expected to have a material effect on the Company's Consolidated Financial Statements.
2. Senior Bank Debt
The Company has a $770,000entered into an amended and restated revolving credit facility (the "Revolver""credit facility") and pays interest on any outstanding obligationsin January 2011, which allows for borrowings of up to $750.0 million at specified rates (based either on the Eurodollar rate or the prime rate as in effect from time to time)of interest that vary depending on the Company's credit rating.ratings. Subject to the agreement of the lenders to provide additionalincremental commitments and subject to certain requirements in the credit facility, the Company has the option to increase the Revolvercredit facility by up to an additional $175,000.$150.0 million.
The Revolver,credit facility, which will mature in February 2012,January 2015, is unsecured and contains financial covenants with respect to leverage and interest coverage. The Revolvercoverage and also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends, asset dispositions and fundamental corporate changes. BorrowingsObligations under the Revolvercredit facility are collateralizedguaranteed by pledgescertain of the substantial majorityCompany's wholly-owned domestic subsidiaries in accordance with the terms of capital stock or other equity interests owned by the Company.credit facility. At June 30, 2010,March 31, 2011, the Company had $659,500$340.0 million of outstanding borrowings underborrowings.
As further described in Note 15, the Revolver; and,Company has entered into interest rate swap contracts to exchange a fixed rate for the variable rate on July 2, 2010, used the net proceeds from the settlementa portion of sales under its forward equity program to pay down the balance of the Revolver to approximately $465,000.credit facility.
3. Senior Convertible Securities
At March 31, 2011, the Company has one senior convertible security outstanding ("2008 senior convertible notes") and two junior convertible trust preferred securities outstanding, issued in 2006 (the
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
"2006 junior convertible trust preferred securities") and in 2007 (the "2007 junior convertible trust preferred securities"). The carrying values of the seniorCompany's convertible securities are as follows:
| December 31, 2009 | June 30, 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Value | Principal amount at maturity | Carrying Value | Principal amount at maturity | |||||||||
2008 senior convertible notes | $ | 409,594 | $ | 460,000 | $ | 415,856 | $ | 460,000 | |||||
Zero coupon senior convertible notes | 47,382 | 50,135 | — | — | |||||||||
Total senior convertible securities | $ | 456,976 | $ | 510,135 | $ | 415,856 | $ | 460,000 | |||||
| December 31, 2010 | March 31, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Value | Principal amount at maturity | Carrying Value | Principal amount at maturity | ||||||||||
Senior convertible securities: | ||||||||||||||
2008 senior convertible notes(1) | $ | 422.1 | $ | 460.0 | $ | 425.5 | $ | 460.0 | ||||||
Junior convertible trust preferred securities: | ||||||||||||||
2007 junior convertible trust preferred securities(1) | $ | 296.3 | $ | 430.8 | $ | 296.6 | $ | 430.8 | ||||||
2006 junior convertible trust preferred securities(1) | 213.6 | 300.0 | 213.9 | 300.0 | ||||||||||
Total junior convertible securities | $ | 509.9 | $ | 730.8 | $ | 510.5 | $ | 730.8 | ||||||
The principal terms of these securities are summarized below.
| 2008 Senior Convertible Notes(1) | 2007 Junior Convertible Trust Preferred Securities(2) | 2006 Junior Convertible Trust Preferred Securities(3) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Issue Date | August 2008 | October 2007 | April 2006 | |||||||
Maturity Date | August 2038 | October 2037 | April 2036 | |||||||
Next Potential Put Date | August 2013 | N/A | N/A | |||||||
Note Denomination | $ | 1,000 | $ | 50 | $ | 50 | ||||
Current Conversion Rate | 7.959 | 0.250 | 0.333 | |||||||
Current Conversion Price | $ | 125.65 | $ | 200.00 | $ | 150.00 | ||||
Stated Coupon | 3.95 | % | 5.15 | % | 5.10 | % | ||||
Coupon Frequency | Semi-annually | Quarterly | Quarterly | |||||||
Tax Deduction Rate(4) | 9.38 | % | 8.00 | % | 7.50 | % |
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2008 Senior Convertible Notes
In August 2008, the Company issued $460,000 of senior convertible notes due 2038 ("2008 senior convertible notes"). The 2008 senior convertible notes bear interest at 3.95%, payable semi-annually in cash. The Company is accreting the carrying value to the principal amount at maturity using an interest rate of 7.4% (over its expected life of five years). Each security is convertible into 7.959 shares of the Company's common stock (at an initial conversion price of $125.65) upon the occurrence of certain events, as follows: (i) during any fiscal quarter, if the closing price of the Company's common stock, as measured over a specified time period during the preceding fiscal quarter, is equal to or greater than 130% of the conversion price of the notes on the last day of such preceding fiscal quarter; (ii) during a certain window of time, if the trading price per $1,000 principal amount of the notes for each day during a specified period is less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate of the notes on such day; (iii) upon the occurrence of specified corporate transactions; (iv) after the notes have been called for redemption; and (v) anytime after February 15, 2038. Upon conversion, the Company may elect to pay cash, deliver shares of its common stock, or a combination thereof. The holders of the 2008 senior convertible notes may require the Company to repurchase the notes in August of 2013, 2018, 2023, 2028 and 2033. The Company may redeem the notes for cash (subject to the holders' right to convert) at any time on or after August 15, 2013.
The 2008 senior convertible notes are considered contingent payment debt instruments under federal income tax regulations. These regulations require the Company to deduct interest in an amount greater than its reported interest expense, which will result in annual deferred tax liabilities of approximately $11.2 million. These deferred tax liabilities will be reclassified directly to stockholders' equity if the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.securities.
Zero Coupon Senior Convertible Notes
In the second quarter of 2010, the Company called the zero coupon senior convertible notes for redemption. In lieu of redemption, all of the holders elected to convert their notes into shares of the Company's common stock. The Company issued 873,626 shares of common stock to settle these conversions. All of the Company's zero coupon senior convertible notes have been cancelled and retired.
4. Junior Convertible Trust Preferred Securities
The carrying values of the Company's junior convertible trust preferred securities are as follows:
| December 31, 2009 | June 30, 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Value | Principal amount at maturity | Carrying Value | Principal amount at maturity | |||||||||
2006 junior convertible trust preferred securities | $ | 212,466 | $ | 300,000 | $ | 213,010 | $ | 300,000 | |||||
2007 junior convertible trust preferred securities | 294,892 | 430,820 | 295,578 | 430,820 | |||||||||
Total junior convertible securities | $ | 507,358 | $ | 730,820 | $ | 508,588 | $ | 730,820 | |||||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2006, the Company issued $300,000 of junior subordinated convertible debentures due 2036 to a wholly-owned trust simultaneous with the issuance, by the trust, of $291,000 of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2006 junior convertible trust preferred securities") have substantially the same terms.
The 2006 junior convertible trust preferred securities bear interest at a rate of 5.1% per annum, payable quarterly in cash. The Company is accreting the carrying value to the principal amount at maturity using an interest rate of 7.5% (over its expected life of 30 years). Each $50 security is convertible, at any time, into 0.333 shares of the Company's common stock, which represents a conversion price of $150 per share (or a 48% premium to the then prevailing share price of $101.45). Upon conversion, holders will receive cash or shares of the Company's common stock (or a combination of cash and common stock) at the election of the Company. The 2006 junior convertible trust preferred securities may not be redeemed by the Company prior to April 15, 2011. On or after April 15, 2011, they may be redeemed if the closing price of the Company's common stock exceeds $195 per share for a specified period of time. The trust's only assets are the junior convertible subordinated debentures. To the extent that the trust has available funds, the Company is obligated to ensure that holders of the 2006 junior convertible trust preferred securities receive all payments due from the trust.
In October 2007, the Company issued an additional $500,000 of junior subordinated convertible debentures which are due 2037 to a wholly-owned trust simultaneous with the issuance, by the trust, of $500,000 of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2007 junior convertible trust preferred securities") have substantially the same terms.
The 2007 junior convertible trust preferred securities bear interest at 5.15% per annum, payable quarterly in cash. The Company is accreting the discounted amount to the principal amount at maturity using an interest rate of 8.0% (over its expected life of 30 years). Each $50 security is convertible, at any time, into 0.25 shares of the Company's common stock, which represents a conversion price of $200 per share (or a 53% premium to the then prevailing share price of $130.77). Upon conversion, holders will receive cash or shares of the Company's common stock (or a combination of cash and common stock) at the election of the Company. The 2007 junior convertible trust preferred securities may not be redeemed by the Company prior to October 15, 2012. On or after October 15, 2012, they may be redeemed if the closing price of the Company's common stock exceeds $260 per share for a specified period of time. The trust's only assets are the 2007 junior convertible subordinated debentures. To the extent that the trust has available funds, the Company is obligated to ensure that holders of the 2007 junior convertible trust preferred securities receive all payments due from the trust.
The 2006 and 2007 junior convertible trust preferred securities are considered contingent payment debt instruments under federal income tax regulations. These regulations require the Company to deduct interest in an amount greater than its reported interest expense, which will result in annual deferred tax liabilities of approximately $9.5 million. These deferred tax liabilities will be reclassified directly to stockholders' equity if the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.
5. Forward Equity Sale Agreements
TheDuring 2009, the Company has entered into threea forward equity sale agreementsagreement with a major securities firmsfirm to sell shares of its common stock, (up to $200,000 under each agreement). Under the terms of these
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
agreements, the Company can settle forward sales at any time prior to December 31, 2010 by issuing sharesand extended this agreement in exchange for cash or, at the Company's option, by settling on a net stock or cash basis.April 2011. As of June 30, 2010, the Company had $200,700 ofMarch 31, 2011, no forward equity sales outstanding, which were subsequently settled net of transaction costs on July 2, 2010 by issuing 3,193,072 shares.are outstanding. The Company may sell up to an additional $103,500$103.5 million under an agreement entered into in July 2009.this agreement.
6.5. Income Taxes
The consolidated income tax provision includes taxes attributable to controlling interests and, to a lesser extent, taxes attributable to non-controlling interests as follows:
| | For the Three Months Ended June 30, | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2010 | 2009 | 2010 | | 2010 | 2011 | ||||||||||||||||
Controlling Interests: | Controlling Interests: | Controlling Interests: | ||||||||||||||||||||||
Current Tax | $ | (1,126 | ) | $ | 5,344 | $ | (9,171 | ) | $ | 7,852 | Current Tax | $ | 2.5 | $ | 13.5 | |||||||||
Intangible related deferred taxes | 9,544 | 14,310 | 19,115 | 25,050 | Intangible related deferred taxes | 10.7 | 12.9 | |||||||||||||||||
Other Deferred Taxes | (4,678 | ) | (4,852 | ) | (2,287 | ) | (6,935 | ) | Other Deferred Taxes | (2.1 | ) | (2.8 | ) | |||||||||||
Total Controlling Interests | 3,740 | 14,802 | 7,657 | 25,967 | Total Controlling Interests | $ | 11.1 | $ | 23.6 | |||||||||||||||
Non-Controlling Interests: | Non-Controlling Interests: | Non-Controlling Interests: | ||||||||||||||||||||||
Current Tax | $ | 1,204 | $ | 2,581 | $ | 2,251 | $ | 3,403 | Current Tax | $ | 0.8 | $ | 3.6 | |||||||||||
Deferred Taxes | — | (460 | ) | — | (460 | ) | Deferred Taxes | — | (0.5 | ) | ||||||||||||||
Total Non-Controlling Interests | 1,204 | 2,121 | 2,251 | 2,943 | Total Non-Controlling Interests | 0.8 | 3.1 | |||||||||||||||||
Provision for income taxes | Provision for income taxes | $ | 4,944 | $ | 16,923 | $ | 9,908 | $ | 28,910 | Provision for income taxes | $ | 11.9 | $ | 26.7 | ||||||||||
Income before income taxes (controlling interest) | Income before income taxes (controlling interest) | $ | 14,719 | $ | 40,006 | $ | 24,761 | $ | 68,634 | Income before income taxes (controlling interest) | $ | 28.6 | $ | 62.7 | ||||||||||
Effective Tax rate attributable to controlling interests(1) | Effective Tax rate attributable to controlling interests(1) | 25.4 | % | 37.0 | % | 30.9 | % | 37.8 | % | Effective Tax rate attributable to controlling interests(1) | 38.8 | % | 37.6 | % |
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the consolidated provision for income taxes is as follows:
| | For the Three Months Ended June 30, | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2010 | 2009 | 2010 | | 2010 | 2011 | ||||||||||||||
Current: | Current: | Current: | ||||||||||||||||||||
Federal | $ | (4,640 | ) | $ | 544 | $ | (14,625 | ) | $ | (204 | ) | Federal | $ | (0.8 | ) | $ | 6.1 | |||||
State | 2,516 | 2,264 | 3,926 | 3,453 | State | 1.2 | 3.1 | |||||||||||||||
Foreign | 2,202 | 5,118 | 3,779 | 8,006 | Foreign | 2.9 | 7.9 | |||||||||||||||
Total Current | Total Current | 78 | 7,926 | (6,920 | ) | 11,255 | Total Current | 3.3 | 17.1 | |||||||||||||
Deferred: | Deferred: | Deferred: | ||||||||||||||||||||
Federal | 7,448 | 8,503 | 18,456 | 16,380 | Federal | 7.9 | 11.3 | |||||||||||||||
State | (2,149 | ) | 1,570 | (891 | ) | 2,843 | State | 1.2 | 0.7 | |||||||||||||
Foreign | (433 | ) | (1,076 | ) | (737 | ) | (1,568 | ) | Foreign | (0.5 | ) | (2.4 | ) | |||||||||
Total Deferred | Total Deferred | 4,866 | 8,997 | 16,828 | 17,655 | Total Deferred | 8.6 | 9.6 | ||||||||||||||
Provision for Income Taxes | Provision for Income Taxes | $ | 4,944 | $ | 16,923 | $ | 9,908 | $ | 28,910 | Provision for Income Taxes | $ | 11.9 | $ | 26.7 | ||||||||
The components of deferred tax assets and liabilities are as follows:
| | December 31, 2009 | June 30, 2010 | | December 31, 2010 | March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Deferred Tax Assets | Deferred Tax Assets | Deferred Tax Assets | ||||||||||||||
State net operating loss carryforwards | $ | 30.6 | $ | 29.6 | ||||||||||||
State net operating loss carryforwards | $ | 28,694 | $ | 28,748 | Foreign tax credit carryforwards | 17.3 | 19.1 | |||||||||
Foreign tax credit carryforwards | 9,442 | 17,186 | Deferred compensation | 10.3 | 11.7 | |||||||||||
Capital loss carryforwards | 1,808 | 1,472 | Accrued expenses | 8.5 | 10.3 | |||||||||||
Other | 14,297 | 14,987 | Capital loss carryforwards | 1.5 | 1.5 | |||||||||||
Total deferred tax assets | Total deferred tax assets | 54,241 | 62,393 | Total deferred tax assets | 68.2 | 72.2 | ||||||||||
Valuation allowance | Valuation allowance | (25,294 | ) | (25,434 | ) | Valuation allowance | (27.6 | ) | (26.7 | ) | ||||||
Deferred tax assets, net of valuation allowance | Deferred tax assets, net of valuation allowance | $ | 28,947 | $ | 36,959 | Deferred tax assets, net of valuation allowance | $ | 40.6 | $ | 45.5 | ||||||
Deferred Tax Liabilities | Deferred Tax Liabilities | Deferred Tax Liabilities | ||||||||||||||
Intangible asset amortization | $ | (188,872 | ) | $ | (194,979 | ) | Intangible asset amortization | $ | (209.3 | ) | $ | (218.9 | ) | |||
Convertible securities interest | (139,279 | ) | (146,671 | ) | Convertible securities interest | (154.5 | ) | (158.5 | ) | |||||||
Non-deductible intangible amortization | (19,745 | ) | (149,706 | ) | Non-deductible intangible amortization | (143.1 | ) | (143.5 | ) | |||||||
Other | (3,722 | ) | (9,754 | ) | Deferred revenue | (26.3 | ) | (24.8 | ) | |||||||
Other | (2.8 | ) | (2.7 | ) | ||||||||||||
Total deferred tax liabilities | Total deferred tax liabilities | (351,618 | ) | (501,110 | ) | Total deferred tax liabilities | (536.0 | ) | (548.4 | ) | ||||||
Net deferred tax liability | $ | (322,671 | ) | $ | (464,151 | ) | Net deferred tax liability | $ | (495.4 | ) | $ | (502.9 | ) | |||
Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets and convertible securities. The Company amortizes most of its intangible assets for tax purposes only, reducing its tax basis below its carrying value for financial statement purposes and generating deferred taxes each reporting period. The Company's 2008 senior convertible notes and junior convertible trust preferred securities and 2008 senior convertible notes also generate deferred taxes because the Company's tax deductions are higher than the interest expense recorded for financial statement purposes.
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the second quarter of 2010, in connection with the closing of the investments in Pantheon and Aston (discussed further in Note 17),At March 31, 2011, the Company recorded deferred tax liabilities. As the Company's investment in Pantheon is deductible in the United States, but is not deductible outside the United States; the Company recorded a deferred tax liability of $51,917. As the Company's investment in Aston was tax-free for Highbury's shareholders, the Company only recorded a deferred tax liability of $13,171 because most of its acquired intangible assets were not deductible for tax purposes.
At June 30, 2010, the Company hadhas state net operating loss carryforwards that expire over a 15-year period beginning in 2010.2011. The Company also has foreign tax credit carryforwards that expire over a 10-year period beginning in 2010.2011. The valuation allowances at December 31, 20092010 and June 30, 2010March 31, 2011 were principally related to the uncertainty of the realization of the foreign tax credits and the state net operating loss carryforwards, which realization depends upon the Company's generation ofability to generate sufficient taxable income prior to their expiration.the expiration of these carryforwards.
At June 30, 2010,March 31, 2011, the Company's liability for uncertain tax positions was $22,150,$24.6 million, including interest and related charges of $3,918. The Company does not anticipate that this liability will change significantly over$3.0 million. Over the next twelve months.months, as a result of state and foreign tax audits, unrecognized tax benefits on uncertain tax positions could increase by $1.0 to $3.0 million.
7.6. Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the dilutive effect of the potential issuance of incremental shares of the Company's common stock. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share available to common stockholders. Unlike all other dollar amounts in these Notes, the amounts in the numerator reconciliation are not presented in thousands.
| | For the Three Months Ended June 30, | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2010 | 2009 | 2010 | | 2010 | 2011 | ||||||||||||||
Numerator: | Numerator: | Numerator: | ||||||||||||||||||||
Net Income (controlling interest) | Net Income (controlling interest) | $ | 10,979,000 | $ | 25,204,000 | $ | 17,104,000 | $ | 42,667,000 | Net Income (controlling interest) | $ | 17.5 | $ | 39.1 | ||||||||
Interest expense on convertible securities, net of taxes | Interest expense on convertible securities, net of taxes | 36,000 | 28,000 | 72,000 | 52,000 | Interest expense on convertible securities, net of taxes | 0.0 | — | ||||||||||||||
Net Income (controlling interest), as adjusted | Net Income (controlling interest), as adjusted | $ | 11,015,000 | $ | 25,232,000 | $ | 17,176,000 | $ | 42,719,000 | Net Income (controlling interest), as adjusted | $ | 17.5 | $ | 39.1 | ||||||||
Denominator: | Denominator: | Denominator: | ||||||||||||||||||||
Average shares outstanding—basic | Average shares outstanding—basic | 41,450,659 | 44,610,506 | 40,740,486 | 43,491,622 | Average shares outstanding—basic | 42.4 | 51.8 | ||||||||||||||
Effect of dilutive instruments: | Effect of dilutive instruments: | Effect of dilutive instruments: | ||||||||||||||||||||
Stock options | 557,275 | 987,830 | 324,501 | 951,364 | Stock options | 0.9 | 1.3 | |||||||||||||||
Forward sale | 277,403 | 1,375,840 | 144,201 | 1,329,622 | Forward sale | 1.3 | — | |||||||||||||||
Senior convertible securities | 873,803 | 661,054 | 873,803 | 767,341 | Senior convertible securities | 0.8 | — | |||||||||||||||
Average shares outstanding—diluted | Average shares outstanding—diluted | 43,159,140 | 47,635,230 | 42,082,991 | 46,539,949 | Average shares outstanding—diluted | 45.4 | 53.1 | ||||||||||||||
As more fully discussed in NotesNote 3, and 4, the Company had certain convertible securities outstanding during the periods presented and is required to apply the if-converted method to these securities in its calculation of diluted earnings per share. Under the if-converted method, shares that are issuable upon conversion are deemed outstanding, regardless of whether the securities are
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contractually convertible into the Company's common stock at that time. For this calculation, the interest expense (net of tax) attributable to these dilutive securities is added back to Net Income (controlling interest), reflecting the assumption that the securities have been converted. Issuable shares for these securities and related interest expense are excluded from the calculation if an assumed conversion would be anti-dilutive to diluted earnings per share.
The calculation of diluted earnings per share for the three months ended June 30, 2009March 31, 2010 and 20102011 excludes the potential exercise of options to purchase 2.11.3 million and 0.80.6 million shares of common shares,stock, respectively, because the effect would be anti-dilutive. The calculation of diluted earnings per share for the six months ended June 30, 2009 and 2010 excludes the potential exercise of options to purchase 2.1 million and 1.2 million common shares, respectively, because the effect would be anti-dilutive.
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As discussed further in Note 19,18, the Company may settle portions of its Affiliate equity purchases in shares of its common stock. Because it is the Company's intent to settle these potential repurchases in cash, the calculation of diluted earnings per share excludes any potential dilutive effect from possible share settlements.
8.7. Commitments and Contingencies
The Company and its Affiliates are subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition or resultsstatements of operations of the Company.
Certain Affiliates operate under regulatory authorities which require that they maintain minimum financial or capital requirements. Management is not aware of any material violations of such financial requirements occurring during the period.requirements.
In connection with its investment in Pantheon investment (discussed further in Note 17),Ventures, the Company has committed to co-invest in certain Pantheon investment partnerships where it serves as the general partnerpartner. As of March 31, 2011, these commitments totaled approximately $98.6 million and may be called in future periods. Russell Investments (Pantheon Ventures former owner) is contractually obligated to reimburse the Company for $69.6 million of these commitments when they are called. As
Under past acquisition agreements, the Company is contingently liable, upon achievement of June 30, 2010,specified financial targets, to make payments of up to $496.5 million through 2015. In 2011, the Company expects to make payments of approximately $1.4 million to settle portions of these commitments totaled approximately $97,000 and may be called in future periods.contingent obligations.
9.8. Investments in Partnerships
The activity in the Affiliate investments in consolidated partnerships was as follows for the six months ended June 30, 2010:
December 31, 2009 | $ | 93,809 | |||
Gross subscriptions | 6,399 | ||||
Gross redemptions | (5,895 | ) | |||
Investment income | (4,759 | ) | |||
June 30, 2010 | $ | 89,554 | |||
Purchases and sales of investments (principally equity securities) were $189,878 and $189,374, respectively, for the six months ended June 30, 2010.
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management fees earned from these partnerships were $200 and $227 for the three months ended June 30, 2009 and 2010, respectively, and $362 and $469 for the six months ended June 30, 2009 and 2010, respectively.
As of December 31, 20092010 and June 30, 2010,March 31, 2011, the Affiliates' investments in partnerships that are not consolidated were $17,631$106.1 million and $94,656,$121.9 million, respectively. These assets are reported within "Other assets" in the Consolidated Balance Sheets. The income or loss related to these investments is classified within "Investment and other (income) loss"income" in the Consolidated Statements of Income.
10.9. Investments in Marketable Securities
Investments in marketable securities are comprised of the Company's 2009 and 2010 investments in Value Partners Group Limited, a publicly-traded asset management firm based in Hong Kong, and investments held by Affiliates. These investments are carried at their fair value. Changes in fair value for securities classified as available-for-sale are reported in accumulated other comprehensive income. Changes in fair value for trading securities are reported within other operating expenses. The cost of investments in marketable securities, gross unrealized gains and losses were as follows:
| December 31, 2009 | June 30, 2010 | December 31, 2010 | March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost of investments in marketable securities | $ | 50,631 | $ | 51,904 | $ | 68.9 | $ | 63.0 | ||||||
Gross unrealized gains | 6,108 | 11,317 | 47.1 | 47.3 | ||||||||||
Gross unrealized losses | (49 | ) | (419 | ) | — | — |
11.
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Unsettled Fund Share Receivables and Payables
Unsettled fund share receivables and payables are created by the normal settlement periods on transactions initiated by certain clients of Affiliate funds domiciled in the United Kingdom. The gross presentation of the receivable ($55,817) and offsetting payable ($50,446) reflects the legal relationship between the underlying investor and the Company.
12.11. Fair Value Measurements
The Company determines the fair value of certain investment securities and other financial and nonfinancial assets and liabilities. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in the most advantageous market, utilizing a hierarchy of three different valuation techniques:
Level 1—Unadjusted quoted market prices for identical instruments in active markets;
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs, or significant value drivers, are observable; and
Level 3—Prices reflecting the Company's own assumptions concerning unobservable inputs to the valuation model. These inputs require significant management judgment and reflect the Company's estimation of assumptions that market participants would use in pricing the asset or liability.
The following table summarizes the Company's assets and liabilities that are measured at fair value on a recurring basis:
| | Fair Value Measurements | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2010 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||
Financial Assets | |||||||||||||||
Cash equivalents | $ | 36.0 | $ | 36.0 | $ | — | $ | — | |||||||
Partnership investments(1) | 124.5 | 16.9 | 21.8 | 85.8 | |||||||||||
Investments in marketable securities(2) | |||||||||||||||
Trading securities | 15.4 | 15.2 | 0.2 | — | |||||||||||
Available for sale securities | 100.6 | 99.2 | 1.4 | — | |||||||||||
Interest rate derivatives | 5.9 | — | 5.9 | — | |||||||||||
Financial Liabilities | |||||||||||||||
Contingent payment obligations(3) | $ | 84.0 | $ | — | $ | — | $ | 84.0 | |||||||
Obligations to related parties | 79.6 | — | — | 79.6 |
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| March 31, 2011 | Level 1 | Level 2 | Level 3 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial Assets | |||||||||||||||
Cash equivalents | $ | 14.6 | $ | 14.6 | $ | — | $ | — | |||||||
Partnership investments(1) | 152.8 | 27.9 | 31.3 | 93.6 | |||||||||||
Investments in marketable securities(2) | |||||||||||||||
Trading securities | 16.0 | 16.0 | — | — | |||||||||||
Available for sale securities | 94.3 | 94.3 | — | — | |||||||||||
Interest rate derivatives | 3.0 | — | 3.0 | — | |||||||||||
Financial Liabilities | |||||||||||||||
Contingent payment obligations(3) | $ | 89.4 | $ | — | $ | — | $ | 89.4 | |||||||
Obligations to related parties | 67.9 | — | — | 67.9 |
The following table summarizesis a description of the Company'ssignificant assets (principally equity securities) and liabilities that are measured at fair value on a quarterly basis.and the fair value methodologies used.
| | Fair Value Measurements | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2009 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
Financial Assets | |||||||||||||
Investments in partnerships | $ | 111,440 | $ | 93,066 | $ | 14,365 | $ | 4,009 | |||||
Investments in marketable securities | 56,690 | 54,480 | 2,210 | — | |||||||||
Financial Liabilities | |||||||||||||
Contingent payment obligations | $ | 27,074 | $ | — | $ | — | $ | 27,074 | |||||
Obligations to related parties | 78,653 | — | — | 78,653 |
Cash equivalents consist primarily of highly liquid investments in money market funds. Cash investments in actively traded money market funds are classified as Level 1.
| | Fair Value Measurements | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| June 30, 2010 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
Financial Assets | |||||||||||||
Investments in partnerships | $ | 184,210 | $ | 83,691 | $ | 36,829 | $ | 63,690 | |||||
Investments in marketable securities | 62,802 | 60,758 | 2,044 | — | |||||||||
Financial Liabilities | |||||||||||||
Contingent payment obligations | $ | 66,239 | $ | — | $ | — | $ | 66,239 | |||||
Obligations to related parties | 48,950 | — | — | 48,950 |
During the threePartnership investments consist of investments in funds advised by Affiliates and six months ended June 30, 2010, there were no significant transfers of financial assets betweenare valued using net asset value ("NAV"). Investments in actively traded funds that calculate daily NAVs are classified as Level 1 and1. Investments in non-public funds that hold investments with observable market prices are classified as Level 2. During the six months ended June 30, 2010, financial assets valued at $3,709 transferred fromInvestments in funds that hold illiquid securities or that are subject to redemption restrictions are classified as Level 3 to Level 2. The fair value of Level 2 assets was determined using quoted prices for similar instruments in active markets.3. The fair value of Level 3 assets was determined using NAV one quarter in arrears (adjusted for current period calls and liabilitiesdistributions).
Investments in marketable securities consist primarily of investments in funds advised by Affiliates which are valued using NAV and in publicly traded securities. Investments in actively traded funds that calculate daily NAVs and actively traded public securities are classified as Level 1. Investments in non-public funds that hold investments with observable market prices are classified as Level 2.
Interest rate derivatives include Treasury rate lock contracts and interest rate swaps at December 31, 2010 and only interest rate swaps at March 31, 2011. The fair value of these assets was determined by model-derived valuations in which all significant inputs were observable in active markets.
Contingent payment obligations represents the present value of the expected future settlement of contingent payment arrangements related to the Company's business combinations. The fair value of these obligations is determined using an income approach with assumptions made about future cash flows and discount rates.
Any change inObligations to related parties include agreements to repurchase Affiliate equity and liabilities offsetting certain investments which are held by the Company but economically attributable to a related party. The fair value of the agreements to repurchase Affiliate investments in consolidated partnershipsequity is presented as "Investment (income) loss from investments in partnerships" in the Consolidated Statements of Income. However, the portion of thisdetermined using an income or loss that is attributableapproach with assumptions made about future cash flows and discount rates. The liability to investors that are unrelated to the Company, if any, is reported as "Net (income) loss (non-controlling interests in partnerships)."a related
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
party is measured based upon certain investments held by the Company, the fair value of which is determined using NAV.
The following table presents the changes in Level 3 assets and liabilities for the three and six months ended June 30, 2009March 31, 2010 and 2010:2011:
| Financial Assets | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, 2009 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2010 | |||||||||
Balance, beginning of period | $ | 4,185 | $ | 300 | $ | 4,185 | $ | 4,009 | |||||
Realized and unrealized gains (losses) included in net income | — | (116 | ) | — | (116 | ) | |||||||
Realized and unrealized gains (losses) included in other comprehensive income | — | — | — | — | |||||||||
New Investments | 63,506 | 63,506 | |||||||||||
Purchases | — | — | — | — | |||||||||
Sales | — | — | — | — | |||||||||
Transfers in and/or out of Level 3 | — | — | — | (3,709 | ) | ||||||||
Balance, end of period | $ | 4,185 | $ | 63,690 | $ | 4,185 | $ | 63,690 | |||||
Amount of total gains (losses) included in net income attributable to unrealized gains (losses) from assets still held at end of period | $ | — | $ | — | $ | — | $ | — | |||||
Amount of total gains (losses) included in other comprehensive income | $ | — | $ | — | $ | — | $ | — |
| Level 3 Financial Assets and Financial Liabilities at Fair Value | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, 2010 | Balance, beginning of period | Net realized gains/losses | Net unrealized gains/losses relating to instruments still held at the reporting date | Purchases and issuances | Settlements and reductions | Net transfers in and/or out of Level 3 | Balance, end of period | |||||||||||||||
Partnership investments | $ | 4.0 | $ | — | (1) | $ | — | (1) | $ | — | $ | — | $ | (3.7 | ) | $ | 0.3 | |||||
Contingent payment obligations | 27.1 | — | (2) | — | (2) | 49.1 | (27.1 | ) | — | 49.1 | ||||||||||||
Obligations to related parties | 78.7 | (0.2 | )(3) | — | (3) | 15.3 | (78.5 | ) | — | 15.3 |
| Financial Liabilities | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, 2009 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2010 | |||||||||
Balance, beginning of period | $ | 2,568 | $ | 64,388 | $ | 27,764 | $ | 105,727 | |||||
Realized and unrealized (gains) losses included in net income | (232 | ) | 2,621 | (232 | ) | 2,454 | |||||||
Realized and unrealized (gains) losses included in other comprehensive income | — | (769 | ) | — | (769 | ) | |||||||
New Investments | — | 48,950 | — | 98,054 | |||||||||
Additions | 672 | — | 672 | 15,284 | |||||||||
Settlements | (1,693 | ) | — | (26,889 | ) | (105,560 | ) | ||||||
Transfers in and/or out of Level 3 | — | — | — | — | |||||||||
Balance, end of period | $ | 1,315 | $ | 115,190 | $ | 1,315 | $ | 115,190 | |||||
Amount of total gains (losses) included in net income attributable to unrealized gains (losses) from unsettled liabilities at end of period | $ | — | $ | 2,621 | $ | — | $ | 2,621 | |||||
Amount of total gains (losses) included in other comprehensive income | $ | — | $ | (769 | ) | $ | — | $ | (769 | ) |
| Level 3 Financial Assets and Financial Liabilities at Fair Value | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, 2011 | Balance, beginning of period | Net realized gains/losses | Net unrealized gains/losses relating to instruments still held at the reporting date | Purchases and issuances | Settlements and reductions | Net transfers in and/or out of Level 3 | Balance, end of period | |||||||||||||||
Partnership investments | $ | 85.8 | $ | 1.1 | (1) | $ | 5.6 | (1) | $ | 2.8 | $ | (1.7 | ) | $ | — | $ | 93.6 | |||||
Contingent payment obligations | 84.0 | — | (2) | 5.4 | (2) | — | — | — | 89.4 | |||||||||||||
Obligations to related parties | 79.6 | 0.3 | (3) | 2.5 | (3) | 9.6 | (24.1 | ) | — | 67.9 |
During the three months ended March 31, 2010, financial assets valued at $3.7 million transferred from Level 3 to Level 2. No such transfers occurred during the three months ended March 31, 2011. In addition, there were no significant transfers of financial assets or liabilities between Level 2 and Level 1 in either period.
As a practical expedient, the Company relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the measurement dates. The following table summarizes, as of December 31, 2010 and March 31, 2011, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized:
| December 31, 2010 | March 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Category of Investment | Fair Value | Unfunded Commitments | Fair Value | Unfunded Commitments | |||||||||
Private equity fund-of-funds(1) | $ | 85.7 | $ | 89.2 | $ | 93.6 | $ | 98.6 | |||||
Other funds(2) | 55.2 | — | 64.0 | — | |||||||||
$ | 140.9 | $ | 89.2 | $ | 157.6 | $ | 98.6 | ||||||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There are no current plans to sell any of these investments.
The carrying amount of the Company's cash, cash equivalents and short-term investments approximates fair value because of the short-term nature of these instruments. The carrying value of
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
notes receivable approximates fair value because interest rates and other terms of the notes are at market rates. The carrying value of notes payable approximates fair value principally because of the short-term nature of the notes. The carrying value of senior bank debt approximates fair value because the debt is a credit facility with variable interest based on selected short-term rates. The fair market value of the 2008 senior convertible notes and the 2006 and 2007 junior convertible trust preferred securities at June 30, 2010March 31, 2011 was $448,500$542.8 million and $509,224,$664.0 million, respectively.
12. Variable Interest Entities
Sponsored Investment Funds
The Company's Affiliates act as the investment manager for certain investment funds that are considered variable interest entities ("VIEs"). In addition to an Affiliate's involvement as the investment manager, Affiliates may also hold investments in these products. Affiliates are not the primary beneficiary of these VIEs as their involvement is limited to that of a service provider and their investment, if any, represents an insignificant interest in the fund's assets under management. As a result, the Company's variable interests will not absorb the majority of the variability of the entity's net assets and therefore the Company has not consolidated these entities.
Trust Preferred Vehicles
The Company established wholly-owned trusts in connection with the 2006 and 2007 issuances of junior convertible trust preferred securities. These entities are considered VIEs and the Company is not the primary beneficiary, therefore these entities are not consolidated in the Company's financial statements.
The net assets and liabilities of these unconsolidated VIEs and the Company's maximum risk of loss related thereto are as follows:
| December 31, 2010 | March 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unconsolidated VIE Net Assets | Carrying Value and Maximum Exposure to Loss | Unconsolidated VIE Net Assets | Carrying Value and Maximum Exposure to Loss | |||||||||
Sponsored investment funds | $ | 3,350.7 | $ | 0.9 | $ | 3,524.6 | $ | 0.8 | |||||
Trust preferred vehicles | 9.0 | 9.0 | 9.0 | 9.0 |
13. Related Party Transactions
The Company periodically records amounts receivable and payable to Affiliate partners in connection with the transfer of Affiliate equity interests. AsThe Company also has liabilities to related parties for deferred purchase price and contingent payment obligations in connection with certain business combinations.
The total receivable as of December 31, 2009 and June 30, 2010 thewas $42.9 million, which is included in "Other assets." The total receivable (reportedas of March 31, 2011 was $57.0 million, of which $14.3 million is included
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in "Prepaid expenses and other current assets" and $42.7 million is included in "Other assets") was $45,253 and $40,945, respectively.assets." The total payable as of December 31, 20092010 was $109,888,$183.0 million, of which $114.8 million is included in current"Payables to related party" and $68.2 million is included in "Other long-term liabilities." The total payable as of June 30, 2010March 31, 2011 was $153,527,$147.6 million, of which $90,791$80.5 million is included in current"Payables to related party" and $67.1 million is included in "Other long-term liabilities."
In certain cases, Affiliate management owners and Company officers may serve as trustees or directors of certain mutual funds from which the Affiliate earns advisory fee revenue.
14. Stock Option and Incentive Plans
The following summarizes the transactions of the Company's stock option and incentive plans for the sixthree months ended June 30, 2010:March 31, 2011:
| Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Unexercised options outstanding—January 1, 2010 | 5,166,344 | $ | 54.29 | ||||||||
Options granted | 3,125 | 71.13 | |||||||||
Options exercised | (584,956 | ) | 43.79 | ||||||||
Options forfeited | (3,043 | ) | 48.79 | ||||||||
Unexercised options outstanding—June 30, 2010 | 4,581,470 | 55.64 | 4.6 | ||||||||
Exercisable at June 30, 2010 | 2,734,354 | 53.21 | 4.4 |
| Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Unexercised options outstanding—January 1, 2011 | 5.1 | $ | 62.34 | ||||||||
Options granted | — | — | |||||||||
Options exercised | (0.3 | ) | 48.03 | ||||||||
Options forfeited | — | — | |||||||||
Unexercised options outstanding—March 31, 2011 | 4.8 | 63.27 | 4.9 | ||||||||
Exercisable at March 31, 2011 | 2.4 | 58.49 | 4.0 |
The Company's Net Income (controlling interest) for the three and six months ended June 30, 2010March 31, 2011 includes compensation expense of $1,943 and $4,184, respectively$3.8 million (net of income tax benefits of $1,216 and $2,619, respectively,$2.3 million related to the Company's share-based compensation arrangements)Stock Option and Incentive, Long-Term Executive Incentive, Long-Term Equity Incentive and Deferred Compensation Plans). As of June 30, 2010,March 31, 2011, the deferredCompany expects to recognize compensation expense related to these share-based compensation arrangements was $40,622 which is expected to be recognizedof $69.7 million over a weighted average period of approximately fourthree years (assuming no forfeitures). As of June 30, 2010, 0.5 millionMarch 31, 2011, no outstanding options have expiration dates prior to the end of 2010.2011.
15. Derivative Financial Instruments
The Company periodically uses derivative contracts to manage interest rate exposure associated with its variable interest rate debt.
In 2010, the Company entered into interest rate swap agreements as summarized in the table below:
| Notional Amount | Paying | Receiving | Start Date | Expiration Date | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Counterparty A | $ | 25.0 | 1.67 | % | 3-Month LIBOR | October 2010 | October 2015 | |||||
Counterparty A | $ | 25.0 | 1.65 | % | 3-Month LIBOR | October 2010 | October 2015 | |||||
Counterparty B | $ | 25.0 | 1.59 | % | 3-Month LIBOR | October 2010 | October 2015 | |||||
Counterparty B | $ | 25.0 | 2.14 | % | 3-Month LIBOR | October 2010 | October 2017 |
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November of 2010, the Company entered into a series of treasury rate lock contracts with a total notional value of $100.0 million which were settled in February 2011 for a net pre-tax gain of $4.0 million (each contract was designated and qualified as a cash flow hedge). These contracts were intended to hedge the risks associated with changes in interest rates on a fixed-rate debt issuance that is anticipated to occur prior to June 2012. The gain on these contracts is reflected as a component of other comprehensive income and will be recognized as a deduction to interest expense over the life of the expected fixed rate debt issuance, or recorded as other income in the event the Company determines that it is not probable it will issue fixed rate debt prior to the third quarter of 2012.
Certain of the Company's derivative contracts contain provisions that may require the Company or the counterparties to post collateral based upon the current fair value of the derivative contracts. As of March 31, 2011, the Company was not required to post collateral.
The Company records all derivative instruments on the balance sheet at fair value. As cash flow hedges, the effective portion of the unrealized gain or loss on the derivative instruments is recorded in accumulated other comprehensive income as a separate component of stockholders' equity. Hedge effectiveness is measured by comparing the present value of the cumulative change in the expected future variable cash flows of the hedged contract with the present value of the cumulative change in the expected future variable cash flows of the hedged item. To the extent that the critical terms of the hedged item and the derivative are not identical, hedge ineffectiveness would be reported in earnings as interest expense. Hedge ineffectiveness was not material in any periods presented. As of March 31, 2011, the unrealized gain (before taxes) on the derivative instruments was $3.0 million. The Company does not expect to reclassify any material portion of the unrealized gain into earnings in the next twelve months.
The following summarizes the location and amount of derivative instrument gains and losses (before taxes) reported in the Consolidated Statements of Income:
| Amount of Gain Recognized in Other Comprehensive Income | ||||||
---|---|---|---|---|---|---|---|
| For the Three Months Ended March 31, | ||||||
| 2010 | 2011 | |||||
Cash Flow Hedges | |||||||
Interest rate swaps | $ | — | $ | 0.6 | |||
Treasury rate locks | — | 0.5 | |||||
Total | $ | — | $ | 1.1 | |||
The following summarizes the location and fair values of derivative instruments on the Consolidated Balance Sheets:
| December 31, 2010 | March 31, 2011 | |||||
---|---|---|---|---|---|---|---|
Cash Flow Hedges | |||||||
Interest rate swaps(1) | $ | 2.5 | $ | 3.0 | |||
Treasury rate locks(1) | 3.4 | — | |||||
Total | $ | 5.9 | $ | 3.0 | |||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company does not hold or issue derivative financial instruments for trading purposes. Interest rate swaps and treasury locks are intended to enable the Company to achieve a level of variable-rate and fixed-rate debt that is acceptable to management and to limit interest rate exposure.
16. Segment Information
Management has assessed and determined that the Company operates in three business segments representing the Company's three principal distribution channels: Mutual Fund, Institutional and High Net Worth, each of which has different client relationships.
Revenue in the Mutual Fund distribution channel is earned from advisory and sub-advisory relationships with all domestically-registered investment products as well as non-institutional investment
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
products that are registered abroad.
Revenue in the Institutional distribution channel is earned from relationships with foundations and endowments, defined benefit and defined contribution plans and Taft-Hartley plans. Revenue in the High Net Worth distribution channel is earned from relationships with high net worth individuals, family trusts and managed account programs.
Revenue earned from client relationships managed by Affiliates accounted for under the equity method is not consolidated with the Company's reported revenue but instead is included (net of operating expenses, including amortization) in "Income from equity method investments," and reported in the distribution channel in which the Affiliate operates. Income tax attributable to the profits of the Company's equity-method Affiliates is reported within the Company's consolidated income tax provision.
In firms with revenue sharing arrangements, a certain percentage of revenue is allocated for use by management of an Affiliate in paying operating expenses of that Affiliate, including salaries and bonuses, and is called an "Operating Allocation." In reporting segment operating expenses, Affiliate expenses are allocated to a particular segment on a pro rata basis with respect to the revenue generated by that Affiliate in such segment. Generally, as revenue increases, additional compensation is typically paid to Affiliate management partners from the Operating Allocation. As a result, the contractual expense allocation pursuant to a revenue sharing arrangement may result in the characterization of any growth in profit margin beyond the Company's Owners' Allocation as an operating expense. All other operating expenses (excluding intangible amortization) and interest expense have been allocated to segments based on the proportion of cash flow distributions reported by Affiliates in each segment.
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Income
| For the Three Months Ended June 30, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mutual Fund | Institutional | High Net Worth | Total | ||||||||||
Revenue | $ | 72,360 | $ | 101,491 | $ | 27,395 | $ | 201,246 | ||||||
Operating expenses: | ||||||||||||||
Depreciation and other amortization | 1,011 | 7,476 | 2,800 | 11,287 | ||||||||||
Other operating expenses | 49,660 | 70,638 | 18,764 | 139,062 | ||||||||||
50,671 | 78,114 | 21,564 | 150,349 | |||||||||||
Operating income | 21,689 | 23,377 | 5,831 | 50,897 | ||||||||||
Non-operating (income) and expenses: | ||||||||||||||
Investment and other income | (5,025 | ) | (1,560 | ) | (606 | ) | (7,191 | ) | ||||||
Income from equity method investments | (139 | ) | (6,835 | ) | (377 | ) | (7,351 | ) | ||||||
Investment income from investments in partnerships | — | (385 | ) | (14,562 | ) | (14,947 | ) | |||||||
Interest expense | 5,198 | 11,441 | 2,554 | 19,193 | ||||||||||
34 | 2,661 | (12,991 | ) | (10,296 | ) | |||||||||
Income before income taxes | 21,655 | 20,716 | 18,822 | 61,193 | ||||||||||
Income taxes | 2,688 | 1,950 | 306 | 4,944 | ||||||||||
Net income | 18,967 | 18,766 | 18,516 | 56,249 | ||||||||||
Net income (non-controlling interests) | (12,994 | ) | (14,130 | ) | (3,547 | ) | (30,671 | ) | ||||||
Net income (non-controlling interests in partnerships) | — | (385 | ) | (14,214 | ) | (14,599 | ) | |||||||
Net Income (controlling interest) | $ | 5,973 | $ | 4,251 | $ | 755 | $ | 10,979 | ||||||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | For the Three Months Ended June 30, 2010 | | For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Mutual Fund | Institutional | High Net Worth | Total | | Mutual Fund | Institutional | High Net Worth | Total | ||||||||||||||||||
Revenue | Revenue | $ | 147,993 | $ | 152,301 | $ | 31,786 | $ | 332,080 | Revenue | $ | 97.9 | $ | 121.8 | $ | 31.3 | $ | 251.0 | ||||||||||
Operating expenses: | Operating expenses: | Operating expenses: | ||||||||||||||||||||||||||
Depreciation and other amortization | 2,596 | 8,258 | 2,113 | 12,967 | Depreciation and other amortization | 2.2 | 7.4 | 2.3 | 11.9 | |||||||||||||||||||
Other operating expenses | 102,719 | 99,574 | 20,989 | 223,282 | Other operating expenses | 66.7 | 83.4 | 20.5 | 170.6 | |||||||||||||||||||
105,315 | 107,832 | 23,102 | 236,249 | 68.9 | 90.8 | 22.8 | 182.5 | |||||||||||||||||||||
Operating income | Operating income | 42,678 | 44,469 | 8,684 | 95,831 | Operating income | 29.0 | 31.0 | 8.5 | 68.5 | ||||||||||||||||||
Non-operating (income) and expenses: | Non-operating (income) and expenses: | Non-operating (income) and expenses: | ||||||||||||||||||||||||||
Investment and other (income) loss | 1,351 | (1,283 | ) | (791 | ) | (723 | ) | Investment and other income | (0.8 | ) | (1.3 | ) | (0.7 | ) | (2.8 | ) | ||||||||||||
Income from equity method investments | (408 | ) | (8,521 | ) | (932 | ) | (9,861 | ) | Income from equity method investments | (0.3 | ) | (7.8 | ) | (1.0 | ) | (9.1 | ) | |||||||||||
Investment loss from investments in partnerships | 126 | 351 | 8,108 | 8,585 | Investment income from Affiliate investments in partnerships | (0.1 | ) | (0.2 | ) | (3.8 | ) | (4.1 | ) | |||||||||||||||
Interest expense | 9,156 | 11,331 | 2,202 | 22,689 | Interest expense | 6.0 | 11.1 | 2.7 | 19.8 | |||||||||||||||||||
10,225 | 1,878 | 8,587 | 20,690 | 4.8 | 1.8 | (2.8 | ) | 3.8 | ||||||||||||||||||||
Income before income taxes | Income before income taxes | 32,453 | 42,591 | 97 | 75,141 | Income before income taxes | 24.2 | 29.2 | 11.3 | 64.7 | ||||||||||||||||||
Income taxes | Income taxes | 7,565 | 7,862 | 1,496 | 16,923 | Income taxes | 5.5 | 5.0 | 1.4 | 11.9 | ||||||||||||||||||
Net income | Net income | 24,888 | 34,729 | (1,399 | ) | 58,218 | Net income | 18.7 | 24.2 | 9.9 | 52.8 | |||||||||||||||||
Net income (non-controlling interests) | (14,755 | ) | (22,736 | ) | (3,920 | ) | (41,411 | ) | Net income (non-controlling interests) | (11.0 | ) | (16.4 | ) | (3.9 | ) | (31.3 | ) | |||||||||||
Net loss (non-controlling interests in partnerships) | 125 | 351 | 7,921 | 8,397 | Net income (non-controlling interests in partnerships) | (0.1 | ) | (0.1 | ) | (3.8 | ) | (4.0 | ) | |||||||||||||||
Net Income (controlling interest) | Net Income (controlling interest) | $ | 10,258 | $ | 12,344 | $ | 2,602 | $ | 25,204 | Net Income (controlling interest) | $ | 7.6 | $ | 7.7 | $ | 2.2 | $ | 17.5 | ||||||||||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | For the Six Months Ended June 30, 2009 | | For the Three Months Ended March 31, 2011 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Mutual Fund | Institutional | High Net Worth | Total | | Mutual Fund | Institutional | High Net Worth | Total | ||||||||||||||||||
Revenue | Revenue | $ | 140,698 | $ | 183,729 | $ | 55,294 | $ | 379,721 | Revenue | $ | 184.2 | $ | 207.0 | $ | 35.1 | $ | 426.3 | ||||||||||
Operating expenses: | Operating expenses: | Operating expenses: | ||||||||||||||||||||||||||
Depreciation and other amortization | 2,089 | 14,900 | 5,631 | 22,620 | Depreciation and other amortization | 4.1 | 19.7 | 2.1 | 25.9 | |||||||||||||||||||
Other operating expenses | 94,229 | 127,872 | 38,331 | 260,432 | Other operating expenses | 126.4 | 127.0 | 22.1 | 275.5 | |||||||||||||||||||
96,318 | 142,772 | 43,962 | 283,052 | 130.5 | 146.7 | 24.2 | 301.4 | |||||||||||||||||||||
Operating income | Operating income | 44,380 | 40,957 | 11,332 | 96,669 | Operating income | 53.7 | 60.3 | 10.9 | 124.9 | ||||||||||||||||||
Non-operating (income) and expenses: | Non-operating (income) and expenses: | Non-operating (income) and expenses: | ||||||||||||||||||||||||||
Investment and other income | (4,399 | ) | (1,727 | ) | (824 | ) | (6,950 | ) | Investment and other income | (2.3 | ) | (5.0 | ) | (1.4 | ) | (8.7 | ) | |||||||||||
Income from equity method investments | (209 | ) | (12,946 | ) | (612 | ) | (13,767 | ) | Income from equity method investments | (1.4 | ) | (7.7 | ) | (1.1 | ) | (10.2 | ) | |||||||||||
Investment income from investments in partnerships | (3 | ) | (316 | ) | (10,833 | ) | (11,152 | ) | Investment income from Affiliate investments in partnerships | — | — | — | — | |||||||||||||||
Interest expense | 11,247 | 22,538 | 5,356 | 39,141 | Interest expense | 10.8 | 14.6 | 2.3 | 27.7 | |||||||||||||||||||
6,636 | 7,549 | (6,913 | ) | 7,272 | 7.1 | 1.9 | (0.2 | ) | 8.8 | |||||||||||||||||||
Income before income taxes | Income before income taxes | 37,744 | 33,408 | 18,245 | 89,397 | Income before income taxes | 46.6 | 58.4 | 11.1 | 116.1 | ||||||||||||||||||
Income taxes | Income taxes | 6,215 | 3,171 | 522 | 9,908 | Income taxes | 11.7 | 12.8 | 2.2 | 26.7 | ||||||||||||||||||
Net income | Net income | 31,529 | 30,237 | 17,723 | 79,489 | Net income | 34.9 | 45.6 | 8.9 | 89.4 | ||||||||||||||||||
Net income (non-controlling interests) | (20,930 | ) | (24,430 | ) | (6,189 | ) | (51,549 | ) | Net income (non-controlling interests) | (18.3 | ) | (27.2 | ) | (4.8 | ) | (50.3 | ) | |||||||||||
Net income (non-controlling interests in partnerships) | (3 | ) | (316 | ) | (10,517 | ) | (10,836 | ) | Net income (non-controlling interests in partnerships) | — | — | — | — | |||||||||||||||
Net Income (controlling interest) | Net Income (controlling interest) | $ | 10,596 | $ | 5,491 | $ | 1,017 | $ | 17,104 | Net Income (controlling interest) | $ | 16.6 | $ | 18.4 | $ | 4.1 | $ | 39.1 | ||||||||||
Balance Sheet Information | Balance Sheet Information | |||||||||||||||||||||||||||
Total assets as of December 31, 2010 | Total assets as of December 31, 2010 | $ | 1,847.9 | $ | 3,009.3 | $ | 434.0 | $ | 5,291.2 | |||||||||||||||||||
Total assets as of March 31, 2011 | Total assets as of March 31, 2011 | 1,955.2 | 2,872.7 | 431.4 | 5,259.3 |
17. Goodwill and Acquired Client Relationships
The following table presents the change in goodwill during the three months ended March 31, 2011:
| Mutual Fund | Institutional | High Net Worth | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, as of December 31, 2010 | $ | 785.9 | $ | 1,083.7 | $ | 261.6 | $ | 2,131.2 | |||||
Goodwill acquired | 1.9 | 0.1 | — | 2.0 | |||||||||
Foreign currency translation | 2.4 | 4.5 | 2.5 | 9.4 | |||||||||
Balance, as of March 31, 2011 | $ | 790.2 | $ | 1,088.3 | $ | 264.1 | $ | 2,142.6 | |||||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| For the Six Months Ended June 30, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mutual Fund | Institutional | High Net Worth | Total | ||||||||||
Revenue | $ | 245,919 | $ | 274,073 | $ | 63,110 | $ | 583,102 | ||||||
Operating expenses: | ||||||||||||||
Depreciation and other amortization | 4,832 | 15,709 | 4,388 | 24,929 | ||||||||||
Other operating expenses | 169,452 | 182,836 | 41,516 | 393,804 | ||||||||||
174,284 | 198,545 | 45,904 | 418,733 | |||||||||||
Operating income | 71,635 | 75,528 | 17,206 | 164,369 | ||||||||||
Non-operating (income) and expenses: | ||||||||||||||
Investment and other (income) loss | 581 | (2,624 | ) | (1,502 | ) | (3,545 | ) | |||||||
Income from equity method investments | (767 | ) | (16,344 | ) | (1,896 | ) | (19,007 | ) | ||||||
Investment loss from investments in partnerships | 73 | 195 | 4,225 | 4,493 | ||||||||||
Interest expense | 15,226 | 22,422 | 4,892 | 42,540 | ||||||||||
15,113 | 3,649 | 5,719 | 24,481 | |||||||||||
Income before income taxes | 56,522 | 71,879 | 11,487 | 139,888 | ||||||||||
Income taxes | 13,030 | 12,896 | 2,984 | 28,910 | ||||||||||
Net income | 43,492 | 58,983 | 8,503 | 110,978 | ||||||||||
Net income (non-controlling interests) | (25,750 | ) | (39,179 | ) | (7,768 | ) | (72,697 | ) | ||||||
Net loss (non-controlling interests in partnerships) | 74 | 196 | 4,116 | 4,386 | ||||||||||
Net Income (controlling interest) | $ | 17,816 | $ | 20,000 | $ | 4,851 | $ | 42,667 | ||||||
Balance Sheet Information | ||||||||||||||
Total assets as of December 31, 2009 | $ | 1,182,940 | $ | 1,702,983 | $ | 504,983 | $ | 3,390,906 | ||||||
Total assets as of June 30, 2010 | 1,752,409 | 2,676,571 | 509,473 | 4,938,453 |
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Goodwill and Acquired Client Relationships
The Company periodically makes new investments in asset management firms and acquires interests from, makes additional purchase payments to and transfers interests to Affiliate management partners. The Company incurred $10,445 and $194 of acquisition-related costs which were recognized as selling, general and administrative expenses during the six months ended June 30, 2010 and June 30, 2009, respectively.
The following table presents the change in goodwill during the six months ended June 30, 2010:
| Mutual Fund | Institutional | High Net Worth | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, as of December 31, 2009 | $ | 561,753 | $ | 602,962 | $ | 248,502 | $ | 1,413,217 | |||||
Goodwill acquired, net | 210,383 | 358,110 | 4,757 | 573,250 | |||||||||
Foreign currency translation | (244 | ) | (1,315 | ) | (1,440 | ) | (2,999 | ) | |||||
Balance, as of June 30, 2010 | $ | 771,892 | $ | 959,757 | $ | 251,819 | $ | 1,983,468 | |||||
The following table reflects the components of intangible assets of the Company's Affiliates that are consolidated as of December 31, 20092010 and June 30, 2010:March 31, 2011:
| | December 31, 2009 | June 30, 2010 | | December 31, 2010 | March 31, 2011 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | Accumulated Amortization | Carrying Amount | Accumulated Amortization | | Carrying Amount | Accumulated Amortization | Carrying Amount | Accumulated Amortization | ||||||||||||||||||
Amortized intangible assets: | Amortized intangible assets: | Amortized intangible assets: | ||||||||||||||||||||||||||
Acquired client relationships | $ | 389,312 | $ | 168,538 | $ | 924,796 | $ | 187,067 | Acquired client relationships | $ | 974.8 | $ | 228.6 | $ | 976.5 | $ | 250.7 | |||||||||||
Non-amortized intangible assets: | Non-amortized intangible assets: | Non-amortized intangible assets: | ||||||||||||||||||||||||||
Acquired client relationships—mutual fund management contracts | 350,799 | — | 659,305 | — | Acquired client relationships-mutual fund management contracts | 678.0 | — | 683.8 | — | |||||||||||||||||||
Goodwill | 1,413,217 | — | 1,983,468 | — | Goodwill | 2,131.2 | — | 2,142.6 | — |
For the Company's Affiliates that are consolidated, definite-lived acquired client relationships are amortized over their expected useful lives. As of June 30, 2010,March 31, 2011, these relationships were being amortized over a weighted average life of approximately 10 years. The Company estimates that its consolidated annual amortization expense will be approximately $82,000$88.5 million for the next five years, assuming no additional investments in new or existing Affiliates.
The definite-lived acquired client relationships attributable to the Company's equity method investments are amortized over their expected useful lives. As of June 30, 2010,March 31, 2011, these relationships were being amortized over approximately seven years. Amortization expense for these relationships was $16,136$8.4 million for the sixthree months ended June 30, 2010. TheMarch 31, 2011. Assuming no additional investments in new or existing Affiliates, the Company estimates that the annual amortization expense attributable to its current equity-method Affiliates will be approximately $32,000 for the next five years assuming no additional investments in new or existing Affiliates.
17. Business Combinations
During the quarter ended June 30, 2010, the Company completed its acquisition of Pantheon Ventures Inc., Pantheon Holdings Limited and Pantheon Capital (Asia) Limited (collectively, "Pantheon") from Russell Investments, a subsidiary of Northwestern Mutual Life Insurance Company.
Pantheon is a global private equity fund-of-funds manager, with over 25 years of private equity investment experience. Pantheon manages regional funds-of-funds in Europe, the United States and
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Asia, as well as global secondary funds-of-funds, global infrastructure fund-of-funds and customized separate account programs.
During the quarter, the Company also completed its investment in Aston Asset Management LLC ("Aston") through the acquisition of Highbury Financial Inc., Aston's parent company. Based in Chicago, Aston offers sub-advised investment products to the mutual fund and managed accounts markets. Aston is the principal advisor to the Aston Funds, a fund family of 24 sub-advised, no-load mutual funds.
Pantheon Purchase Price Allocation
The Company has not yet completed its valuation of Pantheon and, therefore, the Company's purchase price allocation is provisional. These provisional amounts may be revised upon completion of the valuation. The excess of the enterprise value over the net assets acquired was recorded as goodwill, of which 91%, 8% and 1% was attributed to the Company's Institutional, Mutual Fund and High Net Worth segments, respectively. The goodwill and acquired client relationships are deductible for U.S. tax purposes over a 15-year life. The provisional allocation of the purchase price is as follows:
| Controlling Interest | Non-Controlling Interest | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Purchase price | $ | 762,294 | $ | 10,700 | $ | 772,994 | ||||
Retained Non-Controlling interest | — | 106,027 | 106,027 | |||||||
Contingent payment obligation | 15,283 | — | 15,283 | |||||||
Enterprise Value | 777,577 | 116,727 | 894,304 | |||||||
Acquired client relationships | 431,744 | 81,382 | 513,126 | |||||||
Tangible assets, net | 13,034 | 32,295 | 45,329 | |||||||
Deferred income taxes | (51,917 | ) | — | (51,917 | ) | |||||
Goodwill | 384,716 | 3,050 | 387,766 | |||||||
$ | 777,577 | $ | 116,727 | $ | 894,304 | |||||
Year Ending December 31, | Estimated Amortization Expense | |||
---|---|---|---|---|
2011 | $ | 32.9 | ||
2012 | 32.8 | |||
2013 | 32.8 | |||
2014 | 11.3 | |||
2015 | 4.1 |
As part of this investment, the Company is contingently liable to make payments totaling between zero and $225,000 over the next three to five years upon the achievement of specified revenue targets. The Company measured the provisional fair value of the contingent payment obligation using a financial model that included assumptions of expected market performance and net client cash flows. Based on these assumptions, the Company projects contingent payments totaling $26,300. As of June 30, 2010, the present value of these payments was $15,300. This amount is reported in "Other long-term liabilities."
Aston Purchase Price Allocation
The Company has not yet completed its valuation of Aston and, therefore, the Company's purchase price allocation is provisional. These provisional amounts may be revised upon completion of the valuation. The excess of the enterprise value over the net assets acquired was recorded as goodwill, of which 98% and 2% was attributed to the Company's Mutual Fund and High Net Worth segments,
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively. Most of the acquired intangible assets are not deductible for U.S. tax purposes. The provisional allocation of the purchase price is as follows:
| Controlling Interest | Non-Controlling Interest | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Purchase Price | $ | 146,906 | $ | — | $ | 146,906 | ||||
Retained Non-Controlling interest | — | 21,287 | 21,287 | |||||||
Enterprise Value | 146,906 | 21,287 | 168,193 | |||||||
Acquired client relationships | 81,175 | 14,494 | 95,669 | |||||||
Tangible assets | 4,000 | — | 4,000 | |||||||
Deferred income taxes | (13,171 | ) | — | (13,171 | ) | |||||
Goodwill | 74,902 | 6,793 | 81,695 | |||||||
$ | 146,906 | $ | 21,287 | $ | 168,193 | |||||
Unaudited pro forma financial results are set forth below, giving consideration to the Artemis (closed during the first quarter of 2010), Pantheon and Aston investments, as if such transactions occurred as of the beginning of 2009, assuming the revenue sharing arrangement had been in effect for the entire period and after making certain other pro forma adjustments.
| For the Six Months Ended June 30, | ||||||
---|---|---|---|---|---|---|---|
| 2009 | 2010 | |||||
Revenue | $ | 572,376 | $ | 722,167 | |||
Net Income (controlling interest) | 35,020 | 56,684 | |||||
Earnings per share—basic | 0.79 | 1.22 | |||||
Earnings per share—diluted | 0.77 | 1.16 |
Pantheon and Aston's contribution to the Company's revenue and earnings in the quarter ended June 30, 2010 was not material.
18. Recent Accounting Developments
During the first quarter of 2010, the Company adopted a new standard that requires an enterprise to perform a qualitative analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity ("VIE"). Under the standard, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE. This new standard has been deferred for certain entities that utilize the specialized accounting guidance for investment companies or that have the attributes of investment companies. The adoption of the portions of this new standard that were not deferred did not have a material impact on the Company's Consolidated Financial Statements.
During the first quarter of 2010, the Company adopted a new standard that eliminated the concept of a qualifying special-purpose entity ("QSPE"), changed the requirements for derecognizing financial assets, and required additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including an entity's
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
continuing involvement in and exposure to the risks related to transferred financial assets. The standard also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The adoption of this new standard did not have a material impact on the Company's Consolidated Financial Statements.
19. Affiliate Equity
Many of the Company's operating agreements provide Affiliate managersthe Company a conditional right to requirecall and Affiliate partners the Companyconditional right to purchaseput their retained equity interests at certain intervals. Certain agreements also provide the Company a conditional right to require Affiliate managers to sell their retained equity interests to the Company upon their death, permanent incapacity or termination of employment and provide Affiliate managers a conditional right to require the Company to purchase such retained equity interests upon the occurrence of specified events. The purchase price of these conditional purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to the Company's approval or other restrictions.
The Company may pay for Affiliate equity purchases in cash, shares of its common stock or other forms of consideration and can consent to the transfer of these interests to other individuals or entities.
The Company's cumulativecurrent redemption obligation forvalue of these interests has been presented as "Redeemable non-controlling interests" on the Company's Consolidated Balance Sheets. Changes in the value of the Company's cumulative current
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
redemption obligationvalue are recorded to Additional paid-in capital. The following table presents the changes in Redeemable non-controlling interests during the period:
Balance as of January 1, 2010 | $ | 368,999 | ||||||
Balance as of January 1, 2011 | $ | 406.3 | ||||||
Issuance of Redeemable non-controlling interest | 8,352 | 48.5 | ||||||
Repurchase of Redeemable non-controlling interest | (20,512 | ) | (7.0 | ) | ||||
Changes in redemption value | (12,819 | ) | 83.4 | |||||
Balance as of June 30, 2010 | $ | 344,020 | ||||||
Balance as of March 31, 2011 | $ | 531.2 | ||||||
Although the timing and amounts of these purchases are difficult to predict, the Company expects to repurchase approximately $100,000 of Affiliate equity during the next twelve months, and, in such event, will own the cash flow associated with any equity repurchased.
During the three and six months ended June 30, 2009March 31, 2010 and 2010,2011, the Company acquired interests from and transferred interests to Affiliate management partners. The following schedule discloses the effect of changes in the Company's ownership interest in its Affiliates on the controlling interest's equity:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2010 | 2009 | 2010 | |||||||||||
Net Income (controlling interest) | $ | 10,979 | $ | 25,204 | $ | 17,104 | $ | 42,667 | |||||||
Decrease in controlling interest paid-in capital from purchases and sales of Affiliate equity | (5,789 | ) | (3,710 | ) | (5,111 | ) | (23,420 | ) | |||||||
Change from Net Income (controlling interest) and net transfers with non-controlling interests | $ | 5,190 | $ | 21,494 | $ | 11,993 | $ | 19,247 | |||||||
| For the Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | ||||||
Net Income (controlling interest) | $ | 17.5 | $ | 39.1 | ||||
Increase (decrease) in controlling interest paid-in capital from purchases and sales of Affiliate equity | (16.4 | ) | 3.8 | |||||
Change from Net Income (controlling interest) and net transfers with non-controlling interests | $ | 1.1 | $ | 42.9 | ||||
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20.19. Comprehensive Income
A summary of comprehensive income, net of applicable taxes, is as follows:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended March 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2010 | 2009 | 2010 | 2010 | 2011 | ||||||||||||||
Net income | $ | 56,249 | $ | 58,218 | $ | 79,489 | $ | 110,978 | $ | 52.8 | $ | 89.4 | ||||||||
Foreign currency translation adjustment | 24,672 | (16,899 | ) | 14,955 | (4,818 | ) | 12.1 | 14.2 | ||||||||||||
Change in net unrealized gain (loss) on investment securities | 4 | (7,290 | ) | (151 | ) | 6,021 | ||||||||||||||
Change in net unrealized gain on derivative securities | — | 0.7 | ||||||||||||||||||
Change in net unrealized gain on investment securities | 13.3 | (3.5 | ) | |||||||||||||||||
Comprehensive income | 80,925 | 34,029 | 94,293 | 112,181 | 78.2 | 100.8 | ||||||||||||||
Comprehensive income (non-controlling interests) | (45,270 | ) | (33,014 | ) | (62,385 | ) | (68,311 | ) | (35.3 | ) | (50.3 | ) | ||||||||
Comprehensive income (controlling interest) | $ | 35,655 | $ | 1,015 | $ | 31,908 | $ | 43,870 | $ | 42.9 | $ | 50.5 | ||||||||
The components of accumulated other comprehensive income, net of applicable taxes, are as follows:
| December 31, 2009 | June 30, 2010 | December 31, 2010 | March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Foreign currency translation adjustments | $ | 43,055 | $ | 38,237 | $ | 67.9 | $ | 82.1 | ||||||
Unrealized gain on derivative securities | 3.7 | 4.4 | ||||||||||||
Unrealized gain on investment securities | 2,903 | 8,924 | 28.9 | 25.4 | ||||||||||
Accumulated other comprehensive income | $ | 45,958 | $ | 47,161 | $ | 100.5 | $ | 111.9 | ||||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, in our other filings with the United States Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "may," "intends," "believes," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among others, the following:
These factors (among others) could affect our financial performance and cause actual results to differ materially from historical earnings and those presently anticipated and projected. We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements of AMG and its subsidiaries (collectively, the "Company" or "AMG") and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
Executive Overview
We are a global asset management company with equity investments in a diverse group ofleading boutique investment management firms (our "Affiliates"). We pursue a growthOur innovative partnership approach allows each Affiliate's management team to own significant equity in their firm while maintaining operational autonomy. Our strategy designedis to generate shareholder valuegrowth through the internal growth of our existing business, additionalAffiliates, as well as through investments in investment management firmsnew Affiliates. In addition, we provide centralized assistance to our Affiliates in strategic matters, marketing, distribution, product development and strategic transactions and relationships structured to enhance our Affiliates' businesses and growth prospects.operations.
As of June 30, 2010,March 31, 2011, we manage approximately $249$340 billion in assets through our Affiliates in more than 350 investment products across a broad range of asset classes and investment styles in three principal distribution channels: Mutual Fund, Institutional and High Net Worth. We believe that our diversification across asset classes, investment styles and distribution channels helps to mitigate our
exposure to the risks created by changing market environments. The following summarizes our operations in our three principal distribution channels.
directly and through intermediaries, including independent investment advisors, retirement plan sponsors, broker/dealers,broker-dealers, major fund marketplaces and bank trust departments.
New Investments
On June 30, 2010, we completed our investment in Pantheon Ventures Inc., Pantheon Holdings Limited and Pantheon Capital (Asia) Limited (collectively, "Pantheon"). Pantheon manages regional funds-of-funds in Europe, the United States and Asia, as well as global secondary funds-of-funds, global infrastructure fund-of-funds and customized separate account programs.
On April 15, 2010, we completed our investment in Aston Asset Management LLC ("Aston") through the acquisition of Highbury Financial Inc., Aston's parent company. Based in Chicago, Aston offers sub-advised investment products to the mutual fund and managed accounts markets. Aston is the principal advisor to the Aston Funds, a fund family of 24 sub-advised, no-load mutual funds.
On March 15, 2010, we completed our investment in Artemis Investment Management Ltd ("Artemis") in combination with the management team of Artemis. Artemis specializes in active investment management for retail and institutional investors in the UK, as well as Europe and the Middle East, across a range of mutual funds and segregated institutional accounts.
Our Structure and Relationship with Affiliates
We operate our business through our Affiliates in our three principal distribution channels, maintaining each Affiliate's distinct entrepreneurial culture and independence through our investment structure. In making investments in boutique investment management firms, we seek to partner with the highest quality firms in the industry, with outstanding management teams, strong long-term performance records and a demonstrated commitment to continued growth and success. Fundamental to our investment approach is the belief that Affiliate management equity ownership (along with AMG's ownership) aligns our interests and provides Affiliate managers with a powerful incentive to continue to grow their business. Our investment structure provides a degree of liquidity and diversification to principal owners of boutique investment management firms, while at the same time expanding equity ownership opportunities among the firm's management and allowing management to continue to participate in the firm's future growth. Our partnership approach also ensures that Affiliates maintain operational autonomy in managing their business, thereby preserving their firm's entrepreneurial culture and independence.
Although the specific structure of each investment is highly tailored to meet the needs of a particular Affiliate, in all cases, AMG establisheswe establish a meaningful equity interest in the firm, with the remaining equity interests retained by the management of the Affiliate. Each Affiliate is organized as a separate firm, and its operating or shareholder agreement is structured to provide appropriate incentives for Affiliate management owners and to address the Affiliate's particular characteristics while also enabling us to protect our interests, including through arrangements such as long-term employment agreements with key members of the firm's management team.
In most cases, we own a majority of the equity interests of a firm and structure a revenue sharing arrangement, in which a percentage of revenue is allocated for use by management of that Affiliate in paying operating expenses of the Affiliate, including salaries and bonuses. We call this the "Operating Allocation." The portion of theeach Affiliate's revenue that is allocated to the owners of that Affiliate (including us) is called the "Owners' Allocation." Each Affiliate allocates its Owners' Allocation to its managers and to us generally in proportion to their and our respective ownership interests in that Affiliate. However, should actual operating expenses exceed the Operating Allocation, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's managers until that portion is eliminated, before reducing the portion allocated to us. Any such reduction in our portion of the Owners' Allocation is required to be paid back to us out of the portion of future Owners' Allocation allocated to the Affiliate's managers.
One of the purposes of our revenue sharing arrangements is to provide ongoing incentives for Affiliate managers by allowing them to participate in the growth of their firm's revenue, which may increase their compensation from both the Operating Allocation and the Owners' Allocation. These arrangements also provide incentives to control operating expenses, thereby increasing the portion of the Operating Allocation that is available for growth initiatives and compensation.
An Affiliate's Operating Allocation is structured to cover its operating expenses. However, should actual operating expenses exceed the Operating Allocation, our contractual share of cash under the Owners' Allocation generally has priority over the allocations and distributions to the Affiliate's managers. As a result, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's managers until that portion is eliminated, before reducing the portion allocated to us. Any such reduction in our portion of the Owners' Allocation is required to be paid back to us out of the portion of future Owners' Allocation allocated to the Affiliate's managers.
Our minority investments are also structured to align our interests with those of the Affiliate's management through shared equity ownership, as well as to preserve the Affiliate's entrepreneurial culture and independence by maintaining the Affiliate's operational autonomy. In cases where we hold a minority investment, the revenue sharing arrangement generally allocates a percentage of the Affiliate's revenue to us. The remaining revenue is used to pay operating expenses and profit distributions to the other owners. Generally where we own a minority investment, we are required to use the equity method of accounting. Consistent with this method, we have not consolidated the operating results of these firms (including their revenue) in our Consolidated Statements of Income. Our share of these firms' profits (net of intangible amortization) is reported in "Income from equity method investments," and is therefore reflected in our Net Income and EBITDA. As a consequence, increases or decreases in these firms' assets under management ($78.6 billion as of March 31, 2011 and included in our reported assets under management) will not affect reported revenue in the same manner as changes in assets under management at our other Affiliates.
Certain of our Affiliates operate under profit-based arrangements through which we own a majority of the equity in the firm and receive a share of profits as cash flow, rather than a percentage of revenue through a typical revenue sharing agreement. As a result, we participate fully in any increase or decrease in the revenue or expenses of such firms. In these cases, we participate in a budgeting process and generally provide incentives to management through compensation arrangements based on the performance of the Affiliate.
We are focused on establishing and maintaining long-term partnerships with our Affiliates. Our shared equity ownership gives both AMGus and our Affiliate partnersAffiliates meaningful incentives to manage their businesses for strong future growth. From time to time, we may consider changes to the structure of our relationship with an Affiliate in order to better support the firm's growth strategy.
ThroughFinancial Results
The table below summarizes our affiliated investment management firms, we derive mostfinancial highlights:
| For the Three Months Ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions, except as noted and per share data) | 2010 | 2011 | % Change | |||||||
Assets under Management (in billions) | $ | 232.1 | $ | 339.8 | 46 | % | ||||
Revenue | 251.0 | 426.3 | 70 | % | ||||||
Net Income (controlling interest) | 17.5 | 39.1 | 123 | % | ||||||
Earnings per share—diluted | 0.38 | 0.74 | 95 | % | ||||||
Economic Net Income(1) | 50.8 | 85.1 | 68 | % | ||||||
Economic earnings per share(1) | 1.14 | 1.60 | 40 | % | ||||||
EBITDA(2) | 68.2 | 118.2 | 73 | % |
During the provisiontwelve months ended March 31, 2011, global equity market returns continued to improve; the MSCI EAFE and S&P 500 realized increases of investment management services. Investment management fees ("asset-based fees") are usually determined as a percentage fee charged on periodic values of a client's assets under management; most asset-based advisory fees are billed by our Affiliates quarterly. Certain clients are billed for all or a portion of their accounts based upon10.9% and 15.7%, respectively. Our total assets under management valuedgrew to $339.8 billion at the beginningMarch 31, 2011, an increase of a billing period ("approximately 46% over March 31, 2010. The growth in advance"). Other clients are billed for all or a portion of their accounts based uponour assets under management valued atwas the endresult of the billing period ("successful completion of new Affiliate investments in arrears"). Most client accounts in the High Net Worth distribution channel are billed in advance,Aston Asset Management, Pantheon Ventures and most client accounts in the Institutional distribution channel are billed in arrears. Clients in the Mutual Fund distribution channel are billed based upon average daily assets under management. Advisory fees billed in advance will not reflect subsequent changes in the market value of assets under management for that period but may reflect changes due to client withdrawals. Conversely, advisory fees billed in arrears will reflect changes in the market value of assets under management for that period.
In addition, over 50 Affiliate alternative investment and equity products, representing approximately $32 billion of assets under management (as of June 30, 2010)Trilogy Global Advisors ($49.1 billion), also bill on the basis of absolute or relative investment performance ("performance fees"). These products, which are primarily in the Institutional distribution channel, are often structured to have returns that are not directly correlated to changes in broader equity indices($42.8 billion) and if earned, the performance fee component is typically billed less frequently than an asset-based fee. Although performance fees inherently depend on investment results and will vary from period to period, we anticipate performance fees to be a recurring component of our revenue. We also anticipate that, within any calendar year, the majority of any performance fees will typically be realized in the fourth quarter.
For certainorganic growth of our Affiliates generally where we own a non-controlling interest, we are required to use the equity method of accounting. Consistent with this method, we have not consolidated the operating results of these firms (including their revenue) in our Consolidated Statements of Income. Our share of these firms' profits (net of intangible amortization) is reported in "Income from equity method investments," and is therefore reflected in our Net Income (controlling interest) and EBITDA. As a consequence, increases or decreases in these firms' assets under management (which totaled $55.4 billion as of June 30, 2010) will not affect reported revenue in the same manner as changes in assets under management at our other Affiliates.net client cash flows ($16.9 billion).
Our Net Income attributable to controlling interest reflects the revenue of our consolidated Affiliates and our share of income from Affiliates which we account for under the equity method, reduced by:
As discussed above, for consolidated Affiliates with revenue sharing arrangements, the operating expenses of the Affiliate as well as its managers' non-controlling interest generally increase (or decrease) as the Affiliate's revenue increases (or decreases) because of the direct relationship established in many of our agreements between the Affiliate's revenue and its Operating Allocation and Owners' Allocation. At our consolidated profit-based Affiliates, expenses may or may not correspond to increases or decreases in the Affiliates' revenues.
Our level of profitability will depend on a variety of factors, including:
Diversification of Assets under Management
The following table provides information regarding the composition of our assets under management:
| | December 31, 2009 | June 30, 2010 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Assets under Management | Percentage of Total | Assets under Management | Percentage of Total | | December 31, 2010 | March 31, 2011 | ||||||||||||||||||||
(in billions) | (in billions) | | | | | (in billions) | Assets under Management | Percentage of Total | Assets under Management | Percentage of Total | ||||||||||||||||||
Asset Class: | Asset Class: | Asset Class: | ||||||||||||||||||||||||||
Equity(1) | Equity(1) | $ | 153.2 | 74 | % | $ | 159.3 | 64 | % | Equity(1) | $ | 220.4 | 69 | % | $ | 232.1 | 68 | % | ||||||||||
Alternative(2) | Alternative(2) | 31.3 | 15 | % | 59.7 | 24 | % | Alternative(2) | 65.3 | 20 | % | 71.9 | 21 | % | ||||||||||||||
Fixed Income | Fixed Income | 23.5 | 11 | % | 30.0 | 12 | % | Fixed Income | 34.3 | 11 | % | 35.8 | 11 | % | ||||||||||||||
Total | $ | 208.0 | 100 | % | $ | 249.0 | 100 | % | Total | $ | 320.0 | 100 | % | $ | 339.8 | 100 | % | |||||||||||
Geography:(3) | Geography:(3) | Geography:(3) | ||||||||||||||||||||||||||
Domestic | Domestic | $ | 89.7 | 43 | % | $ | 97.8 | 39 | % | Domestic | $ | 110.5 | 34 | % | $ | 115.9 | 34 | % | ||||||||||
Global/International | Global/International | 93.2 | 45 | % | 126.5 | 51 | % | Global/International | 169.1 | 53 | % | 180.7 | 53 | % | ||||||||||||||
Emerging Markets | Emerging Markets | 25.1 | 12 | % | 24.7 | 10 | % | Emerging Markets | 40.4 | 13 | % | 43.2 | 13 | % | ||||||||||||||
Total | $ | 208.0 | 100 | % | $ | 249.0 | 100 | % | Total | $ | 320.0 | 100 | % | $ | 339.8 | 100 | % | |||||||||||
Our investments in Pantheon and Artemis (in the second and first quarters of 2010, respectively) further diversified our business by increasing our exposure to alternative product offerings that we anticipate will be uncorrelated to equity markets (in the case of Pantheon) and global/international product offerings (in the case of Pantheon and Artemis). Our investment in Pantheon also provides a
stable revenue stream because Pantheon charges management fees on the capital committed to its funds, not the value of the funds. Our investment in Aston which closed in the second quarter of 2010 increased our domestic equity product offerings.
In addition, positive investment returns during the six months ended June 30, 2010 in our alternative and fixed income asset classes increased assets under management by asset class increased during the three months ended March 31, 2011 principally as a result of investment performance as well as organic growth from net client cash flows in those strategies. Through positive investment returns, severalour Alternative ($3.2 billion) and Equity asset classes ($2.5 billion). The geographic breakdown of our Affiliates producedassets under management also benefitted from investment performance feesand net client cash flows in this periodGlobal/International ($33.6 million included in our consolidated revenue)3.0 billion) and Emerging Markets ($2.5 billion).
The following table presents our Affiliates' reported assets under management by operating segment (which are also referred to as distribution channels in this Quarterly Report on Form 10-Q).
Assets under Management
Statement of Changes—Quarter to Date (in billions) | Mutual Fund | Institutional | High Net Worth | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets under management, March 31, 2010 | $ | 60.5 | $ | 140.6 | $ | 31.0 | $ | 232.1 | |||||||
New Investments(1) | 9.9 | 23.9 | 0.4 | 34.2 | |||||||||||
Adjusted Assets under management, March 31, 2010 | 70.4 | 164.5 | 31.4 | 266.3 | |||||||||||
Client cash inflows | 4.6 | 5.3 | 1.9 | 11.8 | |||||||||||
Client cash outflows | (4.4 | ) | (5.2 | ) | (1.9 | ) | (11.5 | ) | |||||||
Net client cash flows | 0.2 | 0.1 | — | 0.3 | |||||||||||
Investment performance | (6.2 | ) | (9.4 | ) | (1.9 | ) | (17.5 | ) | |||||||
Other(2) | (0.1 | ) | — | — | (0.1 | ) | |||||||||
Assets under management, June 30, 2010 | $ | 64.3 | $ | 155.2 | $ | 29.5 | $ | 249.0 | |||||||
Statement of Changes-Quarter to Date (in billions) | Mutual Fund | Institutional | High Net Worth | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2010 | $ | 85.2 | $ | 200.1 | $ | 34.7 | $ | 320.0 | |||||||
Client cash inflows | 7.0 | 12.7 | 1.7 | 21.4 | |||||||||||
Client cash outflows | (4.8 | ) | (8.4 | ) | (1.7 | ) | (14.9 | ) | |||||||
Net client cash flows | 2.2 | 4.3 | — | 6.5 | |||||||||||
Other(1) | (0.2 | ) | — | — | (0.2 | ) | |||||||||
Investment performance | 3.4 | 8.3 | 1.8 | 13.5 | |||||||||||
March 31, 2011 | $ | 90.6 | $ | 212.7 | $ | 36.5 | $ | 339.8 | |||||||
Statement of Changes—Year to Date (in billions) | Mutual Fund | Institutional | High Net Worth | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets under management, December 31, 2009 | $ | 44.5 | $ | 133.9 | $ | 29.6 | $ | 208.0 | |||||||
New Investments(1) | 22.9 | 26.1 | 0.4 | 49.4 | |||||||||||
Adjusted Assets under management, December 31, 2009 | 67.4 | 160.0 | 30.0 | 257.4 | |||||||||||
Client cash inflows | 8.9 | 12.3 | 3.6 | 24.8 | |||||||||||
Client cash outflows | (7.9 | ) | (14.2 | ) | (3.4 | ) | (25.5 | ) | |||||||
Net client cash flows | 1.0 | (1.9 | ) | 0.2 | (0.7 | ) | |||||||||
Investment performance | (4.0 | ) | (2.8 | ) | (0.7 | ) | (7.5 | ) | |||||||
Other(2) | (0.1 | ) | (0.1 | ) | — | (0.2 | ) | ||||||||
Assets under management, June 30, 2010 | $ | 64.3 | $ | 155.2 | $ | 29.5 | $ | 249.0 | |||||||
As shown in the assets under management table above, client cash inflows totaled $24.8$21.4 billion while client cash outflows totaled $25.5$14.9 billion for the sixthree months ended June 30, 2010. The netMarch 31, 2011. Client flows for the sixthree months ended June 30, 2010March 31, 2011 occurred across a broad range of product offerings in each of our distribution channels, with no individual cash inflow or outflow having a material impact on our revenue or expenses.
The operating segment analysis presented in the following table is based on average assets under management. For the Mutual Fund distribution channel, average assets under management representrepresents an average of the daily net assets under management. For the Institutional and High Net Worth distribution channels, average assets under management takes into considerationreflects the billing patterns of
particular client accounts. For example, assets under management for an account that bills in advance is includedpresented in the table usingon the basis of beginning of period assets under management while an account that bills in arrears usesis reflected on the basis of end of period assets under management. We believe that this
analysis more closely correlates to the billing cycle of each distribution channel and, as such, provides a more meaningful relationship to revenue.
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | | For the Three Months Ended March 31, | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in millions, except as noted) | 2009 | 2010 | % Change | 2009 | 2010 | % Change | |||||||||||||||||||||||||
(in millions, except as noted) | (in millions, except as noted) | 2010 | 2011 | % Change | |||||||||||||||||||||||||||
Average assets under management (in billions)(1) | Average assets under management (in billions)(1) | Average assets under management (in billions)(1) | |||||||||||||||||||||||||||||
Mutual Fund | Mutual Fund | $ | 33.8 | $ | 63.8 | 89 | % | $ | 33.1 | $ | 55.5 | 68 | % | Mutual Fund | $ | 47.2 | $ | 87.1 | 85 | % | |||||||||||
Institutional | Institutional | 105.1 | 134.4 | 28 | % | 106.6 | 136.3 | 28 | % | Institutional | 138.1 | 208.0 | 51 | % | |||||||||||||||||
High Net Worth | High Net Worth | 25.3 | 29.7 | 17 | % | 25.5 | 30.0 | 18 | % | High Net Worth | 30.3 | 35.8 | 18 | % | |||||||||||||||||
Total | $ | 164.2 | $ | 227.9 | 39 | % | $ | 165.2 | $ | 221.8 | 34 | % | Total | $ | 215.6 | $ | 330.9 | 53 | % | ||||||||||||
Revenue | Revenue | Revenue | |||||||||||||||||||||||||||||
Mutual Fund | Mutual Fund | $ | 72.3 | $ | 148.0 | 105 | % | $ | 140.7 | $ | 245.9 | 75 | % | Mutual Fund | $ | 97.9 | $ | 184.2 | 88 | % | |||||||||||
Institutional | Institutional | 101.5 | 152.3 | 50 | % | 183.7 | 274.1 | 49 | % | Institutional | 121.8 | 207.0 | 70 | % | |||||||||||||||||
High Net Worth | High Net Worth | 27.4 | 31.8 | 16 | % | 55.3 | 63.1 | 14 | % | High Net Worth | 31.3 | 35.1 | 12 | % | |||||||||||||||||
Total | $ | 201.2 | $ | 332.1 | 65 | % | $ | 379.7 | $ | 583.1 | 54 | % | Total | $ | 251.0 | $ | 426.3 | 70 | % | ||||||||||||
Net Income | |||||||||||||||||||||||||||||||
Net Income (controlling interest) | Net Income (controlling interest) | ||||||||||||||||||||||||||||||
Mutual Fund | Mutual Fund | $ | 6.0 | $ | 10.3 | 72 | % | $ | 10.6 | $ | 17.8 | 68 | % | Mutual Fund | $ | 7.6 | $ | 16.6 | 118 | % | |||||||||||
Institutional | Institutional | 4.2 | 12.3 | 193 | % | 5.5 | 20.0 | 264 | % | Institutional | 7.7 | 18.4 | 139 | % | |||||||||||||||||
High Net Worth | High Net Worth | 0.8 | 2.6 | 225 | % | 1.0 | 4.9 | 390 | % | High Net Worth | 2.2 | 4.1 | 86 | % | |||||||||||||||||
Total | $ | 11.0 | $ | 25.2 | 129 | % | $ | 17.1 | $ | 42.7 | 150 | % | Total | $ | 17.5 | $ | 39.1 | 123 | % | ||||||||||||
�� | |||||||||||||||||||||||||||||||
EBITDA(2) | EBITDA(2) | EBITDA(2) | |||||||||||||||||||||||||||||
Mutual Fund | Mutual Fund | $ | 14.4 | $ | 27.0 | 88 | % | $ | 29.3 | $ | 47.9 | 63 | % | Mutual Fund | $ | 20.9 | $ | 38.5 | 84 | % | |||||||||||
Institutional | Institutional | 31.7 | 45.8 | 44 | % | 59.1 | 83.9 | 42 | % | Institutional | 38.1 | 68.9 | 81 | % | |||||||||||||||||
High Net Worth | High Net Worth | 7.1 | 8.9 | 25 | % | 14.0 | 18.2 | 30 | % | High Net Worth | 9.2 | 10.8 | 17 | % | |||||||||||||||||
Total | $ | 53.2 | $ | 81.7 | 54 | % | $ | 102.4 | $ | 150.0 | 46 | % | Total | $ | 68.2 | $ | 118.2 | 73 | % | ||||||||||||
Our revenue is generally determined by the level of our assets under management, the portion of our assets across our products and three operating segments, which realize different fee rates, and the
recognition of any performance fees. As described in the "Overview" section above, performancePerformance fees are generally measured on absolute or relative investment performance against a benchmark. As a result, the level of performance fees earned can vary significantly from period to period and these fees may not necessarily be correlated to changes in total assets under management.
Our total revenue increased $130.9$175.3 million (or 65%70%) in the three months ended June 30, 2010,March 31, 2011, as compared to the three months ended June 30, 2009,March 31, 2010, primarily from a 39%53% increase in average assets under management. Thismanagement and our investments in new Affiliates that realize comparatively higher fee rates. The increase in average assets under management resulted principally from our new Affiliate investments, strong investment performance and investment performance. Unrelated to the changepositive net client cash flows. Performance fees were not a significant component of consolidated revenue in assets under management, performance fees increased $21.2 million (or 221%) ineither the three months ended June 30, 2010, as compared toMarch 31, 2011 or the three months ended June 30, 2009.
Our totalMarch 31, 2010 (approximately 1% of consolidated revenue increased $203.4 million (or 54%) in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, primarily from a 34% increase in average assets under management. This increase in average assets under management resulted principally from our new Affiliate investments and investment performance. Unrelated to the change in assets under management, performance fees increased $22.0 million (or 191%) in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009.for both time periods).
The following discusses the changes in our revenue by operating segments.
Mutual Fund Distribution Channel
Our revenue in the Mutual Fund distribution channel increased $75.7$86.3 million (or 105%88%) in the three months ended June 30, 2010March 31, 2011, as compared to the three months ended June 30, 2009, whileMarch 31, 2010, primarily from a 85% increase in average assets under management increased 89%, and revenue increased $105.2 million (or 75%) in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, while average assets under management increased 68%. These increasesmanagement. The increase in average assets under management resulted principally from our new Affiliate investments, strong investment performance and our 2009 and 2010 investments in new Affiliates.positive net client cash flows.
Institutional Distribution Channel
Our revenue in the Institutional distribution channel increased $50.8$85.2 million (or 50%70%) in the three months ended June 30, 2010March 31, 2011, as compared to the three months ended June 30, 2009, whileMarch 31, 2010, primarily from a 51% increase in average assets under management increased 28%, and revenue increased $90.4 million (or 49%)our investments in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, while average assets under management increased 28%. These increasesnew Affiliates that realize comparatively higher fee rates. The increase in average assets under management resulted principally from our new Affiliate investments, strong investment performance partially offset by negativeand positive net client cash flows. Unrelated to the changePerformance fees were not a significant component of consolidated revenue in assets under management, performance fees increased $21.7 million (or 235%) ineither the three months ended June 30, 2010, as compared toMarch 31, 2011 or the three months ended June 30, 2009, and increased $22.8 (or 210%) in the six months ended June 30, 2010. The increase inMarch 31, 2010 (approximately 2% of consolidated revenue was proportionately greater than the increase in average assets under management as a result of an increase in assets under management at Affiliates that realize comparatively higher fee rates.for both time periods).
High Net Worth Distribution Channel
Our revenue in the High Net Worth distribution channel increased $4.4$3.8 million (or 16%12%) in the three months ended June 30, 2010March 31, 2011, as compared to the three months ended June 30, 2009, whileMarch 31, 2010, primarily from a 18% increase in average assets under management increased 17%, and revenue increased $7.8 million (or 14%) in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, while average assets under management increased 18%. These increasesmanagement. The increase in average assets under management resulted principally from investment performance.
Operating Expenses
The following table summarizes our consolidated operating expenses:
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in millions) | 2009 | 2010 | % Change | 2009 | 2010 | % Change | |||||||||||||||||||||||
(in millions) | 2010 | 2011 | % Change | ||||||||||||||||||||||||||
Compensation and related expenses | $ | 103.4 | $ | 142.7 | 38 | % | $ | 187.5 | $ | 261.9 | 40 | % | $ | 119.2 | $ | 179.5 | 51 | % | |||||||||||
Selling, general and administrative | 31.0 | 72.1 | 133 | % | 62.4 | 117.4 | 88 | % | 45.3 | 87.5 | 93 | % | |||||||||||||||||
Amortization of intangible assets | 8.1 | 9.6 | 19 | % | 16.1 | 18.5 | 15 | % | 8.9 | 22.1 | 148 | % | |||||||||||||||||
Depreciation and other amortization | 3.2 | 3.4 | 6 | % | 6.5 | 6.4 | (2 | )% | 3.0 | 3.8 | 27 | % | |||||||||||||||||
Other operating expenses | 4.7 | 8.4 | 79 | % | 10.5 | 14.5 | 38 | % | 6.1 | 8.5 | 39 | % | |||||||||||||||||
Total operating expenses | $ | 150.4 | $ | 236.2 | 57 | % | $ | 283.0 | $ | 418.7 | 48 | % | $ | 182.5 | $ | 301.4 | 65 | % | |||||||||||
The substantial portion of our operating expenses is incurred by our Affiliates, the majority of which is incurred by Affiliates with revenue sharing arrangements. For Affiliates with revenue sharing arrangements, an Affiliate's Operating Allocation percentage generally determines its operating expenses. Accordingly, our compensation expense is impacted by increases or decreases in each Affiliate's revenue and the corresponding increases or decreases in each Affiliate's respective Operating Allocation. During the three and six months ended June 30, 2010,March 31, 2011, approximately $69.6 million and $125.6$91.4 million (or 49% and 48%51%), respectively, of our consolidated compensation expense was attributable to our Affiliate management partners. The percentage of revenue allocated to operating expenses varies from one Affiliate to another and may also vary within an Affiliate depending on the source or amount of revenue. As a result, changes in our aggregate revenue may not impact our consolidated operating expenses to the same degree.
Compensation and related expenses increased 38% and 40%51% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively,March 31, 2010, primarily as a result of increases in aggregate Affiliate expenses of $37.9 million from new Affiliate investments during 2010, and $13.3 million from the relationship between revenue and operating expenses at extant Affiliates, which experienced increases in revenue, and accordingly, reported higher compensation expenses. These increases wereThis increase was also attributable to increases in aggregate Affiliate expenses of $16.1 million and $21.2 million in the three and six months ended June 30, 2010 from new Affiliate investments, as compared to the three and six months ended June 30, 2009, respectively, as well as increases in holding company incentive and stock-based compensation of $8.6 millionshare-based compensation.
Selling, general and $13.5 millionadministrative increased 93% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively. These increases were partially offset by decreases in aggregate Affiliate expenses from the transfer of our interests in certain Affiliates of $2.1 million and $2.6 million in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively.
Selling, general and administrative expenses increased 133% and 88% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively. These increasesMarch 31, 2010. This increase resulted principally from increases in aggregate Affiliate expenses of $32.4 million and $41.0$27.9 million from new Affiliate investments as well as increases in sub-advisory and distribution expenses attributable to an increase in assets under management at our Affiliates in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively.Mutual Fund distribution channel. These increases also resulted from increaseswere partially offset by a $4.5 million decrease in acquisition-related professional fees principally related to recent investment closings of $5.5 million and $9.9 million in the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009, respectively.fees.
Amortization of intangible assets increased 19% and 15%148% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively. These increases wereMarch 31, 2010. This increase was principally attributable to increases in definite-lived intangible assets resulting from new Affiliate investments.
Depreciation and other amortization increased 6%27% in the three months ended June 30, 2010,March 31, 2011, as compared to the three months ended June 30, 2009,March 31, 2010, principally attributable to a $0.3 million increase in aggregate Affiliate expenses from new Affiliate investments, partially offset by a decrease in spending on depreciable assets in recent periods. Depreciation and other amortization decreased 2% in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, principally attributable to a decrease in spending on depreciable assets in recent periods, partially offset by an increase of $0.4 million in aggregate Affiliate expenses from new Affiliate investments.
Other operating expenses increased 79% and 38%39% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively,March 31, 2010, principally attributable to a loss realized on the transfer of Affiliate interests in the second quarter of 2010, as well as increasesan increase in aggregate Affiliate expenses of $1.0 million and $1.2 million from new Affiliate investments in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively.investments.
Other Income Statement Data
The following table summarizes other income statement data:
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in millions) | 2009 | 2010 | % Change | 2009 | 2010 | % Change | |||||||||||||||||||||||
(in millions) | 2010 | 2011 | % Change | ||||||||||||||||||||||||||
Income from equity method investments | $ | 7.4 | $ | 9.9 | 34 | % | $ | 13.8 | $ | 19.0 | 38 | % | $ | 9.1 | $ | 10.2 | 12 | % | |||||||||||
Investment and other income | 7.2 | 0.7 | (90 | )% | 6.9 | 3.5 | (49 | )% | 2.8 | 8.7 | 211 | % | |||||||||||||||||
Investment income (loss) from investments in partnerships | 14.9 | (8.6 | ) | (158 | )% | 11.2 | (4.5 | ) | (140 | )% | |||||||||||||||||||
Investment income from investments in partnerships | 4.1 | — | (100 | )% | |||||||||||||||||||||||||
Interest expense | 15.8 | 16.3 | 3 | % | 32.4 | 32.4 | 0 | % | 16.0 | 19.4 | 21 | % | |||||||||||||||||
Imputed interest expense | 3.4 | 6.4 | 88 | % | 6.7 | 10.1 | 51 | % | 3.8 | 8.3 | 118 | % | |||||||||||||||||
Income tax expense | 4.9 | 16.9 | 245 | % | 9.9 | 28.9 | 192 | % | 11.9 | 26.7 | 124 | % |
Income from equity method investments consists of our share of income from Affiliates that are accounted for under the equity method of accounting, net of any related intangible amortization. Income from equity method investments increased 34% and 38%12% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively,March 31, 2010, principally as a result of increases in assets under management at Affiliates that we account for under the equity method of accounting. For the quarter ended March 31, 2011, income from performance fees earned on our equity method investments ($13.5 million of revenue) was consistent with amounts reported in the quarter ended March 31, 2010.
Investment and other income decreased 90% and 49%increased 211% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively,March 31, 2010, principally as a result of a decreasean increase in Affiliate investment earnings.earnings, including $4.2 million from new Affiliates.
Investment income (loss) from Affiliate investments in partnerships relates to the consolidation of certain investment partnerships in which our Affiliates are the general partner. In the third quarter of 2010, we deconsolidated these partnerships. For the three months ended June 30, 2009 andMarch 31, 2010, the income (loss) from Affiliate investments in partnerships was $14.9$4.1 million, and $(8.6) million, respectively. For the six months ended June 30, 2009 and 2010, the income (loss) from Affiliate investments in partnerships was $11.2 million and $(4.5) million, respectively. This income (loss)which was principally attributable to investors who are unrelated to us.
Interest expense increased slightly21% in the three months ended June 30, 2010,March 31, 2011, as compared to the three months ended June 30, 2009,March 31, 2010, principally as a result of increased borrowings under our revolving credit facility, which was amended and restated in January 2011 (the "credit facility"), as well as an increase in the cost of our senior bank debt, which resulted from ancredit facility borrowings. The increase was also attributable to a $0.8 million increase in borrowings. Interest expense was flat in the six months ended June 30, 2010, as comparedissuance costs related to the six months ended June 30, 2009.our credit facility amendment.
Imputed interest expense consists of interest accretion on our senior convertible securities and our junior convertible trust preferred securities as well as the accretion of our projected contingent payment arrangements. Imputed interest expense increased 88% and 51%118% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively,March 31, 2010, principally as a result of a $2.6$4.2 million increase in accretion related to our contingent payment arrangements as well as increases in the interest accretion on our convertible securities.
Income taxes increased 245% and 192% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009, respectively, primarilyMarch 31, 2010.
Income taxes increased 124% in the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, as the result of increases in Income before income taxes and approximately $1.1 million of taxes attributable to controllingnon-controlling interests and a one-time $3.0 million benefit in 2009 from the reversal of a valuation allowance on Massachusetts net operating losses.our 2010 new Affiliate investments.
Net Income
The following table summarizes Net Income:
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in millions) | 2009 | 2010 | % Change | 2009 | 2010 | % Change | |||||||||||||||||||||||
(in millions) | 2010 | 2011 | % Change | ||||||||||||||||||||||||||
Net income | $ | 52.8 | $ | 89.4 | 69 | % | |||||||||||||||||||||||
Net income (non-controlling interests) | $ | 30.7 | $ | 41.4 | 35 | % | $ | 51.5 | $ | 72.7 | 41 | % | 31.3 | 50.3 | 61 | % | |||||||||||||
Net income (loss) (non-controlling interests in partnerships) | 14.6 | (8.4 | ) | (158 | )% | 10.8 | (4.4 | ) | (141 | )% | |||||||||||||||||||
Net income (non-controlling interests in partnerships) | 4.0 | — | (100 | )% | |||||||||||||||||||||||||
Net Income (controlling interest) | 11.0 | 25.2 | 129 | % | 17.1 | 42.7 | 150 | % | 17.5 | 39.1 | 123 | % |
Net income attributable to non-controlling interests increased 35% and 41%61% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009,March 31, 2010, principally as a result of the previously discussed changes in revenue partially offset by the previously discussed decreasesincreases in investment and other income.tax expenses.
Net income (loss) (non-controlling interest in partnerships) relates to the consolidation of certain investment partnerships in which our Affiliates are the general partner. In the third quarter of 2010, we deconsolidated these partnerships. For the three months ended June 30, 2009 andMarch 31, 2010, the net income (loss) from Affiliate investmentinvestments in partnerships attributable to the non-controlling interests was $14.6 million and $(8.4) million, respectively. For the six months ended June 30, 2009 and 2010, the net income (loss) from Affiliate investment partnerships attributable to the non-controlling interests was $10.8 million and $(4.4) million, respectively.$4.0 million.
Net Income (controlling interest) increased 129% and 150%123% in the three and six months ended June 30, 2010,March 31, 2011, as compared to the three and six months ended June 30, 2009,March 31, 2010, respectively, as a result of the previously discussed increases in revenue, partially offset by increases in reported operating and income tax expenses.
Supplemental Performance Measures
In reporting our financial and operating results during the second quarter,As supplemental information, we renamed ourprovide non-GAAP performance measures that we refer to as Economic Net Income and Economic earnings per share (formerly known as Cash Net Income and Cash earnings per share).share. We consider Economic Net Income an important measure of our financial performance, as we believe it best represents our operating performance before non-cash expenses relating to our acquisition of interests in our investment management firms. Economic Net Income and Economic earnings per share are used by our management and Board of Directors as our principal performance benchmarks, including as measures for aligning executive compensation with stockholder value. These measures are provided in addition to, but not as a substitute for, Net Income (controlling interest) and Earnings per share. Economic Net Income and Economic earnings per share are not liquidity measures and should not be used in place of any liquidity measure calculated under GAAP. These measures facilitate comparisons to other asset management firms that have not engaged in significant acquisitions or issued convertible debt.
Under our Economic Net Income definition, we add to Net Income (controlling interest) amortization (including equity method amortization), deferred taxes related to intangible assets, Affiliate depreciationnon-cash imputed interest expense (principally related to the accounting for convertible securities and contingent payment arrangements) and Affiliate equity expense, and exclude the non-cash effect of APB 14-1 (principally imputed interest on convertible securities) and non-cash expenses related to contingent payment arrangements.expense. We add back amortization attributable to acquired client relationships because this expense does not correspond to the changes in value of these assets, which do not diminish predictably over time. The portion of deferred taxes generally attributable to intangible assets (including goodwill) that we no longer amortize but which continues to generate tax deductions is added back, because we believe it is unlikely these accruals will be used to settle material tax obligations. Since our acquired assets do not generally depreciate or require replacement by us, and since they generate deferred tax expenses that are unlikely to reverse, we add back these non-cash expenses to Net Income to measure operating performance. We add back non-cash expenses relating to certain transfers of equity between Affiliate management partners, when these transfers have no dilutive effect to our shareholders. We add back the portion of consolidated depreciation expense incurred by our Affiliates because under our Affiliates' operating agreements we are generally not required to replenish these depreciating assets.
Economic earnings per share represents Economic Net Income divided by the adjusted diluted average shares outstanding, which measures the potential share issuance from our senior convertible
securities and junior convertible securities (each further described in Liquidity and Capital Resources) using a "treasury stock" method. Under this method, only the net number of shares of common stock equal to the value of these securities in excess of par, if any, are deemed to be outstanding. We believe the inclusion of net shares under a treasury stock method best reflects the benefit of the increase in available capital resources (which could be used to repurchase shares of common stock) that occurs when these securities are converted and we are relieved of our debt obligation. This method does not take into account any increase or decrease in our cost of capital in an assumed conversion.
In connection with recent investments in Affiliates, in the firstfourth quarter of 2010, we modified our Economic Net Income definition to exclude non-cash imputed interest and revaluation adjustments relatedno longer add back Affiliate depreciation to contingent payment arrangements from Net Income (controlling interest). The modification ofIf we had applied this definition change to the three months ended March 31, 2010, Economic Net Income definition did notwould have an impact on the prior periods reported.been $48.9 million and Economic earnings per share would have been $1.09, as compared to $50.8 million and $1.14, respectively.
The following table provides a reconciliation of Net Income (controlling interest) to Economic Net Income:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions, except shares and per share data) | 2009 | 2010 | 2009 | 2010 | ||||||||||
Net Income (controlling interest) | $ | 11.0 | $ | 25.2 | $ | 17.1 | $ | 42.7 | ||||||
Intangible amortization(1)(2) | 16.0 | 17.0 | 32.0 | 33.7 | ||||||||||
Intangible-related deferred taxes | 9.5 | 14.3 | 19.1 | 25.0 | ||||||||||
Imputed interest and contingent payment adjustments(3) | 2.0 | 3.2 | 4.1 | 5.5 | ||||||||||
Affiliate equity expense | 1.9 | 1.8 | 3.9 | 3.5 | ||||||||||
Affiliate depreciation | 2.0 | 2.3 | 3.9 | 4.2 | ||||||||||
Economic Net Income | $ | 42.4 | $ | 63.8 | $ | 80.1 | $ | 114.6 | ||||||
| For the Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
(in millions, except shares and per share data) | 2010 | 2011 | ||||||
Net Income (controlling interest) | $ | 17.5 | $ | 39.1 | ||||
Intangible amortization(1)(2) | 16.7 | 27.1 | ||||||
Intangible-related deferred taxes | 10.7 | 12.9 | ||||||
Imputed interest(3) | 2.3 | 4.4 | ||||||
Affiliate equity expense | 1.7 | 1.6 | ||||||
Affiliate depreciation | 1.9 | — | ||||||
Economic Net Income | $ | 50.8 | $ | 85.1 | ||||
Average shares outstanding—diluted | 45.4 | 53.1 | ||||||
Assumed issuance of senior convertible securities shares | (0.8 | ) | — | |||||
Assumed issuance of junior convertible securities shares | — | — | ||||||
Dilutive impact of senior convertible securities shares | 0.2 | — | ||||||
Dilutive impact of junior convertible securities shares | — | — | ||||||
Average shares outstanding—adjusted diluted | 44.8 | 53.1 | ||||||
Economic earnings per share | $ | 1.14 | $ | 1.60 | ||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2010 | 2009 | 2010 | ||||||||||
Average shares outstanding—diluted | 43,159,140 | 47,635,230 | 42,082,991 | 46,539,949 | ||||||||||
Assumed issuance of senior convertible securities shares | (873,803 | ) | (661,054 | ) | (873,803 | ) | (767,341 | ) | ||||||
Assumed issuance of junior convertible securities shares | — | — | — | — | ||||||||||
Dilutive impact of senior convertible securities shares | 1,163 | 185,589 | 581 | 197,651 | ||||||||||
Dilutive impact of junior convertible securities shares | — | — | — | — | ||||||||||
Average shares outstanding—adjusted diluted | 42,286,500 | 47,159,765 | 41,209,769 | 45,970,259 | ||||||||||
Economic earnings per share | $ | 1.00 | $ | 1.35 | $ | 1.94 | $ | 2.49 | ||||||
Economic Net Income increased 50% and 43%68% in the three and six months ended June 30, 2010March 31, 2011 as compared to the three and six months ended June 30, 2009,March 31, 2010, primarily as a result of the previously-describedpreviously described factors that caused an increase in Net Income as well as increases in amortization and intangible-related deferred tax expenses.
Liquidity and Capital Resources
The following table summarizes certain key financial data relating to our liquidity and capital resources:
(in millions) | December 31, 2009 | June 30, 2010 | December 31, 2010 | March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance Sheet Data | ||||||||||||||
Cash and cash equivalents | $ | 259.5 | $ | 220.5 | $ | 313.3 | $ | 252.8 | ||||||
Senior bank debt | — | 659.5 | 460.0 | 340.0 | ||||||||||
2008 senior convertible notes | 409.6 | 415.9 | 422.1 | 425.5 | ||||||||||
Zero coupon convertible notes | 47.4 | — | ||||||||||||
Junior convertible trust preferred securities | 507.4 | 508.6 | 509.9 | 510.5 |
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended March 31, | |||||||||||||||||
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| 2009 | 2010 | 2009 | 2010 | 2010 | 2011 | ||||||||||||||
Cash Flow Data | ||||||||||||||||||||
Operating cash flow | $ | 72.2 | $ | 115.1 | $ | 87.9 | $ | 183.1 | $ | 68.0 | $ | 130.2 | ||||||||
Investing cash flow | (5.0 | ) | (682.9 | ) | (8.7 | ) | (814.8 | ) | (131.9 | ) | (12.1 | ) | ||||||||
Financing cash flow | (31.6 | ) | 586.3 | (202.4 | ) | 593.8 | 7.6 | (180.8 | ) | |||||||||||
EBITDA(1) | 53.2 | 81.7 | 102.4 | 150.0 | 68.2 | 118.2 |
We view our ratio of debt to EBITDA (our "internal leverage ratio") as an important gauge of our ability to service debt, make new investments and access additional capital. Consistent with industry practice, we do not consider junior trust preferred securities as debt for the purpose of determining our internal leverage ratio. We also view our leverage on a "net debt" basis by deducting from our debt balance holding company cash (including prospective proceeds from the settlement of our forward equity sale agreements).cash. At June 30, 2010,March 31, 2011, our internal leverage ratio was 2.2:1.4:1.
Under the terms of our credit facility we are required to meet two financial ratio covenants. The first of these covenants is a maximum ratio of debt to EBITDA (the "bank leverage ratio") of 3.5. The calculation of our bank leverage ratio is generally consistent with our internal leverage ratio approach. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.0 (our "bank interest coverage ratio"). For the purposes of calculating these ratios, share-based compensation expense is added back to EBITDA. As of June 30, 2010,March 31, 2011, our actual bank leverage and bank interest coverage ratios were 2.71.7 and 5.7,8.0, respectively, and we were in full compliance with all terms of our credit facility. Following the July 2 settlement of the outstanding forward equity sales and the use of these funds to pay down senior bank debt, our pro forma bank leverage ratio was 2.3. Following this repayment, weWe have $305.2$410 million of remaining capacity under our $770$750 million credit facility of whichand we could borrow a total of $305.2 million without violatingthe entire amount and remain in compliance with our credit facility covenants.agreement.
We are rated BBB- by both Standard & Poor's. APoor's and Fitch rating agencies. With the exception of a modest increase in the borrowing rate under our credit facility (0.50%), a downgrade of our credit rating either as a result of industry or company-specific considerations, would not have a materialno direct financial effect on any of our agreements or securities (or otherwise trigger a default).
Supplemental Liquidity Measure
As supplemental information in this Quarterly Report on Form 10-Q, we have provided information regarding our EBITDA, a non-GAAP liquidity measure. This measure is provided in
addition to, but not as a substitute for, cash flow from operations. EBITDA represents earnings before
interest expense, income taxes, depreciation and amortization. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies. As a measure of liquidity, we believe that EBITDA is useful as an indicator of our ability to service debt, make new investments and meet working capital requirements. We further believe that many investors use this information when analyzing the financial position of companies in the investment management industry.
The following table provides a reconciliation of cash flow from operations to EBITDA:
| | For the Three Months Ended June 30, | For the Six Months Ended June 30, | | For the Three Months Ended March 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | (in millions) | 2009 | 2010 | 2009 | 2010 | (in millions) | 2010 | 2011 | |||||||||||||||
Cash flow from operations | Cash flow from operations | $ | 72.2 | $ | 115.1 | $ | 87.9 | $ | 183.1 | Cash flow from operations | $ | 68.0 | $ | 130.2 | |||||||||
Interest expense, net of non-cash items(1) | 13.9 | 14.4 | 28.7 | 28.6 | Interest expense, net of non-cash items(1) | 14.2 | 16.8 | ||||||||||||||||
Current tax provision | (1.1 | ) | 5.3 | (9.2 | ) | 7.9 | Current tax provision | 2.5 | 13.5 | ||||||||||||||
Income from equity method investments, net of distributions(2) | 5.4 | 4.4 | 0.8 | (1.6 | ) | Income from equity method investments, net of distributions(2) | (6.0 | ) | (46.4 | ) | |||||||||||||
Changes in assets and liabilities | Net income (non-controlling interests) | (31.3 | ) | (50.3 | ) | ||||||||||||||||||
and other adjustments(3) | (37.2 | ) | (57.5 | ) | (5.8 | ) | (68.0 | ) | Net income (non-controlling interests in partnerships) | (4.0 | ) | — | |||||||||||
Changes in assets and liabilities | 28.3 | 65.1 | |||||||||||||||||||||
Other non-cash adjustments(3) | (3.5 | ) | (10.7 | ) | |||||||||||||||||||
EBITDA | EBITDA | $ | 53.2 | $ | 81.7 | $ | 102.4 | $ | 150.0 | EBITDA | $ | 68.2 | $ | 118.2 | |||||||||
In the sixthree months ended June 30, 2010,March 31, 2011, we met our operating cash requirements primarily through cash generated by operating activities. Our principal uses of cash in the three and six months ended June 30, 2010March 31, 2011 were to make distributions to Affiliate managers and repay our senior bank debt. We expect that our principal uses of cash for the foreseeable future will be for investments in new and existing Affiliates, distributions to Affiliate managers, payment of principal and interest on outstanding debt, the repurchase of debt securities, and the repurchase of shares of our common stock and for working capital purposes.
The following table summarizes the principal amount due at maturity of our debt obligations and convertible securities as of June 30, 2010:March 31, 2011:
(in millions) | Amount | Maturity Date | Form of Repayment | Amount | Maturity Date | Form of Repayment | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Bank Debt | $ | 465.0 | (1) | 2012 | (2) | $ | 340.0 | 2015 | (1) | |||||||||
2008 Senior Convertibles Notes | 460.0 | 2038 | (3) | 460.0 | 2038 | (2) | ||||||||||||
Junior Convertible Trust Preferred Securities | 730.8 | 2036/2037 | (4) | 730.8 | 2036/2037 | (3) |
Senior Bank Debt
We have a $770 million revolvingUnder the credit facility, (the "Revolver") under which we pay interest at specified rates (based eitherbased on thea LIBOR rate or the prime rate as in effect from time to time) that vary(plus an applicable spread, which varies depending on our credit rating.rating). Subject to the agreement of lenders to provide additional commitments, we have the option to increase the Revolvercredit facility by up to $175$150 million. The Revolvercredit facility is unsecured and contains financial covenants with respect to leverage and interest coverage and customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Revolver are collateralized by pledges of the substantial majority of our capital stock or other equity interests owned by us. As of June 30, 2010,March 31, 2011, we had $660$340 million outstanding under the Revolver; and, on July 2, 2010 used the net proceeds from the settlement of sales under our forward equity program to pay down the balance outstanding under the Revolver to approximately $465 million.credit facility.
Senior Convertible Securities
WeAt March 31, 2011, we have one senior convertible security outstanding at June 30, 2010. The principal terms of these notes are summarized below.
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The 2008 convertible notes are convertible into a defined number of shares of our common stock upon the occurrence of certain events. Upon conversion, we may elect to pay or deliver cash, shares of common stock, or some combination thereof. The holders of the 2008 convertible notes may put these securities to us in August of 2013, 2018, 2023, 2028 and 2033. We may call the notes for cash at any time on or after August 15, 2013.
In the second quarter of 2010, we called our Zero Coupon Senior Convertible Notes due May 7, 2021 ("zero coupon senior convertible notes") for redemption at their principal amount plus any original issue discount accrued thereon. In lieu of redemption, all of the holders elected to convert their zero coupon senior convertible notes into shares of our common stock. We issued 873,626 shares of common stock to settle these conversions. All of our zero coupon senior convertible notes have been cancelled and retired as of June 14, 2010.
Junior Convertible Trust Preferred Securities
We have two junior convertible trust preferred securities outstanding, at June 30, 2010, one issued in 2006 (the "2006 junior convertible trust preferred securities") and a second issued in 2007 (the "2007 junior convertible trust preferred securities").) The principal terms of these securities are summarized below.
| 2006 Junior Convertible Trust Preferred Securities | 2007 Junior Convertible Trust Preferred Securities | 2008 Senior Convertible Notes | 2007 Junior Convertible Trust Preferred Securities | 2006 Junior Convertible Trust Preferred Securities | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Issue Date | April 2006 | October 2007 | August 2008 | October 2007 | April 2006 | |||||||||
Maturity Date | April 2036 | October 2037 | August 2038 | October 2037 | April 2036 | |||||||||
Next Potential Put Date | August 2013 | N/A | N/A | |||||||||||
Par Value | $300.0 | $430.8 | $460.0 | $430.8 | $300.0 | |||||||||
Carrying Value | 213.0 | (1) | 295.6 | (2) | ||||||||||
Carrying Value(1) | 425.5 | 296.6 | 213.9 | |||||||||||
Note Denomination | 50 | 50 | 1,000 | 50 | 50 | |||||||||
Current Conversion Rate | 0.333 | 0.250 | 7.959 | 0.250 | 0.333 | |||||||||
Current Conversion Price | 150.00 | 200.00 | $125.65 | $200.00 | $150.00 | |||||||||
Stated Coupon | 5.10 | % | 5.15 | % | 3.95 | % | 5.15 | % | 5.10 | % | ||||
Tax Deduction Rate | 7.50% | (3) | 8.00% | (3) | ||||||||||
Coupon Frequency | Semi-annually | Quarterly | Quarterly | |||||||||||
Tax Deduction Rate(2) | 9.38 | % | 8.00 | % | 7.50 | % |
BothDerivative Instruments
From time to time, we seek to offset our exposure to changing interest rates under our debt financing arrangements by entering into interest rate hedging contracts. These instruments are designated as cash flow hedges with changes in fair value recorded in other comprehensive income for the 2006effective portion of the hedge.
We have entered into interest rate swap contracts to exchange a fixed rate for the variable rate on our credit facility. These contracts expire between 2015 and 2007 junior convertible trust preferred securities are convertible, at any time, into2017. Under these contracts, we will pay a defined numberweighted average fixed rate of shares. Upon conversion, holders1.76% on a notional amount of $100.0 million through October 2015. Thereafter, through October 2017, we will receive cash or sharespay a weighted average fixed rate of our common stock, or2.14% on a combination thereof. We can callremaining notional amount of $25 million. As of March 31, 2011, the 2006 junior convertible trust preferred securitiesunrealized gain on or after April 2011 if the closing price of our common stock exceeds $195 per share for a specified period of time.these contracts was $3.0 million.
We can call the 2007 junior convertible trust preferred securities on or after October 2012 if the closing pricealso entered into treasury rate lock agreements with a notional value of our common stock exceeds $260 per share$100.0 million to hedge an anticipated issuance of fixed-rate debt. These contracts were settled in February 2011 for a specified periodnet pre-tax gain of time. Holders of the 2006 and 2007 junior trust preferred securities have no rights to put these securities to us.$4.0 million.
Forward Equity Sale Agreement
We haveDuring 2009, we entered into threea forward equity sale agreementsagreement with a major securities firmsfirm to sell shares of our common stock, (up to $200 million under each agreement). Under the termsand extended this agreement in April 2011. As of these agreements, we can settle forward sales at any time prior to DecemberMarch 31, 2010 by issuing shares in exchange for cash. Alternatively, we may choose to settle forward sales on a net stock or cash basis. Through June 30, 2010, we have completed $496.5 million of forward sales. In March 2009, we settled $147.2 million of2011, no forward equity sales by issuing 1.8 million shares of our common stock. In May 2010, we settled $46.6 million of forward equity sales by issuing 0.5 million shares of our common stock. In
June 2010, we settled $102.0 million of forward equity sales by issuing 1.8 million shares of our common stock. In July 2010, we settled the remaining $200.7 million of outstanding forward equity sales through the issuance of 3.2 million shares of our common stock.are outstanding. We have the additional capacity tomay sell up to an additional $103.5 million under an agreement entered into in July 2009.this agreement.
Share Repurchase Program
In the second quarter of 2010, we did not purchase any shares of common stock under our share repurchase programs. In July 2010, ourOur Board of Directors has authorized an additional 500,000 shares of common stock for repurchase under our share repurchase programs. There are currently 1,584,706programs in recent periods. The maximum number of shares that couldmay yet be purchasedrepurchased under outstanding programs is approximately 1.6 million. The timing and amount of issuances and repurchases are determined at the discretion of our share repurchase program.management.
Affiliate Equity
Many of our operating agreements provide Affiliate managersus a conditional right to require uscall and Affiliate partners the conditional right to purchaseput their retained equity interests at certain intervals. Certain agreements also provide us a conditional right to require Affiliate managers to sell their retained equity interests to us upon their death, permanent incapacity or termination of employment and provide Affiliate managers a conditional right to require us to purchase such retained equity interests upon the occurrence of specified events. The purchase price of these conditional purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions.
We may pay for Affiliate equity purchases in cash, shares of our common stock or other forms of consideration and can consent to the transfer of these interests to other individuals or entities.
Our cumulativecurrent redemption obligationvalue for these interests has been presented as "Redeemable non-controlling interests" on our Consolidated Balance Sheets. Although the timing and amounts of these purchases are difficult to predict, we expect to repurchase approximately $100 million of Affiliate equity during the next twelve months, and, in such event, will own the cash flow associated with any equity repurchased.
Operating Cash Flow
Cash flow from operations generally represents Net Income plus non-cash charges for amortization, deferred taxes, equity-based compensation and depreciation, as well as increases and decreases in our consolidated working capital.
The increase in cash flows from operations for the sixthree months ended June 30, 2010March 31, 2011 as compared to the sixthree months ended June 30, 2009,March 31, 2010, resulted principally from increasedan increase in Net Income of $31.5$36.6 million, an increase in distributions from equity method investments of $41.7 million and a decrease in settlementscollection of accounts payable and accrued liabilitiesunsettled shares receivable of $48.0 million and purchases of prepaids and other current assets of $29.0$38.0 million, partially offset by a decrease in collectionspayments of investment advisory fees receivableunsettled shares payable of $43.2 million.
We consolidated $93.8$53.9 million and $89.6 millionan increase in accounts payable and accrued liabilities of client assets held in partnerships controlled by our Affiliates as of December 31, 2009 and June 30, 2010, respectively. Sales of $0.3 million increased operating cash flow in the six months ended June 30, 2009. Purchases of $0.5 million decreased operating cash flow in the six months ended June 30, 2010.$19.5 million.
Investing Cash Flow
The net cash flow used in investing activities increased $806.1decreased $119.8 million for the sixthree months ended June 30, 2010March 31, 2011 as compared to the sixthree months ended June 30, 2009.March 31, 2010. This was primarily the result of an increase of $791.6a $114.4 million relating to ourdecrease in cash flow used for new Affiliate investments in Pantheon and Aston during the second quarter of2011, as compared to 2010.
Financing Cash Flow
Net cash flows fromused in financing activities increased $796.1$188.4 million for the sixthree months ended June 30, 2010,March 31, 2011, as compared to the sixthree months ended June 30, 2009.March 31, 2010. This was primarily a result of an increase inrepayments of the credit facility for the three months ended March 31, 2011 (as compared to net borrowings of senior bank debt of $893.0 million,for the three months ended March 31, 2010), partially offset by an increasea decrease in repurchases of Affiliate equity of $76.7 million. In addition, we received $144.3 million and $100.0 million of proceeds from the settlement of forward equity sales in the six months ended June 30, 2009 and June 30, 2010, respectively. In July 2010, we settled our remaining forward sales with the issuance of 3.2 million shares for $194.7$94.8 million.
Our investment in Artemis was financed through borrowings under our Revolver, and our investment in Aston was financed throughIn the issuancesecond quarter of 2011, we will make a payment of approximately 1.7$63.8 million shares ofrepresenting the deferred purchase price from our common stock. Our investment in Pantheon was financed with borrowings under our Revolver and proceeds from the partial settlement of forward equity sales.
Under past acquisition agreements, weVentures acquisition. We are also contingently liable, upon achievement of specified financial targets, to make payments of up to $601$496.5 million through 2015.2015 under past acquisition agreements. In the remainder of 2010,2011, we do not expect to make any significanttotal payments of approximately $1.4 million to settle portions of these contingent obligations.obligations and we expect to repurchase about $100.0 million of interests in certain existing Affiliates in 2011.
Proceeds availableWe anticipate that borrowings under our Revolver arethe credit facility and proceeds from the settlement of any forward equity sales, together with cash flows from operations will be sufficient to support our cash flow needs for the foreseeable future.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2010:March 31, 2011:
| | Payments Due | | Payments Due | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Remainder of 2011 | | | | |||||||||||||||||||||||||||
(in millions) | Total | 2012-2013 | 2014-2015 | Thereafter | ||||||||||||||||||||||||||||
Contractual Obligations | Total | Remainder of 2010 | 2011-2012 | 2013-2014 | Thereafter | Remainder of 2011 | ||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Senior bank debt | $ | 659.5 | $ | — | $ | 659.5 | $ | — | $ | — | $ | 340.0 | $ | — | $ | 340.0 | $ | — | $ | — | ||||||||||||
Senior convertible securities(1) | 977.8 | 9.1 | 36.3 | 36.3 | 896.1 | 959.6 | 9.1 | 36.3 | 36.3 | 877.9 | ||||||||||||||||||||||
Junior convertible trust preferred securities(2) | 1,717.9 | 18.5 | 74.1 | 74.1 | 1,551.2 | |||||||||||||||||||||||||||
Junior convertible trust preferred securities | 1,690.2 | 27.8 | 74.1 | 74.1 | 1,514.2 | |||||||||||||||||||||||||||
Leases | 82.4 | 10.6 | 33.8 | 23.8 | 14.2 | 123.8 | 18.4 | 42.5 | 32.0 | 30.9 | ||||||||||||||||||||||
Other liabilities(3) | 155.6 | 21.6 | 134.0 | — | — | |||||||||||||||||||||||||||
Other liabilities(2) | 122.0 | 80.5 | — | — | 41.5 | |||||||||||||||||||||||||||
Total Contractual Obligations | $ | 3,593.2 | $ | 59.8 | $ | 937.7 | $ | 134.2 | $ | 2,461.5 | $ | 3,235.6 | $ | 135.8 | $ | 492.9 | $ | 142.4 | $ | 2,464.5 | ||||||||||||
Contingent Obligations | | | | | | |||||||||||||||||||||||||||
Contingent payment obligations(4) | $ | 106.6 | $ | — | $ | 80.3 | $ | 24.2 | $ | 2.1 | ||||||||||||||||||||||
Contingent payment obligations(3) | $ | 128.8 | $ | 1.4 | $ | 93.9 | $ | 33.5 | $ | — |
Recent Accounting Developments
During the first quarter of 2010, we adopted a new standard that requires an enterprise to perform a qualitative analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity ("VIE"). Under the standard, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE. This new standard has been deferred for certain entities that utilize the specialized accounting guidance for investment companies or that have the attributes of investment companies. The adoption of the portions of this new standard that were not deferred did not have a material impact on our Consolidated Financial Statements.
During the first quarter of 2010, we adopted a new standard that eliminated the concept of a qualifying special-purpose entity ("QSPE"), changed the requirements for derecognizing financial assets, and required additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including an entity's continuing involvement in and exposure to the risks related to transferred financial assets. The standard also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The adoption of this new standard did not have a material impact on our Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our Quantitative and Qualitative Disclosures About Market Risk in the three and six months ended June 30, 2010.March 31, 2011. Please refer to Item 7A in our 20092010 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures during the quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the quarter covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective in ensuring that (i) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their stated objectives and our principal executive officer and principal financial officers concluded that our disclosure controls and procedures are effective at the reasonable assurance level. We review on an ongoing basis and document our disclosure controls and procedures, and our internal control over financial reporting, and we may from time to time make changes in an effort to enhance their effectiveness and ensure that our systems evolve with our business.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Sarbanes-Oxley Act of 2002 provides that recent business combinations may be excluded from internal controls assessment; consequently, management will include Pantheon Ventures and Trilogy Global Advisors in our assessment of internal control over financial reporting as of December 31, 2011.
The exhibits are listed on the Exhibit Index and are included elsewhere in this Quarterly Report on Form 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AFFILIATED MANAGERS GROUP, INC. | ||||
/s/ on behalf of the Registrant as |
Exhibit No. | Description | ||
---|---|---|---|
31.1 | Certification of Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Registrant's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Registrant's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Registrant's Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101 | The following financial statements from the Registrant's Quarterly Report on Form 10-Q for the quarter ended |