Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to “OMAM” refer to OM Asset Management plc, references to the “Company” refer to OMAM, and references to “we,” “our” and “us” refer to OMAM and its consolidated subsidiaries and equity-accounted Affiliates, excluding discontinued operations. References to the holding company or “Center” excluding the Affiliates refer to OMAM Inc., or OMUS, a Delaware corporation and indirect, wholly owned subsidiary of OMAM. Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to “Affiliates” or an “Affiliate” refer to the asset management firms in which we have an ownership interest. References in this Annual Report on Form 10-K to “OM plc” refer to Old Mutual plc, our former parent. None of the information in this Annual Report on Form 10-K constitutes either an offer or a solicitation to buy or sell any of our Affiliates’ products or services, nor is any such information a recommendation for any of our Affiliates’ products or services.
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes which appear in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data.
This discussion contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under Item 1A, Risk Factors.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.
Our MD&A is presented in five sections:
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•
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Overview
provides a brief description of our Affiliates, a summary of
The Economics of Our Business
and an explanation of
How We Measure Performance
using a non-GAAP measure which we refer to as economic net income, or ENI. This section also provides a
Summary Results of Operations
and information regarding our
Assets Under Management
by Affiliate and asset class.
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•
|
U.S. GAAP Results of Operations for the years ended
December 31, 2017
,
2016
, and
2015
includes an explanation of changes in our U.S. GAAP revenue, expense, and other items over the last three years as well as key U.S. GAAP operating metrics.
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•
|
Non-GAAP Supplemental Performance Measure—Economic Net Income
includes an explanation of the key differences between U.S. GAAP net income and ENI, the key measure management uses to evaluate our performance. This section also provides a reconciliation between U.S. GAAP net income and ENI for the years ended
December 31, 2017
,
2016
, and
2015
, as well as a reconciliation of key ENI operating items including ENI revenue and ENI operating expenses. In addition, this section provides key Non-GAAP operating metrics and a calculation of tax on economic net income.
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•
|
Capital Resources and Liquidity
discusses our key balance sheet data including
Working Capital and Long-Term Debt
. This section also discusses
Cash Flows
from the business;
Adjusted EBITDA; Future Capital Needs; and Commitments, Contingencies and Off-Balance Sheet Obligations.
The discussion of Adjusted EBITDA includes an explanation of how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income attributable to controlling interests.
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•
|
Critical Accounting Policies and Estimates
provides a discussion of the key accounting policies used in the preparation of our U.S. GAAP financial statements.
|
Overview
We are a diversified, multi-boutique asset management firm headquartered in London, UK. We currently operate our business through
seven
affiliate firms to whom we refer in this Annual Report as our Affiliates. Through our Affiliates, we offer a diverse range of actively-managed investment strategies and products to institutional investors around the globe. While our Affiliates maintain autonomy in the investment process and the day-to-day management of their businesses, our strategy is to work with them to accelerate the growth and profitability of their firms.
Under U.S. GAAP, our Affiliates may be consolidated into our operations or may be accounted for as equity investments. We may also be required to consolidate certain of our Affiliates’ Funds, due to the nature of our decision-making rights, our economic interests in these Funds or the rights of third-party clients in those Funds.
Our current Affiliates and their principal strategies include
(1)
:
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•
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Acadian Asset Management LLC (“Acadian”)
—a leading quantitatively-oriented manager of active global and international equity, and alternative strategies.
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•
|
Barrow, Hanley, Mewhinney & Strauss, LLC (“Barrow Hanley”)
—a widely recognized value-oriented investment manager of U.S., international and global equities, fixed income and a range of balanced investment management strategies.
|
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|
•
|
Campbell Global, LLC (“Campbell Global”)
—a leading sustainable timber and natural resource investment manager that seeks to deliver superior investment performance by focusing on unique acquisition opportunities, client objectives and disciplined management.
|
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•
|
Copper Rock Capital Partners LLC (“Copper Rock”)
—a specialized growth equity investment manager of small-cap international, global and emerging markets equity strategies.
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•
|
Investment Counselors of Maryland, LLC (“ICM”)
(2)
—
a value-driven domestic equity manager with product offerings across the entire capitalization range and a primary focus on small-cap companies.
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•
|
Landmark Partners, LLC (“Landmark”)
—a leading global secondary private equity, real estate and real asset investment firm.
|
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•
|
Thompson, Siegel & Walmsley LLC (“TSW”)
—a value-oriented investment manager focused on small- and mid-cap U.S. equity, international equity and fixed income strategies.
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(1)
|
In August 2017, we executed an agreement to sell our stake in Heitman LLC, a real estate manager, to Heitman’s management for cash consideration totaling $110 million. We have therefore presented operational information (including AUM and flow data) excluding Heitman for periods beginning in the third quarter of 2017 (Heitman remains in operational information for the first half of 2017). The transaction closed on January 5, 2018. Under U.S. GAAP, financial results of operations presented herein continue to include Heitman through November 30, 2017. We will retain our co-investment interests in Heitman-managed funds as well as any carried interest associated with these investments.
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(2)
|
Accounted for under the equity method of accounting.
|
The Economics of Our Business
Our profitability is affected by a variety of factors including the level and composition of our average assets under management, or AUM, fee rates charged on AUM and our expense structure. Our Affiliates earn management fees based on assets under management. Approximately 75% of our management fees are calculated based on average AUM (calculated on either a daily or monthly basis) with the remainder of our management fees calculated based on period end AUM or other measuring methods. Changes in the levels of our AUM are driven by our investment performance and net client cash flows. Our Affiliates may also earn performance fees when certain accounts add value in relation to relevant benchmarks or exceed required returns. Approximately
$55.4 billion
, or
23%
of our AUM in consolidated Affiliates, are in accounts with incentive fee or carried interest features in which OMAM participates in the performance fee. The majority of these incentive fees are calculated based on value added over the relevant benchmarks on a rolling three year basis. Carried interests are features of private equity funds, which are calculated based on long-term cumulative returns. Performance fees earned on eligible AUM managed by our equity-accounted Affiliates are not reflected as part of ENI or U.S. GAAP performance fee revenue.
Our largest expense item is compensation and benefits paid to our and our Affiliates’ employees, which consists of both fixed and variable components. Fixed compensation and benefits represents base salaries and wages, payroll taxes and the costs of our employee benefit programs. Variable compensation, calculated as described below, may be awarded in cash, equity or profit interests.
The arrangements in place with our Affiliates result in the sharing of economics between OMUS and each Affiliate’s key management personnel using a profit-sharing model, except for ICM, which uses a revenue share model as a result of a legacy economic arrangement that has not been restructured. Profit sharing affects two elements within our earnings: (i) the calculation of variable compensation and (ii) the level of each Affiliate’s equity or profit interests distribution to its employees. Variable compensation is the portion of earnings that is contractually allocated to Affiliate employees as a bonus pool, typically representing a fixed percentage of earnings before variable compensation, which is measured as revenues less fixed compensation and benefits and other operating and administrative expenses. Profits after variable compensation are shared between us and Affiliate key employee equity holders according to our respective equity or profit interests ownership. The sharing of profits in this manner ensures that the economic interests of Affiliate key employees and those of OMUS are aligned, both in terms of generating strong annual earnings as well as investing those earnings back into the business in order to generate growth over the long term. We view profit sharing as an attractive operating model, as it allows us to share in the benefits of operating leverage as the business grows, and ensures all equity and profit interests holders are incentivized to achieve that growth.
Equity or profit interests owned by Affiliate key employees are either awarded as part of their variable compensation arrangements, or alternatively, may have originally resulted from OMUS acquiring less than 100% of the Affiliate. Over time, Affiliate key employee-owned equity or profit interests are recycled from one generation of employee-owners to the next either by the next generation purchasing equity or profit interests directly from retiring principals, or by Affiliate key employees forgoing cash bonuses in exchange for the equivalent value in Affiliate equity or profit interests. The recycling of equity or profit interests is often facilitated by OMUS; see “—U.S. GAAP Results of Operations—U.S. GAAP Expenses—Compensation and Benefits Expense” for a further discussion.
The diagram below provides an illustrative example of how the profit-sharing model would work initially and over time if the affiliate grew its revenue and profits. In this example, the employees’ variable compensation has been contractually set at 30% of earnings before variable compensation, and the earnings after variable compensation are split 60% to OMUS and 40% to the affiliate key employees. Revenue initially equals $200 and operating expenses equal $100. Therefore, earnings before variable compensation equal $100 and the contractual bonus pool (variable compensation) equals $30. The owners split the $70 profit after variable compensation, with OMUS receiving $42, or 60%, and the Affiliate key employees receiving $28, or 40%. Including both the contractual employee bonus pool and the key employees’ share of profit, the employees receive $58, or 58% of profit before variable compensation. Employee equity is valued at a fixed multiple of this $28 share of profits, so employees have transparency into both their earning potential in any year from the bonus pool and share of profits, as well as the current value of their equity and the long-term potential to realize value from its growth. In this structure, key employees who are managing their business have incentives to manage for profit, but also to manage the business prudently, in the interest of their clients, and invest for growth, since they will benefit over the long term as both employees and equity holders. In this way, each Affiliate is aligned with OMUS and the public shareholders to generate profits and growth over time.
Illustrative Structure: Profit-Sharing Economics
Figures in parenthesis indicate impact of model after five years if revenue and pre-bonus operating expenses grew 15% and 7% annually, respectively.
The alignment of interests is even clearer if we consider the impact of growth on the profit-sharing model. The numbers in parenthesis in the diagram represent the financial results of the illustrative business in five years, assuming revenue has grown at 15% annually and operating expenses have grown at 7% annually. With revenue of $400 and operating expenses of $140, profit before variable compensation has now increased to $260, representing an annual growth rate of 21%. The 30% contractual bonus pool of $78 has also grown 21% annually, as has OMUS’s 60% share of profits, which equals $109, and the affiliate’s 40% share of profits, which equals $73. From this example, it is clear that as profit in the affiliate’s business grows and the operating margin increases, both of the stakeholders—OMUS and the key employees—are benefiting in a proportionate way. This means that both parties are aligned to invest in the business by hiring new investment professionals, developing new products, or establishing new distribution channels. We believe this investment in turn benefits clients and should generate growth over time.
The alternative structure common in the industry is the revenue share model. In the revenue share model, the affiliate’s revenue is typically divided into two fixed percentages—the operating allocation and the owners’ allocation. All operating expenses of the business, including employee bonuses, must be covered by the operating allocation. The owners’ allocation can be owned entirely by the multi-boutique owner or ownership can be divided between the multi-boutique owner and the affiliate’s key employees. In either case, the multi-boutique owner effectively owns a fixed percentage of the affiliates’ revenue, which typically does not change as the business grows. While the initial economics of the profit share model and the revenue share model can be similar, over time the economic split and incentive structure can be quite different, leading to less alignment between the affiliate and the multi-boutique owner. The multi-boutique owner’s share of profits grows in line with revenue, while any operating leverage in the business is retained entirely by the affiliate’s employees. Likewise, new costs and investments to drive growth are borne entirely by the affiliate employees, while the revenue generated by these investments is shared with the multi-boutique owner. While the revenue share structure has been successfully implemented by a number of our peers who have a more autonomous strategy, for OMAM, which emphasizes collaborative engagement and joint investment with our Affiliates, the alignment of the profit-sharing model is mutually reinforcing with our overall growth strategy and operating philosophy.
How We Measure Performance
We manage our business in aggregate based on a single reportable segment, reflecting how our management assesses the performance of our business. Within our organizational framework, the same operational resources support multiple products and Affiliates and performance is evaluated at a consolidated level.
In measuring and monitoring the key components of our earnings, our management uses a non-GAAP financial measure, ENI, to evaluate the financial performance of, and to make operational decisions for, our business. We also use ENI to make resource allocation decisions, determine appropriate levels of investment or dividend payout, manage balance sheet leverage, determine Affiliate variable compensation and equity distributions, and incentivize management. It is an important measure in evaluating our financial performance because we believe it most accurately represents our operating performance and cash generation capability.
ENI differs from net income determined in accordance with U.S. GAAP as a result of both the reclassification of certain income statement items and the exclusion of certain non-cash or non-recurring income statement items. In particular, ENI excludes non-cash charges representing the changes in the value of Affiliate equity and profit interests held by Affiliate key employees, and the results of discontinued operations which are no longer part of our business and that portion of consolidated Funds which are not attributable to our shareholders. ENI is also adjusted for amortization of acquisition-related contingent consideration and pre-acquisition retained equity with service components.
ENI revenue is primarily comprised of the fee revenues paid to us by our clients for our advisory services and earnings from our equity-accounted Affiliates. Revenue included within ENI differs from U.S. GAAP revenue in that it excludes amounts from consolidated Funds which are not attributable to our shareholders and includes our share of earnings from equity-accounted Affiliates.
ENI expenses are calculated to reflect all usual expenses from ongoing continuing operations attributable to our shareholders. Expenses included within ENI differ from U.S. GAAP expenses in that they exclude amounts from consolidated Funds which are not attributable to our shareholders, revaluations of Affiliate key employee owned equity and profit interests, amortization and impairment of acquired intangibles and other acquisition-related items, and certain other non-cash expenses.
“Non-controlling interests” is a concept under U.S. GAAP that identifies net components of revenues and expenses that are not attributable to our shareholders. For example, the portion of the net income (loss) of any consolidated Funds that is attributable to the outside investors or clients of the consolidated Funds is included in “Non-controlling interests” in our Consolidated Financial Statements. Conversely, “controlling interests” is the portion of revenue or expense that is attributable to our shareholders.
Summary Results of Operations
The following table summarizes our results of operations for the years ended
December 31, 2017
,
2016
, and
2015
. Beginning in the third quarter of 2016, following the purchase of seed capital investments from OM plc, we consolidated certain Funds. Additional Funds have been consolidated in 2017 as additional seed and co-investment capital has been deployed:
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Years ended December 31,
|
|
Increase (Decrease)
|
($ in millions, unless otherwise noted)
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
U.S. GAAP Basis
|
|
|
|
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|
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|
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|
|
|
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|
Revenue
|
$
|
887.4
|
|
|
$
|
663.5
|
|
|
$
|
699.3
|
|
|
$
|
223.9
|
|
|
$
|
(35.8
|
)
|
Pre-tax income from continuing operations attributable to controlling interests
|
137.1
|
|
|
161.0
|
|
|
201.3
|
|
|
(23.9
|
)
|
|
(40.3
|
)
|
Net income attributable to controlling interests
|
4.2
|
|
|
126.4
|
|
|
155.5
|
|
|
(122.2
|
)
|
|
(29.1
|
)
|
U.S. GAAP operating margin
(1)
|
8
|
%
|
|
23
|
%
|
|
27
|
%
|
|
(1545) bps
|
|
|
(389) bps
|
|
Earnings per share, basic ($)
|
$
|
0.04
|
|
|
$
|
1.05
|
|
|
$
|
1.29
|
|
|
$
|
(1.01
|
)
|
|
$
|
(0.24
|
)
|
Earnings per share, diluted ($)
|
0.04
|
|
|
1.05
|
|
|
1.29
|
|
|
$
|
(1.01
|
)
|
|
$
|
(0.24
|
)
|
Basic shares outstanding (in millions)
|
110.7
|
|
|
119.2
|
|
|
120.0
|
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|
(8.5
|
)
|
|
(0.8
|
)
|
Diluted shares outstanding (in millions)
|
111.4
|
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|
119.5
|
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120.5
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(8.1
|
)
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(1.0
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)
|
Economic Net Income Basis
(2)(3)
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(Non-GAAP measure used by management)
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ENI revenue
(4)(5)
|
$
|
900.7
|
|
|
$
|
678.5
|
|
|
$
|
663.9
|
|
|
$
|
222.2
|
|
|
$
|
14.6
|
|
Pre-tax economic net income
(4)(6)
|
251.3
|
|
|
190.7
|
|
|
203.5
|
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|
60.6
|
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|
(12.8
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)
|
Economic net income, excluding non-recurring performance fee
(4)(7)
|
180.9
|
|
|
145.1
|
|
|
149.7
|
|
|
35.8
|
|
|
(4.6
|
)
|
ENI diluted earnings per share, excluding non-recurring performance fee, ($)
(4)
|
$
|
1.62
|
|
|
$
|
1.21
|
|
|
$
|
1.24
|
|
|
$
|
0.41
|
|
|
$
|
(0.03
|
)
|
ENI operating margin
(4)(8)
|
38
|
%
|
|
35
|
%
|
|
37
|
%
|
|
261 bps
|
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|
(137) bps
|
|
Adjusted EBITDA
(4)
|
$
|
281.9
|
|
|
$
|
208.5
|
|
|
$
|
212.7
|
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$
|
73.4
|
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$
|
(4.2
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)
|
Economic net income (including non-recurring performance fee)
(5)
|
180.9
|
|
|
145.1
|
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|
161.1
|
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|
35.8
|
|
|
(16.0
|
)
|
ENI diluted EPS (including non-recurring performance fee),($)
|
$
|
1.62
|
|
|
$
|
1.21
|
|
|
$
|
1.34
|
|
|
$
|
0.41
|
|
|
$
|
(0.13
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)
|
Other Operational Information
(9)
|
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Assets under management (AUM) at year end (in billions)
|
$
|
243.0
|
|
|
$
|
240.4
|
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$
|
212.4
|
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$
|
2.6
|
|
|
$
|
28.0
|
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Net client cash flows (in billions)
|
(6.0
|
)
|
|
(1.6
|
)
|
|
(5.1
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)
|
|
(4.4
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)
|
|
3.5
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|
Annualized revenue impact of net flows (in millions)
(10)
|
32.9
|
|
|
11.0
|
|
|
18.9
|
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|
21.9
|
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|
(7.9
|
)
|
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(1)
|
U.S. GAAP operating margin equals operating income from continuing operations divided by total revenue. Our U.S. GAAP operating margin is not significantly impacted by the effect of consolidated Funds for the years ended
December 31, 2017
,
2016
, and
2015
.
|
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(2)
|
Economic net income is a non-GAAP measure we use to evaluate the performance of our business. For a reconciliation to U.S. GAAP financial information and a further discussion of economic net income refer to “—Non-GAAP Supplemental Performance Measures—Economic Net Income.”
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(3)
|
Excludes restructuring charges associated with the CEO transition amounting to $9.8 million ($5.7 million after taxes) and $1.0 million related to the Heitman transaction ($0.6 million after taxes) for the year ended
December 31, 2017
.
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(4)
|
In the second quarter of 2015, we recorded a non-recurring performance fee of $11.4 million, net of associated expenses and taxes. While all performance fees fall within OMAM’s definition of economic net income, we believe that the unique characteristics of this fee, including its size and the extraordinary investment performance of the underlying product, make it unrepresentative of our recurring economics. We have therefore presented economic net income with this non-recurring performance fee excluded from revenue and expenses. This presentation provides a more comparative view across reporting periods of the line items which make up ENI revenue and expense. Unless explicitly noted, the revenue, expense and key ENI metrics herein exclude the impact of the non-recurring performance fee.
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(5)
|
ENI revenue is the ENI measure which corresponds to U.S. GAAP revenue.
|
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(6)
|
Pre-tax economic net income is the ENI measure which corresponds to U.S. GAAP pre-tax income from continuing operations attributable to controlling interests.
|
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(7)
|
Economic net income excluding the non-recurring performance fee is the ENI measure which corresponds to U.S. GAAP net income from continuing operations attributable to controlling interests.
|
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(8)
|
ENI operating margin is a non-GAAP efficiency measure, calculated based on ENI operating earnings divided by ENI revenue. The ENI operating margin is most comparable to our U.S. GAAP operating margin (excluding the effect of consolidated Funds) of
8%
for the year ended
December 31, 2017
,
23%
for the year ended
December 31, 2016
and
27%
for the year ended
December 31, 2015
.
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(9)
|
On August 2, 2017, we entered into a non-binding term sheet to sell our stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, we entered into a redemption agreement on November 17, 2017. Heitman stopped contributing to our financial results as of November 30, 2017 and the transaction closed on January 5, 2018. We have broken the Heitman AUM and flows out of our AUM reporting as of July 1, 2017, in order to give the reader a better perspective of the ongoing business following the closing of this transaction. Unless specifically noted, flow information includes flows from Heitman for the first half of 2017, but excludes it thereafter, and AUM data at
December 31, 2017
excludes the Heitman AUM. Including Heitman, AUM, net flows, and annualized revenue impact of net flows were $272.0 billion, $(5.8) billion, and $25.2 million, respectively, for the eleven months ended November 30, 2017.
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(10)
|
Annualized revenue impact of net flows represents the difference between annualized management fees expected to be earned on new accounts and net assets contributed to existing accounts, less the annualized management fees lost on terminated accounts or net assets withdrawn from existing accounts, including equity-accounted Affiliates. The annualized management fees are calculated by multiplying the annual gross fee rate for the relevant account by the net assets gained in the account in the event of a positive flow, excluding any current or future market appreciation or depreciation, or the net assets lost in the account in the event of an outflow, excluding any current or future market appreciation or depreciation. For a further discussion of the uses and limitations of the annualized revenue impact of net flows, see “Assets Under Management” herein.
|
Assets Under Management
On August 2, 2017, we entered into a non-binding term sheet to sell our stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, we entered into a redemption agreement on November 17, 2017. Heitman stopped contributing to our financial results as of November 30, 2017 and the transaction closed on January 5, 2018. We have broken the Heitman AUM and flows out of our AUM reporting as of July 1, 2017, in order to give the reader a better perspective of the ongoing business following the closing of this transaction. Unless specifically noted, flow information includes flows from Heitman for the first half of 2017, but excludes it thereafter, and AUM data at
December 31, 2017
excludes the Heitman AUM.
Our total assets under management as of
December 31, 2017
were
$243.0 billion
. The following table presents our assets under management by Affiliate as of each of the dates indicated:
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($ in billions)
|
December 31, 2017
|
|
December 31, 2016
|
|
December 31, 2015
|
Acadian Asset Management
|
$
|
97.7
|
|
|
$
|
75.0
|
|
|
$
|
66.8
|
|
Barrow, Hanley, Mewhinney & Strauss
|
91.7
|
|
|
92.3
|
|
|
89.2
|
|
Campbell Global
|
5.3
|
|
|
5.2
|
|
|
6.3
|
|
Copper Rock Capital Partners
|
6.4
|
|
|
5.1
|
|
|
4.7
|
|
Investment Counselors of Maryland
|
2.1
|
|
|
2.0
|
|
|
1.8
|
|
Landmark Partners
|
14.8
|
|
|
9.7
|
|
|
n/a
|
|
Thompson, Siegel & Walmsley
|
25.0
|
|
|
19.9
|
|
|
14.5
|
|
Total assets under management of current Affiliates
|
243.0
|
|
|
209.2
|
|
|
183.3
|
|
Heitman
|
—
|
|
|
31.2
|
|
|
29.1
|
|
Total assets under management*
|
$
|
243.0
|
|
|
$
|
240.4
|
|
|
$
|
212.4
|
|
* Reported AUM.
n/a Not an Affiliate as of the date indicated
Our primary asset classes include:
|
|
i.
|
U.S. equity, which includes small cap through large cap securities and substantially value or blended investment styles;
|
|
|
ii.
|
Global/non-U.S. equity, which includes global and international equities including emerging markets;
|
|
|
iii.
|
Fixed income, which includes government bonds, corporate bonds and other fixed income investments in the United States; and
|
|
|
iv.
|
Alternatives, which consist of real estate, timberland investments, secondary Funds and other alternative investments.
|
The following table presents our assets under management by strategy as of each of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in billions)
|
December 31, 2017
|
|
December 31, 2016
|
|
December 31, 2015
|
U.S. equity, small/smid cap value
|
$
|
7.6
|
|
|
$
|
7.9
|
|
|
$
|
6.9
|
|
U.S. equity, mid cap value
|
13.0
|
|
|
11.3
|
|
|
9.5
|
|
U.S. equity, large cap value
|
57.8
|
|
|
59.2
|
|
|
57.4
|
|
U.S. equity, core/blend
|
2.8
|
|
|
3.6
|
|
|
3.1
|
|
Total U.S. equity
|
81.2
|
|
|
82.0
|
|
|
76.9
|
|
Global equity
|
40.3
|
|
|
32.3
|
|
|
29.4
|
|
International equity
|
55.5
|
|
|
42.5
|
|
|
37.0
|
|
Emerging markets equity
|
30.4
|
|
|
21.6
|
|
|
18.4
|
|
Total global/non-U.S. equity
|
126.2
|
|
|
96.4
|
|
|
84.8
|
|
Fixed income
|
13.5
|
|
|
13.9
|
|
|
13.8
|
|
Alternatives
(1)
|
22.1
|
|
|
48.1
|
|
|
36.9
|
|
Total assets under management
|
$
|
243.0
|
|
|
$
|
240.4
|
|
|
$
|
212.4
|
|
|
|
(1)
|
Reflects the removal of Heitman in the third quarter of 2017.
|
AUM flows and the annualized revenue impact of net flows
In the following tables, we present our asset flows and market appreciation by asset class, client type and client location. We also present a key metric used to better understand our asset flows, the annualized revenue impact of net client cash flows. Annualized revenue impact of net flows represents the difference between annualized management fees expected to be earned on new accounts and net assets contributed to existing accounts, less the annualized management fees lost on terminated accounts or net assets withdrawn from existing accounts, including equity-accounted Affiliates. The annualized management fees are calculated by multiplying the annual gross fee rate for the relevant account by the net assets gained in the account in the event of a positive flow, excluding any current or future market appreciation or depreciation, or the net assets lost in the account in the event of an outflow, excluding any current or future market appreciation or depreciation.
The annualized revenue impact of net flows metric is designed to provide investors with a better indication of the potential financial impact of net client cash flows, however it has certain limitations. For instance, it does not include assumptions for the next twelve months’ market appreciation or depreciation or investment performance associated with the assets gained or lost. Nor does it account for factors such as future client terminations or additional contributions or withdrawals over the next twelve months. Additionally, the basis points reported are fee rates based on the asset levels at the time of the transactions and do not consider the fact that client fee rates may change over the next twelve months.
The following table summarizes our asset flows and market appreciation/depreciation by asset class for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in billions)
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
U.S. equity
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
82.0
|
|
|
$
|
76.9
|
|
|
$
|
87.3
|
|
Gross inflows
|
4.9
|
|
|
7.9
|
|
|
5.6
|
|
Gross outflows
|
(16.4
|
)
|
|
(14.3
|
)
|
|
(14.5
|
)
|
Net flows
|
(11.5
|
)
|
|
(6.4
|
)
|
|
(8.9
|
)
|
Market appreciation (depreciation)
|
10.7
|
|
|
11.0
|
|
|
(1.5
|
)
|
Other
|
—
|
|
|
0.5
|
|
|
—
|
|
Ending balance
|
$
|
81.2
|
|
|
$
|
82.0
|
|
|
$
|
76.9
|
|
Average AUM
|
$
|
81.1
|
|
|
$
|
78.3
|
|
|
$
|
82.8
|
|
Average AUM of consolidated Affiliates
|
79.1
|
|
|
76.5
|
|
|
80.8
|
|
|
|
|
|
|
|
Global / non-U.S. equity
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
96.4
|
|
|
$
|
84.8
|
|
|
$
|
84.0
|
|
Gross inflows
|
17.0
|
|
|
14.1
|
|
|
14.2
|
|
Gross outflows
|
(16.0
|
)
|
|
(9.6
|
)
|
|
(10.8
|
)
|
Net flows
|
1.0
|
|
|
4.5
|
|
|
3.4
|
|
Market appreciation (depreciation)
|
28.8
|
|
|
6.7
|
|
|
(3.2
|
)
|
Other
|
—
|
|
|
0.4
|
|
|
0.6
|
|
Ending balance
|
$
|
126.2
|
|
|
$
|
96.4
|
|
|
$
|
84.8
|
|
Average AUM
(1)
|
$
|
113.1
|
|
|
$
|
90.0
|
|
|
$
|
87.5
|
|
|
|
|
|
|
|
Fixed income
|
|
|
|
|
|
Beginning balance
|
$
|
13.9
|
|
|
$
|
13.8
|
|
|
$
|
15.2
|
|
Gross inflows
|
1.4
|
|
|
1.2
|
|
|
1.4
|
|
Gross outflows
|
(2.7
|
)
|
|
(2.1
|
)
|
|
(2.2
|
)
|
Net flows
|
(1.3
|
)
|
|
(0.9
|
)
|
|
(0.8
|
)
|
Market appreciation (depreciation)
|
0.9
|
|
|
1.0
|
|
|
(0.3
|
)
|
Other
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Ending balance
|
$
|
13.5
|
|
|
$
|
13.9
|
|
|
$
|
13.8
|
|
Average AUM
(1)
|
$
|
13.4
|
|
|
$
|
14.1
|
|
|
$
|
14.9
|
|
|
|
|
|
|
|
Alternatives
(2)(3)
|
|
|
|
|
|
Beginning balance
|
$
|
48.1
|
|
|
$
|
36.9
|
|
|
$
|
34.3
|
|
Acquisition (removal) of Affiliates
|
(32.4
|
)
|
|
8.8
|
|
|
—
|
|
Gross inflows
|
7.7
|
|
|
6.7
|
|
|
5.4
|
|
Gross outflows
|
(1.1
|
)
|
|
(1.6
|
)
|
|
(1.8
|
)
|
Hard asset disposals
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
Net flows
|
5.8
|
|
|
1.2
|
|
|
1.2
|
|
Market appreciation
|
0.6
|
|
|
2.0
|
|
|
1.3
|
|
Other
|
—
|
|
|
(0.8
|
)
|
|
0.1
|
|
Ending balance
|
$
|
22.1
|
|
|
$
|
48.1
|
|
|
$
|
36.9
|
|
Average AUM
|
$
|
33.7
|
|
|
$
|
40.7
|
|
|
$
|
35.7
|
|
Average AUM of consolidated Affiliates
|
19.2
|
|
|
10.2
|
|
|
7.8
|
|
|
|
|
|
|
|
Total
(2)(3)
|
|
|
|
|
|
Beginning balance
|
$
|
240.4
|
|
|
$
|
212.4
|
|
|
$
|
220.8
|
|
Acquisition (removal) of Affiliates
|
(32.4
|
)
|
|
8.8
|
|
|
—
|
|
Gross inflows
|
31.0
|
|
|
29.9
|
|
|
26.6
|
|
Gross outflows
|
(36.2
|
)
|
|
(27.6
|
)
|
|
(29.3
|
)
|
Hard asset disposals
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
Net flows
|
(6.0
|
)
|
|
(1.6
|
)
|
|
(5.1
|
)
|
Market appreciation (depreciation)
|
41.0
|
|
|
20.7
|
|
|
(3.7
|
)
|
Other
|
—
|
|
|
0.1
|
|
|
0.4
|
|
Ending balance
|
$
|
243.0
|
|
|
$
|
240.4
|
|
|
$
|
212.4
|
|
Average AUM
|
$
|
241.3
|
|
|
$
|
223.1
|
|
|
$
|
220.9
|
|
Average AUM of consolidated Affiliates
|
224.8
|
|
|
190.8
|
|
|
191.0
|
|
|
|
|
|
|
|
Annualized basis points: inflows
(3)
|
51.3
|
|
|
41.9
|
|
|
45.9
|
|
Annualized basis points: outflows
(3)
|
34.1
|
|
|
36.3
|
|
|
32.6
|
|
Annualized revenue impact of net flows (in millions)
|
$
|
32.9
|
|
|
$
|
11.0
|
|
|
$
|
18.9
|
|
|
|
(1)
|
Average AUM equals average AUM of consolidated Affiliates.
|
|
|
(2)
|
We have removed Heitman from our AUM and cash flow metrics as of the beginning of the third quarter, 2017. Heitman stopped contributing to the Company's financial results as of November 30, 2017, therefore Heitman's December 31, 2017 AUM is not reflected in the table above. Heitman's AUM at November 30, 2017 was $33.3 billion. For the year ended December 31, 2016, $8.8 billion of acquisitions represents the investment in Landmark Partners.
|
|
|
(3)
|
Reflects the removal of Heitman in the third quarter of 2017.
|
We also analyze our asset flows by client type and client location. Our client types include:
|
|
i.
|
Sub-advisory, which includes assets managed for underlying mutual fund and variable insurance products which are sponsored by insurance companies and mutual fund platforms, where the end client is typically retail;
|
|
|
ii.
|
Institutional, which includes assets managed for public / government pension funds, including U.S. state and local government funds and non-U.S. sovereign wealth, local government and national pension funds; also includes corporate and union-sponsored pension plans; and
|
|
|
iii.
|
Retail / other, which includes assets managed for mutual funds sponsored by our Affiliates, defined contribution plans and accounts managed for high net worth clients.
|
The following table summarizes our asset flows by client type for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in billions)
|
Years ended December 31,
|
|
2017(1)
|
|
2016
|
|
2015
|
Sub-advisory
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
75.9
|
|
|
$
|
69.0
|
|
|
$
|
74.1
|
|
Acquisition (removal) of Affiliates
|
(3.0
|
)
|
|
—
|
|
|
—
|
|
Gross inflows
|
8.7
|
|
|
11.2
|
|
|
7.8
|
|
Gross outflows
|
(14.2
|
)
|
|
(12.3
|
)
|
|
(11.4
|
)
|
Net flows
|
(5.5
|
)
|
|
(1.1
|
)
|
|
(3.6
|
)
|
Market appreciation (depreciation)
|
12.7
|
|
|
7.7
|
|
|
(1.5
|
)
|
Other
|
—
|
|
|
0.3
|
|
|
—
|
|
Ending balance
|
$
|
80.1
|
|
|
$
|
75.9
|
|
|
$
|
69.0
|
|
|
|
|
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
154.1
|
|
|
$
|
133.8
|
|
|
$
|
137.2
|
|
Acquisition (removal) of Affiliates
|
(29.0
|
)
|
|
8.6
|
|
|
—
|
|
Gross inflows
|
20.6
|
|
|
16.9
|
|
|
16.6
|
|
Gross outflows
|
(20.0
|
)
|
|
(12.4
|
)
|
|
(16.1
|
)
|
Hard asset disposals
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
Net flows
|
(0.2
|
)
|
|
0.6
|
|
|
(1.9
|
)
|
Market appreciation (depreciation)
|
27.0
|
|
|
11.7
|
|
|
(1.9
|
)
|
Other
|
—
|
|
|
(0.6
|
)
|
|
0.4
|
|
Ending balance
|
$
|
151.9
|
|
|
$
|
154.1
|
|
|
$
|
133.8
|
|
|
|
|
|
|
|
Retail / Other
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
10.4
|
|
|
$
|
9.6
|
|
|
$
|
9.5
|
|
Acquisition (removal) of Affiliates
|
(0.4
|
)
|
|
0.2
|
|
|
—
|
|
Gross inflows
|
1.7
|
|
|
1.8
|
|
|
2.2
|
|
Gross outflows
|
(2.0
|
)
|
|
(2.9
|
)
|
|
(1.8
|
)
|
Net flows
|
(0.3
|
)
|
|
(1.1
|
)
|
|
0.4
|
|
Market appreciation (depreciation)
|
1.3
|
|
|
1.3
|
|
|
(0.3
|
)
|
Other
|
—
|
|
|
0.4
|
|
|
—
|
|
Ending balance
|
$
|
11.0
|
|
|
$
|
10.4
|
|
|
$
|
9.6
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
240.4
|
|
|
$
|
212.4
|
|
|
$
|
220.8
|
|
Acquisition (removal) of Affiliates
|
(32.4
|
)
|
|
8.8
|
|
|
—
|
|
Gross inflows
|
31.0
|
|
|
29.9
|
|
|
26.6
|
|
Gross outflows
|
(36.2
|
)
|
|
(27.6
|
)
|
|
(29.3
|
)
|
Hard asset disposals
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
Net flows
|
(6.0
|
)
|
|
(1.6
|
)
|
|
(5.1
|
)
|
Market appreciation (depreciation)
|
41.0
|
|
|
20.7
|
|
|
(3.7
|
)
|
Other
|
—
|
|
|
0.1
|
|
|
0.4
|
|
Ending balance
|
$
|
243.0
|
|
|
$
|
240.4
|
|
|
$
|
212.4
|
|
|
|
(1)
|
Reflects the removal of Heitman in the third quarter of 2017.
|
It is a strategic objective to increase our percentage of assets under management sourced from non-U.S. clients. Our categorization by client location includes:
|
|
i.
|
U.S.-based clients, where the contracting client is based in the United States, and
|
|
|
ii.
|
Non-U.S.-based clients, where the contracting client is based outside the United States.
|
The following table summarizes asset flows by client location for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in billions)
|
Years ended December 31,
|
|
2017(1)
|
|
2016
|
|
2015
|
U.S.
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
191.6
|
|
|
$
|
171.8
|
|
|
$
|
176.6
|
|
Acquisition (removal) of Affiliates
|
(25.5
|
)
|
|
7.4
|
|
|
—
|
|
Gross inflows
|
22.5
|
|
|
21.2
|
|
|
20.6
|
|
Gross outflows
|
(29.0
|
)
|
|
(23.1
|
)
|
|
(20.2
|
)
|
Hard asset disposals
|
(0.5
|
)
|
|
(2.7
|
)
|
|
(2.1
|
)
|
Net flows
|
(7.0
|
)
|
|
(4.6
|
)
|
|
(1.7
|
)
|
Market appreciation (depreciation)
|
31.0
|
|
|
16.9
|
|
|
(2.8
|
)
|
Other
|
—
|
|
|
0.1
|
|
|
(0.3
|
)
|
Ending balance
|
$
|
190.1
|
|
|
$
|
191.6
|
|
|
$
|
171.8
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
48.8
|
|
|
$
|
40.6
|
|
|
$
|
44.2
|
|
Acquisition (removal) of Affiliates
|
(6.9
|
)
|
|
1.4
|
|
|
—
|
|
Gross inflows
|
8.5
|
|
|
8.7
|
|
|
6.0
|
|
Gross outflows
|
(7.2
|
)
|
|
(4.5
|
)
|
|
(9.1
|
)
|
Hard asset disposals
|
(0.3
|
)
|
|
(1.2
|
)
|
|
(0.3
|
)
|
Net flows
|
1.0
|
|
|
3.0
|
|
|
(3.4
|
)
|
Market appreciation (depreciation)
|
10.0
|
|
|
3.8
|
|
|
(0.9
|
)
|
Other
|
—
|
|
|
—
|
|
|
0.7
|
|
Ending balance
|
$
|
52.9
|
|
|
$
|
48.8
|
|
|
$
|
40.6
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
240.4
|
|
|
$
|
212.4
|
|
|
$
|
220.8
|
|
Acquisition (removal) of Affiliates
|
(32.4
|
)
|
|
8.8
|
|
|
—
|
|
Gross inflows
|
31.0
|
|
|
29.9
|
|
|
26.6
|
|
Gross outflows
|
(36.2
|
)
|
|
(27.6
|
)
|
|
(29.3
|
)
|
Hard asset disposals
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
Net flows
|
(6.0
|
)
|
|
(1.6
|
)
|
|
(5.1
|
)
|
Market appreciation (depreciation)
|
41.0
|
|
|
20.7
|
|
|
(3.7
|
)
|
Other
|
—
|
|
|
0.1
|
|
|
0.4
|
|
Ending balance
|
$
|
243.0
|
|
|
$
|
240.4
|
|
|
$
|
212.4
|
|
|
|
(1)
|
Reflects the removal of Heitman in the third quarter of 2017.
|
At
December 31, 2017
, our total assets under management were
$243.0 billion
,
an increase
of
$2.6 billion
or
1.1%
compared to
$240.4 billion
at
December 31, 2016
. The assets under management at
December 31, 2016
represented
an increase
of
$28.0 billion
or
13.2%
compared to
$212.4 billion
at
December 31, 2015
. In addition to the removal of Heitman, which accounted for a decrease in assets under management of
$(32.4) billion
, the change in assets under management during the year ended
December 31, 2017
reflects net market appreciation of
$41.0 billion
and net outflows of
$(6.0) billion
. The change in assets under management during the year ended
December 31, 2016
reflects net market appreciation of
$20.7 billion
, net outflows of
$(1.6) billion
and other movements of
$0.1 billion
, plus the acquisition of Landmark, which accounted for an increase in assets under management of $8.8 billion. Other movements in 2016 reflect the standardization of AUM definitions across Affiliates and mandates and the revaluation of certain hard assets. These changes align the definition of AUM with management fees charged to clients. The change in assets under management during the year ended
December 31, 2015
reflects net market depreciation of $
(3.7) billion
, net outflows of
$(5.1) billion
and other movements of
$0.4 billion
. Other movements in
2015
primarily represent the AUM impact of the disposal of certain fund strategies offset by the consolidation of a joint venture.
For the year ended
December 31, 2017
, our net outflows were
$(6.0) billion
compared to net outflows of
$(1.6) billion
for the year ended
December 31, 2016
and net outflows of
$(5.1) billion
for the year ended
December 31, 2015
. Hard asset disposals of
$(0.8) billion
,
$(3.9) billion
and
$(2.4) billion
are reflected in the net flows for the years ended
December 31, 2017
,
2016
and
2015
, respectively. For the year ended
December 31, 2017
, the annualized revenue impact of the net flows was
$32.9 million
, as gross inflows of
$31.0 billion
during the year were into higher fee asset classes yielding an annualized fee rate of
51.3
bps, versus gross outflows and hard asset disposals in the same period of
$(37.0) billion
out of asset classes yielding an annualized fee rate of
34.1
bps. This is compared to the annualized revenue impact of net flows of
$11.0 million
for the year ended
December 31, 2016
and
$18.9 million
for the year ended
December 31, 2015
.
U.S. GAAP Results of Operations
For the Years Ended
December 31, 2017
,
2016
, and
2015
Our U.S. GAAP results of operations were as follows for the years ended
December 31, 2017
,
2016
, and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
Increase (Decrease)
|
($ in millions unless otherwise noted)
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
U.S. GAAP Statement of Operations
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
$
|
858.0
|
|
|
$
|
659.9
|
|
|
$
|
637.2
|
|
|
$
|
198.1
|
|
|
$
|
22.7
|
|
Performance fees
|
26.5
|
|
|
2.6
|
|
|
61.8
|
|
|
23.9
|
|
|
(59.2
|
)
|
Other revenue
|
1.2
|
|
|
0.9
|
|
|
0.3
|
|
|
0.3
|
|
|
0.6
|
|
Consolidated Funds’ revenue
|
1.7
|
|
|
0.1
|
|
|
—
|
|
|
1.6
|
|
|
0.1
|
|
Total revenue
|
887.4
|
|
|
663.5
|
|
|
699.3
|
|
|
223.9
|
|
|
(35.8
|
)
|
Compensation and benefits
|
682.8
|
|
|
397.4
|
|
|
412.8
|
|
|
285.4
|
|
|
(15.4
|
)
|
General and administrative
|
112.9
|
|
|
98.3
|
|
|
88.2
|
|
|
14.6
|
|
|
10.1
|
|
Amortization of acquired intangibles
|
6.6
|
|
|
2.6
|
|
|
0.2
|
|
|
4.0
|
|
|
2.4
|
|
Depreciation and amortization
|
11.7
|
|
|
9.4
|
|
|
6.9
|
|
|
2.3
|
|
|
2.5
|
|
Consolidated Funds’ expense
|
2.4
|
|
|
0.2
|
|
|
—
|
|
|
2.2
|
|
|
0.2
|
|
Total expenses
|
816.4
|
|
|
507.9
|
|
|
508.1
|
|
|
308.5
|
|
|
(0.2
|
)
|
Operating income
|
71.0
|
|
|
155.6
|
|
|
191.2
|
|
|
(84.6
|
)
|
|
(35.6
|
)
|
Investment income
|
27.4
|
|
|
17.2
|
|
|
13.0
|
|
|
10.2
|
|
|
4.2
|
|
Interest income
|
0.8
|
|
|
0.4
|
|
|
0.2
|
|
|
0.4
|
|
|
0.2
|
|
Interest expense
|
(24.5
|
)
|
|
(11.3
|
)
|
|
(3.1
|
)
|
|
(13.2
|
)
|
|
(8.2
|
)
|
Revaluation of DTA deed
|
51.8
|
|
|
—
|
|
|
—
|
|
|
51.8
|
|
|
—
|
|
Net consolidated Funds’ investment gain (loss)
|
15.5
|
|
|
(1.1
|
)
|
|
—
|
|
|
16.6
|
|
|
(1.1
|
)
|
Income from continuing operations before taxes
|
142.0
|
|
|
160.8
|
|
|
201.3
|
|
|
(18.8
|
)
|
|
(40.5
|
)
|
Income tax expense
|
132.8
|
|
|
40.8
|
|
|
46.6
|
|
|
92.0
|
|
|
(5.8
|
)
|
Income from continuing operations
|
9.2
|
|
|
120.0
|
|
|
154.7
|
|
|
(110.8
|
)
|
|
(34.7
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
(0.1
|
)
|
|
6.2
|
|
|
0.8
|
|
|
(6.3
|
)
|
|
5.4
|
|
Net income (loss)
|
9.1
|
|
|
126.2
|
|
|
155.5
|
|
|
(117.1
|
)
|
|
(29.3
|
)
|
Net income (loss) attributable to non-controlling interests in consolidated Funds
|
4.9
|
|
|
(0.2
|
)
|
|
—
|
|
|
5.1
|
|
|
(0.2
|
)
|
Net income attributable to controlling interests
|
$
|
4.2
|
|
|
$
|
126.4
|
|
|
$
|
155.5
|
|
|
$
|
(122.2
|
)
|
|
$
|
(29.1
|
)
|
Basic earnings per share ($)
|
$
|
0.04
|
|
|
$
|
1.05
|
|
|
$
|
1.29
|
|
|
$
|
(1.01
|
)
|
|
$
|
(0.24
|
)
|
Diluted earnings per share ($)
|
0.04
|
|
|
1.05
|
|
|
1.29
|
|
|
(1.01
|
)
|
|
(0.24
|
)
|
Weighted average basic shares outstanding
|
110.7
|
|
|
119.2
|
|
|
120.0
|
|
|
(8.5
|
)
|
|
(0.8
|
)
|
Weighted average diluted ordinary shares outstanding
|
111.4
|
|
|
119.5
|
|
|
120.5
|
|
|
(8.1
|
)
|
|
(1.0
|
)
|
U.S. GAAP operating margin
(2)
|
8
|
%
|
|
23
|
%
|
|
27
|
%
|
|
(1545) bps
|
|
|
(389) bps
|
|
|
|
(1)
|
Certain Funds have been consolidated due to our seed capital or co-investments in the Funds, including seed capital investments purchased from OM plc in September of 2016 and July 2017.
|
|
|
(2)
|
U.S. GAAP operating margin equals operating income from continuing operations divided by total revenue.
|
The following table reconciles our net income attributable to controlling interests to our pre-tax income from continuing operations attributable to controlling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP Statement of Operations
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests
|
$
|
4.2
|
|
|
$
|
126.4
|
|
|
$
|
155.5
|
|
Exclude: (Gain) loss on discontinued operations attributable to controlling interests
|
0.1
|
|
|
(6.2
|
)
|
|
(0.8
|
)
|
Net income from continuing operations attributable to controlling interests
|
4.3
|
|
|
120.2
|
|
|
154.7
|
|
Add: Income tax expense
|
132.8
|
|
|
40.8
|
|
|
46.6
|
|
Pre-tax income from continuing operations attributable to controlling interests
|
$
|
137.1
|
|
|
$
|
161.0
|
|
|
$
|
201.3
|
|
U.S. GAAP Revenues
Our U.S. GAAP revenues principally consist of:
|
|
i.
|
management fees earned based on our overall weighted average fee rate charged to our clients and the level of assets under management;
|
|
|
ii.
|
performance fees earned or management fee adjustments when our Affiliates’ investment performance over agreed time periods for certain clients has differed from pre-determined hurdles;
|
|
|
iii.
|
other revenue, consisting primarily of marketing, distribution and consulting services; and
|
|
|
iv.
|
revenue from consolidated Funds, a portion of which is attributable to the holders of non-controlling interests in consolidated Funds.
|
Management Fees
Our management fees are a function of the fee rates our Affiliates charge to their clients, which are typically expressed in basis points, and the levels of our assets under management.
Excluding assets managed by our equity-accounted Affiliates, average basis points earned on average assets under management were
38.2
bps for the year ended
December 31, 2017
,
34.6
bps for the year ended
December 31, 2016
and
33.4
bps for the year ended
December 31, 2015
. The greatest driver of increases or decreases in this average fee rate is changes in the mix of our assets under management caused by net inflows or outflows in certain asset classes or disproportionate market movements. Additionally, average yields in the years ended December 31, 2017 and 2016 were also positively impacted by the higher yields earned on alternative assets managed by Landmark.
Our average basis points by asset class (including only consolidated Affiliates that are included in management fee revenue, unless indicated) over each of the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions,
except AUM data in billions
and fee rates in basis points earned on AUM)
|
Years ended December 31,
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
Basis Pts
|
|
Revenue
|
|
Basis Pts
|
|
Revenue
|
|
Basis Pts
|
U.S. equity
|
$
|
192.9
|
|
|
24
|
|
|
$
|
187.7
|
|
|
25
|
|
|
$
|
193.6
|
|
|
24
|
|
Global / non-U.S. equity
|
465.6
|
|
|
41
|
|
|
374.1
|
|
|
42
|
|
|
366.2
|
|
|
42
|
|
Fixed income
|
27.8
|
|
|
21
|
|
|
29.1
|
|
|
21
|
|
|
31.4
|
|
|
21
|
|
Alternatives
|
171.7
|
|
|
89
|
|
|
69.0
|
|
|
67
|
|
|
46.0
|
|
|
58
|
|
U.S. GAAP management fee revenue & weighted average fee rate on average AUM of consolidated Affiliates
(1)
|
$
|
858.0
|
|
|
38.2
|
|
|
$
|
659.9
|
|
|
34.6
|
|
|
$
|
637.2
|
|
|
33.4
|
|
Average AUM excluding equity-accounted Affiliates
|
$
|
224.8
|
|
|
|
|
|
$
|
190.8
|
|
|
|
|
|
$
|
191.0
|
|
|
|
|
Average AUM including equity-accounted Affiliates & weighted average fee rate
(2)
|
$
|
241.3
|
|
|
38.2
|
|
|
$
|
223.1
|
|
|
35.4
|
|
|
$
|
220.9
|
|
|
34.3
|
|
|
|
(1)
|
Amounts shown are equivalent to ENI management fee revenue. (See “ENI Revenues.”)
|
|
|
(2)
|
Average AUM including equity-accounted Affiliates excludes Heitman as of the beginning of the third quarter, 2017.
|
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Management fees
increased
$198.1 million
, or
30.0%
, from
$659.9 million
for the year ended
December 31, 2016
to
$858.0 million
for the year ended
December 31, 2017
. The increase was primarily attributable to higher overall levels of assets under management as a result of positive markets, shifts into higher fee rate products, and incremental revenue from the Landmark transaction including subsequent increases in assets under management. Average assets under management excluding equity-accounted Affiliates increased
17.8%
, from
$190.8 billion
for the year ended
December 31, 2016
to
$224.8 billion
for the year ended
December 31, 2017
.
Overall, the increase in management fee revenue is reflective of the increases in basis point yields of our assets under management. Excluding equity-accounted Affiliates, the weighted average fee rate earned on our average assets under management was
38.2
basis points in
2017
and
34.6
basis points in
2016
, with the increase driven mostly by the mix of flows and market movements in and out of assets with varying fee rates as well as the higher fee-rate assets under management added as a result of the Landmark transaction. Compared to the twelve months ended
December 31, 2016
, the combined share of higher fee global/non-U.S. equity and alternative assets, excluding equity-accounted Affiliates, increased by approximately
6%
, to
59%
of average assets, while the mix of U.S. equity and fixed income decreased approximately
(6)%
to
41%
of average assets.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Management fees
increased
$22.7 million
, or
3.6%
, from
$637.2 million
for the year ended
December 31, 2015
to
$659.9 million
for the year ended
December 31, 2016
. The increase was attributable to increases in the weighted average fee rate earned on the average AUM of consolidated Affiliates as discussed below.
Overall, the increase in management fee revenue is reflective of the increases in basis point yields of our assets under management. Excluding equity-accounted Affiliates, the weighted average fee rate earned on our average assets under management was
34.6
basis points in
2016
and
33.4
basis points in
2015
with the increase driven mostly by the mix of flows and market movements in and out of assets with varying fee rates as well as the higher fee-rate assets under management added as a result of the Landmark transaction. Compared to the twelve months ended
December 31, 2016
, the combined share of higher fee global/non-U.S. equity and alternative assets, excluding equity-accounted Affiliates, increased by approximately
3%
, to
53%
of average assets, while the mix of U.S. equity and fixed income decreased approximately
(3)%
to
47%
of average assets. Approximately 1.5% of this shift was driven by the addition of Landmark’s $8.8 billion of alternative assets under management, while the remainder of this was due to the impact of market movements and flows.
Performance Fees
Approximately
$55.4 billion
, or
23%
of our AUM in consolidated Affiliates at
December 31, 2017
, are in accounts with incentive fee or carried interest features, where we participate in such a fee. Included below is a breakdown of our AUM from consolidated Affiliates, broken out between AUM subject to performance fees or carried interest and that subject only to management fees. Our alternative products subject to performance fees or carried interest earn these performance fees upon exceeding high-water mark performance thresholds or outperforming a hurdle rate. Conversely, the separate accounts/other products, which primarily earn management fees, are potentially subject to performance adjustment up or down based on investment performance versus benchmark. For each of these categories and in total, we have indicated in the table below the ratio of performance fees or carried interest relative to total management fees and performance fees (together, total fees).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM of consolidated Affiliates
at December 31, 2017
($ in billions)
|
|
Management fees for the twelve months ended December 31, 2017
($ in millions)
|
|
Performance fees for the twelve months ended December 31, 2017
($ in millions)
|
Category
|
|
Total
|
|
AUM of accounts without perfor-mance fees
|
|
AUM of accounts with perfor-mance
fees
|
|
Total
|
|
Accounts without perfor-mance fees
|
|
Accounts with perfor-mance fees
|
|
Total
|
|
As a % of total category fees among accounts with perfor-mance fees
|
|
As a % of total category fees
(among all accounts)
|
Alternative products
|
|
$
|
22.1
|
|
|
$
|
13.2
|
*
|
|
$
|
8.9
|
|
|
$
|
171.7
|
|
|
$
|
113.7
|
|
|
$
|
58.0
|
|
|
$
|
12.1
|
|
|
17.3
|
%
|
|
6.6
|
%
|
Separate accounts/other products
|
|
218.8
|
|
|
172.3
|
|
|
46.5
|
|
|
686.3
|
|
|
586.8
|
|
|
99.5
|
|
|
14.4
|
|
|
12.6
|
%
|
|
2.1
|
%
|
Total
|
|
$
|
240.9
|
|
|
$
|
185.5
|
|
|
$
|
55.4
|
|
|
$
|
858.0
|
|
|
$
|
700.5
|
|
|
$
|
157.5
|
|
|
$
|
26.5
|
|
|
14.4
|
%
|
|
3.0
|
%
|
|
|
*
|
Certain legacy Landmark Funds include a carried interest component in which we do not participate and which is not consolidated in our financial results. A majority of the
$13.2 billion
shown here includes such Funds managed by Landmark and any carried interest earned by these Funds is not attributable to us.
|
In aggregate, we recognized
$26.5 million
in performance fees for the year ended
December 31, 2017
. Included in this number were $(12.0) million of negative performance fees, calculated in total by each account that had net negative performance fees on a year-to-date basis. The negative performance fee generally represents performance adjustments in certain sub-advisory accounts. Gross performance fees earned, excluding performance fees at equity-accounted Affiliates, were
3.0%
of total fees in
2017
,
0.4%
of total fees in
2016
, and
2.1%
of total fees in
2015
(
8.8%
including the 2015 non-recurring performance fee). Performance fees are typically shared with our Affiliate key employees through various contractual compensation and profit-sharing arrangements, as illustrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
2015
|
($ in millions)
|
2017
|
|
2016
|
|
Including the non-recurring performance fee
|
|
Excluding the non-recurring performance fee
|
Gross performance fees
|
$
|
26.5
|
|
|
$
|
2.6
|
|
|
$
|
61.8
|
|
|
$
|
13.7
|
|
Net performance fees
(1)
|
$
|
16.7
|
|
|
$
|
1.8
|
|
|
$
|
26.7
|
|
|
$
|
7.6
|
|
Percentage of performance fees accruing to OMAM
(2)
|
63.0
|
%
|
|
69.2
|
%
|
|
43.2
|
%
|
|
55.5
|
%
|
Gross performance fees as a percentage of total fees
(3)
|
3.0
|
%
|
|
0.4
|
%
|
|
8.8
|
%
|
|
2.1
|
%
|
|
|
(1)
|
Net performance fees are shown after the effect of contractual variable compensation and distributions to key employees of the Affiliates and represent the amount of the performance fee directly attributable to our shareholders.
|
|
|
(2)
|
Reflects net performance fees as a percentage of gross performance fees.
|
|
|
(3)
|
Total fees, comprised of management fees and performance fees, excluding the effect of consolidated Funds were
$884.5 million
for the year ended
December 31, 2017
,
$662.5 million
for the year ended December 31,
2016
, and
$650.9 million
(or
$699.0 million
including the non-recurring performance fee) for the year ended December 31,
2015
.
|
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Performance fees
increased
$23.9 million
, or
919.2%
, from
$2.6 million
for the year ended
December 31, 2016
to
$26.5 million
for the year ended
December 31, 2017
. Performance fees are variable and are contractually triggered based on investment performance results over agreed upon time periods. The increase was primarily attributable to a performance fee earned on an alternative product in the second quarter and strong performance from global/non-U.S. equity for the fourth quarter.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Performance fees
decreased
$(59.2) million
, or
(95.8)%
from
$61.8 million
for the year ended
December 31, 2015
to
$2.6 million
for the year ended
December 31, 2016
. In the second quarter of 2015, we recorded a non-recurring gross performance fee of $48.1 million related to the sale and liquidation of a fund that resulted in a significant gain to the investor from the initial investment. The unique characteristics of this fee, including its size and the exceptional investment performance of the underlying product, is particular to this liquidated fund and it therefore is unrepresentative of our recurring economics. Excluding the non-recurring performance fee received in the second quarter of 2015, performance fees decreased
$(11.1) million
, or
(81.0)%
from
$13.7 million
for the year ended
December 31, 2015
to
$2.6 million
for the year ended
December 31, 2016
. This decrease is a result of under-performance versus investment benchmarks and management fee adjustments, including net downward performance fee adjustments based on investment performance versus benchmark in separate accounts/other products. Performance fees are variable and are contractually triggered based on investment performance results over agreed upon time periods.
The liquidation of an alternative product may result in the recognition of a performance fee. With respect to liquidations likely to occur in the near term, we do not expect to receive any net performance fees that would be material to our operating results. These projections are based on market conditions and investment performance as of
December 31, 2017
.
Other Revenue
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Other revenue
increase
d
$0.3 million
, or
33.3%
, from
$0.9 million
for the year ended
December 31, 2016
to
$1.2 million
for the year ended
December 31, 2017
. The
increase
was primarily due to consulting services offered by an Affiliate in 2017.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Other revenue
increased
$0.6 million
, or
200.0%
, from
$0.3 million
for the year ended
December 31, 2015
to
$0.9 million
for the year ended
December 31, 2016
. The increase was primarily due to settlement proceeds received by an Affiliate in 2016.
U.S. GAAP Expenses
Our U.S. GAAP expenses principally consist of:
|
|
i.
|
compensation paid to our investment professionals and other employees, including base salary, benefits, sales-based compensation, variable compensation, Affiliate distributions, re-valuation of key employee owned Affiliate equity and profit interests, and the amortization of acquisition-related consideration and pre-acquisition employee equity;
|
|
|
ii.
|
general and administrative expenses;
|
|
|
iii.
|
amortization of acquired intangible assets;
|
|
|
iv.
|
depreciation and amortization charges; and
|
|
|
v.
|
expenses of consolidated Funds, the net cost of which is attributable to the holders of non-controlling interests.
|
Compensation and Benefits Expense
Our most significant category of expense is compensation and benefits awarded to our and our Affiliates’ employees. The following table presents the components of U.S. GAAP compensation expense for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Fixed compensation and benefits
(1)
|
$
|
172.9
|
|
|
$
|
146.4
|
|
|
$
|
134.2
|
|
Sales-based compensation
(2)
|
18.6
|
|
|
17.2
|
|
|
19.7
|
|
Compensation related to restructuring expenses
(3)
|
—
|
|
|
—
|
|
|
0.6
|
|
Variable compensation
(4)
|
252.2
|
|
|
172.7
|
|
|
201.0
|
|
Affiliate key employee distributions
(5)
|
73.1
|
|
|
41.7
|
|
|
38.8
|
|
Non-cash Affiliate key employee equity revaluations
(6)(7)
|
95.4
|
|
|
(7.1
|
)
|
|
18.5
|
|
Acquisition-related consideration and pre-acquisition employee equity
(8)
|
70.6
|
|
|
26.5
|
|
|
—
|
|
Total U.S. GAAP compensation and benefits expense
|
$
|
682.8
|
|
|
$
|
397.4
|
|
|
$
|
412.8
|
|
|
|
(1)
|
Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. For the year ended
December 31, 2017
,
$172.4 million
of fixed compensation and benefits (of the
$172.9 million
above) is included within economic net income, which excludes the compensation and benefits associated with the CEO transition costs.
|
|
|
(2)
|
Sales-based compensation is paid to our and our Affiliates’ sales and distribution teams and represents compensation earned by our sales professionals, paid over a multi-year period, related to revenue earned on new sales. Its variability is based upon the structure of sales-based compensation due on inflows of assets under management and market-based movement in both current and prior periods.
|
|
|
(3)
|
Restructuring costs incurred in continuing operations represent an exit from a distinct product or line of business.
|
|
|
(4)
|
Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses. Variable compensation is usually awarded based on a contractual percentage of each Affiliate’s ENI profits before variable compensation and may be paid in the form of cash or non-cash Affiliate equity or profit interests. In Affiliates with an agreed split of performance fees between Affiliate employees and OMAM, the Affiliates’ share of performance fees is allocated entirely to variable compensation. Center variable compensation includes cash and OMAM equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between
25%
and
35%
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Cash variable compensation
|
$
|
226.5
|
|
|
$
|
147.5
|
|
|
$
|
177.2
|
|
Non-cash equity-based award amortization
|
25.7
|
|
|
25.2
|
|
|
23.8
|
|
Total variable compensation
(a)(b)
|
$
|
252.2
|
|
|
$
|
172.7
|
|
|
$
|
201.0
|
|
|
|
(a)
|
For the year ended
December 31, 2017
,
$243.4 million
of variable compensation expense (of the
$252.2 million
above) is included within economic net income, which excludes the variable compensation associated with the CEO transition costs.
|
|
|
(b)
|
For the year ended December 31, 2015, $174.0 million of variable compensation expense (of the
$201.0 million
above) is included within economic net income variable compensation, which separates the variable compensation attributable to the non-recurring performance fee.
|
|
|
(5)
|
Affiliate key employee distributions represent the share of Affiliate profits after variable compensation that is attributable to Affiliate key employee equity and profit interests holders, according to their ownership interests. The Affiliate key employee distribution ratio at each Affiliate is calculated as Affiliate key employee distributions divided by ENI operating earnings at that Affiliate. At certain Affiliates with tiered equity structures, OMUS and other classes of employee equity holders are entitled to an initial proportionate preference over profits after variable compensation, structured such that before a preference threshold is reached, there would be no required key employee distributions to the tiered equity holders, whereas for profits above the threshold the key employee distribution amount to the tiered equity holders would be calculated based on the tiered key employee ownership percentages. Based on current economic arrangements, employee distributions range from approximately
20%
to
40%
of marginal ENI operating earnings at each of our consolidated Affiliates.
|
|
|
(6)
|
Non-cash Affiliate key employee equity revaluations represent changes in the value of Affiliate equity and profit interests held by Affiliate key employees. These ownership interests may in certain circumstances be repurchased by OMUS at a value based on a pre-determined fixed multiple of trailing earnings and as such this value is carried on our balance sheet as a liability. However, any equity or profit interests repurchased by OMUS can be used to fund a portion of future variable compensation awards, resulting in savings in cash variable compensation that offset the negative cash effect of repurchasing the equity. Our Affiliate equity and profit interest plans have been designed to ensure OMUS is not required to repurchase more equity than we can reasonably recycle through variable compensation awards in any given twelve month period. OMUS may also choose to retain repurchased Affiliate equity or profit interests, entitling us to an additional share of future Affiliate earnings that represents an unrecognized economic asset to us.
|
|
|
(7)
|
Included in non-cash Affiliate key employee equity revaluations are revaluations as a result of the Landmark transaction related to contingent consideration amounting to
$25.9 million
for the year ended
December 31, 2017
and
$0.0 million
for the year ended
December 31, 2016
, along with the revaluations of Landmark employee equity owned pre-acquisition amounting to
$24.3 million
for the year ended
December 31, 2017
and
$(0.5) million
for the year ended
December 31, 2016
.
|
|
|
(8)
|
Acquisition-related consideration and pre-acquisition employee equity represents the amortization of acquisition-related contingent consideration created as a result of the Landmark transaction amounting to
$37.1 million
for the year ended
December 31, 2017
and
$13.9 million
for the year ended
December 31, 2016
, along with the amortization of employee equity owned pre-acquisition amounting to
$33.5 million
for the year ended
December 31, 2017
and
$12.6 million
for the year ended
December 31, 2016
. These items have been included in U.S. GAAP compensation expense as a result of ongoing service requirements for employee recipients.
|
Fluctuations in compensation and benefits expense for the periods presented are discussed below.
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Compensation and benefits expense
increase
d
$285.4 million
, or
71.8%
, from
$397.4 million
for the year ended
December 31, 2016
to
$682.8 million
for the year ended
December 31, 2017
. Fixed compensation and benefits increased
$26.5 million
, or
18.1%
, from
$146.4 million
for the year ended
December 31, 2016
to
$172.9 million
for the year ended
December 31, 2017
. This increase reflects the effect of the Landmark acquisition as well as new hires, CEO succession, and annual cost of living increases. Variable compensation increased
$79.5 million
, or
46.0%
, from
$172.7 million
for the year ended
December 31, 2016
to
$252.2 million
for the year ended
December 31, 2017
due to the higher pre-variable compensation earnings, in part reflecting the effect of the Landmark transaction as well as severance paid to our former CEO and former Head of Global Distribution. Sales-based compensation increased
$1.4 million
, or
8.1%
, from
$17.2 million
for the year ended
December 31, 2016
to
$18.6 million
for the year ended
December 31, 2017
, as a result of the structure of sales-based compensation due to the timing of asset inflows triggering sales-based compensation in both current and prior periods. Affiliate key employee distributions increased
$31.4 million
, or
75.3%
, from
$41.7 million
for the year ended
December 31, 2016
to
$73.1 million
for the year ended
December 31, 2017
as a result of higher underlying operating earnings, the levered structure of distributions at certain Affiliates, and the effect of the Landmark transaction, as Landmark employees own 40% of their business. Revaluations of Affiliate equity increased
$102.5 million
, reflecting revaluations of key employee ownership interests at certain Affiliates, and Landmark in particular, as the value of Affiliate equity decreased
$(7.1) million
for the year ended
December 31, 2016
and increased
$95.4 million
for the year ended
December 31, 2017
. Acquisition-related consideration and pre-acquisition equity was
$70.6 million
for the year ended
December 31, 2017
an increase of
$44.1 million
, or
166.4%
compared to
$26.5 million
for the year ended
December 31, 2016
, and represents amortization of the value of contingent consideration and employee-owned equity, related to Landmark, recorded as compensation under U.S. GAAP due to certain service requirements associated with the arrangements. The increase in compensation resulting from the amortization of acquisition-related consideration and pre-acquisition employee equity, as well as the non-cash Affiliate key employee equity revaluations and increased variable compensation, all of which were impacted by the Landmark transaction, were the primary reasons for the reduction of our U.S. GAAP operating margin.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Compensation and benefits expense
decreased
$(15.4) million
, or
(3.7)%
, from
$412.8 million
for the year ended
December 31, 2015
to
$397.4 million
for the year ended
December 31, 2016
. Fixed compensation and benefits increased
$12.2 million
, or
9.1%
, from
$134.2 million
for the year ended
December 31, 2015
to
$146.4 million
for the year ended
December 31, 2016
. This increase reflects the effect of the Landmark acquisition as well as new hires and annual cost of living increases. Variable compensation decreased
$(28.3) million
, or
(14.1)%
, from
$201.0 million
for the year ended
December 31, 2015
to
$172.7 million
for the year ended
December 31, 2016
, primarily due to the variable compensation associated with the non-recurring performance fee in 2015. Variable compensation excluding the non-recurring performance fee decreased
$(1.3) million
, or
(0.7)%
, from
$174.0 million
for the year ended December 31, 2015, to
$172.7 million
for the year ended December 31, 2016, which was attributable to lower pre-variable compensation earnings exclusive of the 2015 non-recurring performance fee, partially offset by the positive earnings impact of Landmark. Sales-based compensation decreased
$(2.5) million
, or
(12.7)%
, from
$19.7 million
for the year ended
December 31, 2015
to
$17.2 million
for the year ended
December 31, 2016
, as a result of the timing and structure of sales-based compensation due. Affiliate key employee distributions increased
$2.9 million
, or
7.5%
, from
$38.8 million
for the year ended
December 31, 2015
to
$41.7 million
for the year ended
December 31, 2016
primarily as a result of the Landmark transaction (as Landmark employees own 40% of their business), offset by lower earnings before Affiliate key employee distributions. Revaluations of Affiliate equity decreased
$(25.6) million
, reflecting revaluations of key employee ownership interests at certain Affiliates, as the value of Affiliate equity increased
$18.5 million
for the year ended
December 31, 2015
and decreased
$(7.1) million
for the year ended
December 31, 2016
. Acquisition-related consideration and pre-acquisition equity was
$26.5 million
for the year ended
December 31, 2016
and represents amortization of the value of contingent consideration and employee-owned equity, related to Landmark, recorded as compensation under U.S. GAAP due to certain service requirements associated with the arrangements.
General and Administrative Expense
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
General and administrative expense
increased
$14.6 million
, or
14.9%
, from
$98.3 million
for the year ended
December 31, 2016
to
$112.9 million
for the year ended
December 31, 2017
. The increases in general and administrative expenses primarily reflect new initiatives and the impact of Landmark, offset by efficiencies of scale.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
General and administrative expense
increased
$10.1 million
, or
11.5%
, from
$88.2 million
for the year ended
December 31, 2015
to
$98.3 million
for the year ended
December 31, 2016
, driven by systems costs, new initiatives and the impact of Landmark.
Amortization of Acquired Intangibles Expense
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Amortization of acquired intangibles expense increased
$4.0 million
, or
153.8%
, from
$2.6 million
for the year ended
December 31, 2016
to
$6.6 million
for the year ended
December 31, 2017
. The increase reflects the amortization of intangible assets acquired in the Landmark transaction.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Amortization of acquired intangibles expense increased from
$0.2 million
for the year ended
December 31, 2015
to
$2.6 million
for the year ended
December 31, 2016
. Upon acquiring Landmark, the Company recorded
$85.0 million
of definite-lived intangible assets, the amortization of which is reflected in the 2016 activity.
Depreciation and Amortization Expense
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Depreciation and amortization expense
increase
d
$2.3 million
, or
24.5%
, from
$9.4 million
for the year ended
December 31, 2016
to
$11.7 million
for the year ended
December 31, 2017
. The
increase
was primarily related to additional fixed asset and technology investments in the business.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Depreciation and amortization expense
increased
$2.5 million
, or
36.2%
, from
$6.9 million
for the year ended
December 31, 2015
to
$9.4 million
for the year ended
December 31, 2016
. The increase was primarily related to additional fixed asset and technology investments in the business in 2016, as well as an office move at an Affiliate.
U.S. GAAP Other Non-Operating Items of Income and Expense
Other non-operating items of income and expense consist of:
In the year ended December 31, 2017, we recorded
$51.8 million
of income associated with the revaluation of our DTA deed with OM plc, discussed further in “—U.S. GAAP Income Tax Expense” below.
Investment Income
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Investment income
increased
$10.2 million
, or
59.3%
, from
$17.2 million
for the year ended
December 31, 2016
to
$27.4 million
for the year ended
December 31, 2017
, primarily due to higher returns on seed capital investments following the purchase of approximately $40 million in seed capital from OM plc in September 2016 and approximately $63 million in July 2017, somewhat offset by lower earnings from our equity-accounted Affiliates which decreased
$(0.6) million
, or
(4.0)%
, from
$15.1 million
for the year ended
December 31, 2016
to
$14.5 million
for the year ended
December 31, 2017
. In August 2017, the Company agreed in principle to sell its stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, the Company entered into a redemption agreement on November 17, 2017. Heitman continued to contribute to the Company’s financial results of operations through November 30, 2017 and the transaction closed on January 5, 2018. Heitman contributed
$12.0 million
of our investment income in 2017 and
$12.6 million
in 2016.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Investment income
increased
$4.2 million
, or
32.3%
, from
$13.0 million
for the year ended
December 31, 2015
to
$17.2 million
for the year ended
December 31, 2016
, primarily due to higher earnings on equity-accounted Affiliates which increased
$2.4 million
, or
18.9%
, from
$12.7 million
for the year ended
December 31, 2015
to
$15.1 million
for the year ended
December 31, 2016
, combined with higher returns on co-investments and seed capital investments following the purchase of approximately $40 million in seed capital from OM plc in September 2016.
Interest Income
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Interest income
increased
$0.4 million
, or
100.0%
, from
$0.4 million
for the year ended
December 31, 2016
to
$0.8 million
for the year ended
December 31, 2017
, principally due to higher average cash balances in 2017.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Interest income
increased
$0.2 million
, or
100.0%
from
$0.2 million
for the year ended
December 31, 2015
to
$0.4 million
for the year ended
December 31, 2016
, principally due to higher average cash balances for a portion of the year.
Interest Expense
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Interest expense
increased
$13.2 million
, or
116.8%
, from
$11.3 million
for the year ended
December 31, 2016
to
$24.5 million
for the year ended
December 31, 2017
, reflecting a full year of interest expense in 2017 and a partial year of interest expense in 2016 related to the issuance of $400 million in long-term bonds in July 2016.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Interest expense
increased
$8.2 million
, or
264.5%
, from
$3.1 million
for the year ended
December 31, 2015
to
$11.3 million
for the year ended
December 31, 2016
, reflecting the issuance of $400 million in long-term bonds in July 2016.
U.S. GAAP Income Tax Expense
Our effective tax rate has been impacted by changes in reserves for uncertain tax positions, the mix of income earned in the United States versus lower-taxed foreign jurisdictions and benefits from intercompany financing arrangements. In addition, tax law changes in both the U.S. and U.K. have significantly influenced the effective tax rate in the fourth quarter of 2017. Our effective tax rate could be impacted in the future by these items as well as further changes in tax laws and regulations in jurisdictions in which we operate.
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Income tax expense
increased
$92.0 million
, or
225.5%
, from
$40.8 million
for the year ended
December 31, 2016
to
$132.8 million
for the year ended
December 31, 2017
. The increase relates primarily to the tax impacts associated with the 2017 enactment of the Tax Act. As a result of the enactment, we have recognized a tax charge of $122.7 million, predominately relating to the revaluation of our deferred tax assets to the reduced federal corporate tax rate of 21% which resulted in a one-time tax charge of $121.1 million. Additionally, the U.K. Finance (No.2) Bill, which was enacted on November 20, 2017, resulted in the loss of interest deductions in the U.K. as of the effective date of July 13, 2017 and had the effect of increasing our effective tax rate in the fourth quarter of 2017. The reduction of our deferred tax asset as a result of the Tax Act also caused a
$51.8 million
adjustment to our DTA Deed with OM plc, reflected in income from continuing operations before tax. This adjustment to the DTA Deed is not subject to U.K. tax, consequently having the effect of reducing our effective tax rate. The increase in tax expense from the Tax Act was reduced by the tax effect of decreases in income from continuing operations before tax, a favorable effective tax rate on the earnings from our seed capital investments and adjustments to uncertain tax positions. In 2016 the adjustment for uncertain tax positions increased income tax expense and in 2017 the adjustments to uncertain tax positions, primarily reflecting the expiration of the statute of limitations, decreased income tax expense. The effective tax rate increased to 93.5% for the year ended December 31, 2017 from 25.3% for the year ended December 31, 2016 primarily due to the tax charge associated with the Tax Act.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Income tax expense
decreased
$(5.8) million
, or
(12.4)%
, from
$46.6 million
for the year ended
December 31, 2015
to
$40.8 million
for the year ended
December 31, 2016
. The decrease relates primarily to decreases in income from continuing operations before tax. This decrease was offset by benefits recognized in 2015 which did not recur in 2016 relating to valuation allowance adjustments and changes in state tax laws. In 2015 we released our valuation allowance for foreign tax credits resulting from amending income tax returns for 2009 through 2014.
U.S. GAAP Consolidated Funds
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
Consolidated Funds’ revenue
increased
$1.6 million
from
$0.1 million
for the year ended
December 31, 2016
to
$1.7 million
for the year ended
December 31, 2017
. Consolidated Funds expense
increased
$2.2 million
, from
$0.2 million
for the year ended
December 31, 2016
to
$2.4 million
for the year ended
December 31, 2017
. Consolidated Funds’ investment gain (loss)
increased
$16.6 million
from
$(1.1) million
for the year ended
December 31, 2016
to
$15.5 million
for the year ended
December 31, 2017
. The increases in consolidated Funds revenue, expense and investment gain were all due to a greater number of Funds consolidated in 2017 which in turn was reflective of higher levels of seed and co-investment capital deployed on our balance sheet in 2017 in large part due to the purchase of seed capital from OM plc in September 2016 and July 2017.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
There were no gains or losses recorded in 2015, as there were no Funds which required consolidation during that year. Funds consolidation for the year ended December 31, 2016 reflected consolidated Funds revenue of
$0.1 million
, consolidated Funds expense of
$0.2 million
and consolidated Funds investment gain (loss) of
$(1.1) million
. There was no income or loss attributable to non-controlling interests of consolidated Funds in the year ended December 31, 2015.
Discontinued Operations
Gains on disposal in 2015 and 2016 represents additional proceeds received, net of tax, for previously disposed-of lines of business.
Year ended
December 31, 2017
compared to year ended
December 31, 2016
:
All of our discontinued operations were wound down, sold, or transferred to OM plc prior to 2016 and there were no results from discontinued operations in either the year ended
December 31, 2016
or
December 31, 2017
. Gain (loss) on disposal, net of tax decreased
$(6.3) million
, from a gain on disposal of
$6.2 million
for the year ended
December 31, 2016
to a loss on disposal of
$(0.1) million
for the year ended
December 31, 2017
.
Year ended
December 31, 2016
compared to year ended
December 31, 2015
:
Gain (loss) on disposal, net of tax increased
$5.4 million
, from a gain on disposal of
$0.8 million
for the year ended December 31, 2015 to a gain on disposal of
$6.2 million
for the year ended
December 31, 2016
. In 2016, the management team of a previously disposed Affiliate, together with subsidiaries of ours holding interests in that Affiliate, entered into a purchase and sale agreement with a third party, which resulted in a
$7.4 million
payment to us, or
$5.1 million
, net of tax. The remaining gain on disposal in 2016 represents residual amounts received from previously discontinued operations.
Key U.S. GAAP Operating Metrics
The following table shows our key U.S. GAAP operating metrics for the years ended
December 31, 2017
,
2016
and
2015
. In the years ended
December 31, 2017
and
2016
, certain Funds have been consolidated due to our seed capital or co-investments in the Funds, including seed capital investments purchased from OM plc. The second, third and fourth metrics below have each been adjusted to eliminate the effect of consolidated Funds to more accurately reflect the economics of our Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Numerator: Operating income
|
$
|
71.0
|
|
|
$
|
155.6
|
|
|
$
|
191.2
|
|
Denominator: Total revenue
|
$
|
887.4
|
|
|
$
|
663.5
|
|
|
$
|
699.3
|
|
U.S. GAAP operating margin
(1)
|
8.0
|
%
|
|
23.5
|
%
|
|
27.3
|
%
|
|
|
|
|
|
|
Numerator: Total operating expenses
(2)
|
$
|
814.0
|
|
|
$
|
507.7
|
|
|
$
|
508.1
|
|
Denominator: Management fee revenue
|
$
|
858.0
|
|
|
$
|
659.9
|
|
|
$
|
637.2
|
|
U.S. GAAP operating expense / management fee revenue
(3)
|
94.9
|
%
|
|
76.9
|
%
|
|
79.7
|
%
|
|
|
|
|
|
|
Numerator: Variable compensation
|
$
|
252.2
|
|
|
$
|
172.7
|
|
|
$
|
201.0
|
|
Denominator: Operating income before variable compensation and Affiliate key employee distributions
(2)(4)(5)
|
$
|
397.0
|
|
|
$
|
370.1
|
|
|
$
|
431.0
|
|
U.S. GAAP variable compensation ratio
(3)
|
63.5
|
%
|
|
46.7
|
%
|
|
46.6
|
%
|
|
|
|
|
|
|
Numerator: Affiliate key employee distributions
|
$
|
73.1
|
|
|
$
|
41.7
|
|
|
$
|
38.8
|
|
Denominator: Operating income before Affiliate key employee distributions
(2)(3)(5)(6)
|
$
|
144.8
|
|
|
$
|
197.4
|
|
|
$
|
230.0
|
|
U.S. GAAP Affiliate key employee distributions ratio
(3)
|
50.5
|
%
|
|
21.1
|
%
|
|
16.9
|
%
|
|
|
(1)
|
Excluding the effect of Funds consolidation in the applicable periods, the U.S. GAAP operating margin would be
8.1%
for the year ended
December 31, 2017
,
23.5%
for the year ended
December 31, 2016
, and
27.3%
for the year ended
December 31, 2015
.
|
|
|
(2)
|
Excludes consolidated Funds expense of
$2.4 million
for the year ended
December 31, 2017
and
$0.2 million
for the year ended
December 31, 2016
. We did not consolidate results from operations of any Funds in the year ended December 31, 2015.
|
|
|
(3)
|
Excludes the effect of Funds consolidation for the years ended
December 31, 2017
and
2016
. We did not consolidate results from operations of any Funds in the year ended December 31, 2015.
|
|
|
(4)
|
Excludes consolidated Funds revenue of
$1.7 million
for the year ended
December 31, 2017
and
$0.1 million
for the year ended
2016
. We did not consolidate results from operations of any Funds in the year ended December 31, 2015.
|
|
|
(5)
|
The following table identifies the components of operating income before variable compensation and Affiliate key employee distributions, as well as operating income before Affiliate key employee distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Operating income
|
$
|
71.0
|
|
|
$
|
155.6
|
|
|
$
|
191.2
|
|
Affiliate key employee distributions
|
73.1
|
|
|
41.7
|
|
|
38.8
|
|
Operating loss of consolidated Funds
|
0.7
|
|
|
0.1
|
|
|
—
|
|
Operating income before Affiliate key employee distributions
|
$
|
144.8
|
|
|
$
|
197.4
|
|
|
$
|
230.0
|
|
Variable compensation
|
252.2
|
|
|
172.7
|
|
|
201.0
|
|
Operating income before variable compensation and Affiliate key employee distributions
|
$
|
397.0
|
|
|
$
|
370.1
|
|
|
$
|
431.0
|
|
Effects of Inflation
For the years ended
December 31, 2017
,
2016
, and
2015
, inflation did not have a material effect on our consolidated results of operations.
Non-GAAP Supplemental Performance Measure—Economic Net Income
As supplemental information, we provide a non-GAAP performance measure that we refer to as economic net income, or ENI, which represents our management’s view of the underlying economic earnings generated by us. We define economic net income as ENI revenue less (i) ENI operating expenses, (ii) variable compensation, (iii) key employee distributions, (iv) net interest and (v) taxes, each as further discussed in this section. ENI adjustments to U.S. GAAP include both reclassifications of U.S. GAAP revenue and expense items, as well as adjustments to U.S. GAAP results, primarily to exclude non-cash, non-economic expenses, or to reflect cash benefits not recognized under U.S. GAAP.
ENI is an important measure to investors because it is used by the Company to make resource allocation decisions, determine appropriate levels of investment or dividend payout, manage balance sheet leverage, determine Affiliate variable compensation and equity distributions, and incentivize management. It is also an important measure because it assists management in evaluating our operating performance and is presented in a way that most closely reflects the key elements of our profit share operating model with our Affiliates. For a further discussion of how we use ENI and why ENI is useful to investors, see “—Overview—How We Measure Performance.” We have also added additional explanatory language to item (ii) in light of the treatment of a portion of the purchase price and non-controlling interests from Landmark Partners as compensation for U.S. GAAP purposes.
To calculate economic net income, we re-categorize certain line items on our Statement of Operations to reflect the following:
|
|
•
|
We exclude the effect of Funds consolidation by removing the portion of Fund revenues, expenses and investment return which were not attributable to our shareholders.
|
|
|
•
|
We include within management fee revenue any fees paid to Affiliates by consolidated Funds, which are viewed as investment income under U.S. GAAP.
|
|
|
•
|
We include our share of earnings from equity-accounted Affiliates within other income in ENI revenue, rather than investment income.
|
|
|
•
|
We treat sales-based compensation as a general and administrative expense, rather than part of fixed compensation and benefits.
|
|
|
•
|
We identify separately from operating expenses variable compensation and Affiliate key employee distributions, which represent Affiliate earnings shared with Affiliate key employees.
|
We also make the following adjustments to U.S. GAAP results to more closely reflect our economic results:
|
|
i.
|
We exclude non-cash expenses representing changes in the value of Affiliate equity and profit interests held by Affiliate key employees. These ownership interests may in certain circumstances be repurchased by OMUS at a value based on a pre-determined fixed multiple of trailing earnings and as such this value is carried on our balance sheet as a liability. Non-cash movements in the value of this liability are treated as compensation expense under U.S. GAAP. However, any equity or profit interests repurchased by OMUS can be used to fund a portion of future variable compensation awards, resulting in savings in cash variable compensation that offset the negative cash effect of repurchasing the equity. Our Affiliate equity and profit interest plans have been designed to ensure OMUS is never required to repurchase more equity than we can reasonably recycle through variable compensation awards in any given twelve month period. OMUS may also choose to retain repurchased Affiliate equity or profit interests, entitling us to an additional share of future Affiliate earnings that represents an unrecognized economic asset to us.
|
|
|
ii.
|
We exclude non-cash amortization or impairment expenses related to acquired goodwill and other intangibles as these are non-cash charges that do not result in an outflow of tangible economic benefits from the business. We also exclude the amortization of acquisition-related contingent consideration, as well as the value of employee equity owned pre-acquisition, as occurred as a result of the Landmark transaction, where such items have been included in compensation expense as a result of ongoing service requirements for certain employees. Please note that the revaluations related to these acquisition-related items are included in (i) above.
|
|
|
iii.
|
We exclude capital transaction costs, including the costs of raising debt or equity, gains or losses realized as a result of redeeming debt or equity and direct incremental costs associated with acquisitions of businesses or assets.
|
|
|
iv.
|
We exclude seed capital and co-investment gains, losses and related financing costs. The net returns on these investments are considered and presented separately from ENI because ENI is primarily a measure of our earnings from managing client assets, which therefore differs from earnings generated by our investments in Affiliate products, which can be variable from period to period.
|
|
|
v.
|
We include cash tax benefits associated with deductions allowed for acquired intangibles and goodwill that may not be recognized or have timing differences compared to U.S. GAAP.
|
|
|
vi.
|
We exclude the results of discontinued operations attributable to controlling interests since they are not part of our ongoing business, and restructuring costs incurred in continuing operations which represent an exit from a distinct product or line of business.
|
|
|
vii.
|
We exclude deferred tax resulting from changes in tax law and expiration of statutes, adjustments for uncertain tax positions, deferred tax attributable to intangible assets and other unusual items not related to current operating results to reflect ENI tax normalization.
|
We also adjust our income tax expense to reflect any tax impact of our ENI adjustments.
Reconciliation of U.S. GAAP Net Income to Economic Net Income for the Years Ended
December 31, 2017
,
2016
and
2015
The following table reconciles net income attributable to controlling interests to economic net income for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP net income attributable to controlling interests
|
$
|
4.2
|
|
|
$
|
126.4
|
|
|
$
|
155.5
|
|
Adjustments to reflect the economic earnings of the Company:
|
|
|
|
|
|
|
|
|
i.
|
Non-cash key employee-owned equity and profit interest revaluations
(1)
|
95.4
|
|
|
(7.1
|
)
|
|
18.5
|
|
ii.
|
Amortization of acquired intangible assets, acquisition-related consideration and pre-acquisition employee equity
(2)
|
77.2
|
|
|
29.1
|
|
|
0.2
|
|
iii.
|
Capital transaction costs
|
—
|
|
|
6.4
|
|
|
2.3
|
|
iv.
|
Seed/Co-investment (gains) losses and financings
(3)
|
(17.3
|
)
|
|
1.4
|
|
|
(0.3
|
)
|
v.
|
Tax benefit of goodwill and acquired intangibles deductions
|
8.7
|
|
|
5.0
|
|
|
2.5
|
|
vi.
|
Discontinued operations and restructuring
(4)
|
11.0
|
|
|
(6.2
|
)
|
|
(0.2
|
)
|
vii.
|
ENI tax normalization
(5)
|
68.6
|
|
|
2.1
|
|
|
(8.8
|
)
|
Tax effect of above adjustments
(6)
|
(66.9
|
)
|
|
(12.0
|
)
|
|
(8.6
|
)
|
Economic net income (including the non-recurring performance fee)
|
180.9
|
|
|
145.1
|
|
|
161.1
|
|
Non-recurring performance fee, net
(7)
|
—
|
|
|
—
|
|
|
(11.4
|
)
|
Economic net income, excluding the non-recurring performance fee
|
$
|
180.9
|
|
|
$
|
145.1
|
|
|
$
|
149.7
|
|
|
|
(1)
|
Included in non-cash key employee-owned equity and profit interest revaluations are revaluations as a result of the Landmark transaction related to contingent consideration amounting to
$25.9 million
for the year ended
December 31, 2017
and
$0.0 million
for the year ended
December 31, 2016
, along with revaluations of Landmark employee equity owned pre-acquisition amounting to
$24.3 million
for the year ended
December 31, 2017
and
$(0.5) million
for the year ended
December 31, 2016
.
|
|
|
(2)
|
Acquisition-related consideration and pre-acquisition employee equity includes the amortization of acquisition-related contingent consideration created as a result of the Landmark transaction amounting to
$37.1 million
for the year ended
December 31, 2017
and
$13.9 million
for the year ended
December 31, 2016
. It also includes the value of employee equity owned pre-acquisition amounting to
$33.5 million
for the year ended
December 31, 2017
and
$12.6 million
for the year ended
December 31, 2016
.
|
The table below summarizes the Landmark-related components included in items (i) and (ii) of the above reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Landmark contingent consideration
|
$
|
63.0
|
|
|
$
|
13.9
|
|
|
$
|
—
|
|
Landmark pre-acquisition employee equity
|
57.8
|
|
|
12.1
|
|
|
—
|
|
Landmark-related total
|
120.8
|
|
|
26.0
|
|
|
—
|
|
Other Affiliate equity and amortization of intangible assets
|
51.8
|
|
|
(4.0
|
)
|
|
18.7
|
|
Total
|
$
|
172.6
|
|
|
$
|
22.0
|
|
|
$
|
18.7
|
|
|
|
(3)
|
The net return on seed/co-investment (gains) losses and financings for the years ended
December 31, 2017
,
2016
, and
2015
are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Seed/Co-investment (gains) losses
|
$
|
(22.2
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(0.3
|
)
|
Financing costs:
|
|
|
|
|
|
Seed/Co-investment average balance
|
88.9
|
|
|
64.4
|
|
|
12.3
|
|
Blended interest rate*
|
5.5
|
%
|
|
3.9
|
%
|
|
1.5
|
%
|
Financing costs
|
4.9
|
|
|
2.5
|
|
|
—
|
|
Net seed/co-investment (gains) losses and financing
|
$
|
(17.3
|
)
|
|
$
|
1.4
|
|
|
$
|
(0.3
|
)
|
* Prior to the July 2016 bond issuances, the blended interest rate was based on our interest rate on our revolving credit facility. Subsequent to the 2016 bond issuance and the establishment of our non-recourse seed capital facility in July 2017, the blended rate is based first on the interest rate paid on our non-recourse seed capital facility up to the average amount drawn, and thereafter on the weighted average rate of the long-term debt.
|
|
(4)
|
Included in restructuring for the year ended
December 31, 2017
is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs.
|
|
|
(5)
|
Includes
$51.8 million
in the year ended December 31, 2017 related to the revaluation of the Deferred Tax Asset Deed with OM plc offset by the $122.7 million impact of the Tax Act.
|
|
|
(6)
|
Reflects the sum of line items i, ii, iii, iv and the restructuring portion of line item vi taxed at the 40.2% U.S. statutory rate (including state tax). The restructuring portion of line item vi amounted to
$10.8 million
for the year ended
December 31, 2017
,
$0.0 million
for the year ended
December 31, 2016
and
$0.5 million
for the year ended
December 31, 2015
.
|
|
|
(7)
|
In the second quarter of 2015, we recorded a non-recurring gross performance fee of $48.1 million. The $11.4 million represents the net amount accruing to OMAM after Affiliate contractual variable compensation, other directly related expenses, and the tax effect of the non-recurring performance fee calculated using a 40.2% tax rate.
|
Limitations of Economic Net Income
Economic net income is the key measure our management uses to evaluate the financial performance of, and make operational decisions for, our business. Economic net income is not audited, and is not a substitute for net income or other performance measures that are derived in accordance with U.S. GAAP. Furthermore, our calculation of economic net income may differ from similarly titled measures provided by other companies.
Because the calculation of economic net income excludes certain ongoing expenses, including amortization expense and certain compensation costs, it has certain material limitations and should not be viewed in isolation or as a substitute for U.S. GAAP measures of earnings.
ENI Revenues
The following table reconciles U.S. GAAP Revenue to ENI Revenue for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP Revenue
|
$
|
887.4
|
|
|
$
|
663.5
|
|
|
$
|
699.3
|
|
Include investment return from equity-accounted Affiliates
|
14.5
|
|
|
15.1
|
|
|
12.7
|
|
Exclude the non-recurring performance fee
|
—
|
|
|
—
|
|
|
(48.1
|
)
|
Exclude revenue from consolidated Funds attributable to non-controlling interests
|
(1.7
|
)
|
|
(0.1
|
)
|
|
—
|
|
Other reconciling items
|
0.5
|
|
|
—
|
|
|
—
|
|
ENI Revenue
|
$
|
900.7
|
|
|
$
|
678.5
|
|
|
$
|
663.9
|
|
The following table identifies the components of ENI revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Management fees
(1)
|
$
|
858.0
|
|
|
$
|
659.9
|
|
|
$
|
637.2
|
|
Performance fees (excluding the non-recurring performance fee)
(2)
|
26.5
|
|
|
2.6
|
|
|
13.7
|
|
Other income, including equity-accounted Affiliates
(3)
|
16.2
|
|
|
16.0
|
|
|
13.0
|
|
ENI Revenue
|
$
|
900.7
|
|
|
$
|
678.5
|
|
|
$
|
663.9
|
|
|
|
(1)
|
ENI management fees correspond to U.S. GAAP management fees.
|
|
|
(2)
|
In the second quarter of 2015, we recorded a non-recurring performance fee of $48.1 million ($11.4 million, net of associated expenses and taxes). Unless explicitly noted, the ENI revenue, ENI expenses, and ENI key metrics for the year ended December 31, 2015 exclude the impact of the non-recurring performance fee. While all performance fees fall within OMAM’s definition of economic net income, we believe that the unique characteristics of this fee, including its size and the extraordinary investment performance of the underlying product, make it unrepresentative of our recurring economics and we have therefore removed it from our presentation of ENI revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP performance fees
|
$
|
26.5
|
|
|
$
|
2.6
|
|
|
$
|
61.8
|
|
Less: non-recurring performance fee
|
—
|
|
|
—
|
|
|
(48.1
|
)
|
ENI performance fees
|
$
|
26.5
|
|
|
$
|
2.6
|
|
|
$
|
13.7
|
|
|
|
(3)
|
ENI other income is comprised primarily of other revenue under U.S. GAAP, plus our earnings from equity-accounted Affiliates of
$14.5 million
for the year ended
December 31, 2017
,
$15.1 million
for the year ended
December 31, 2016
and
$12.7 million
for the year ended
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP other revenue
|
$
|
1.2
|
|
|
$
|
0.9
|
|
|
$
|
0.3
|
|
Investment return from equity-accounted Affiliates
(a)
|
14.5
|
|
|
15.1
|
|
|
12.7
|
|
Other reconciling items
|
0.5
|
|
|
—
|
|
|
—
|
|
ENI other income
|
$
|
16.2
|
|
|
$
|
16.0
|
|
|
$
|
13.0
|
|
|
|
(a)
|
Includes income from Heitman of
$12.0 million
for the year ended
December 31, 2017
,
$12.6 million
for the year ended
December 31, 2016
and
$10.2 million
for the year ended
December 31, 2015
.
|
ENI Operating Expenses
The largest difference between U.S. GAAP operating expense and ENI operating expense relates to compensation. As shown in the following reconciliation, the Company excludes the impact of key employee equity revaluations. We also exclude the amortization of contingent purchase price and pre-acquisition equity owned by employees, both with a service requirement, associated with the Landmark acquisition. Variable compensation and Affiliate key employee distributions are also segregated out of U.S. GAAP operating expense in order to align with the manner in which these items are contractually calculated at the Affiliate level.
The following table reconciles U.S. GAAP operating expense to ENI operating expense for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP operating expense
|
$
|
816.4
|
|
|
$
|
507.9
|
|
|
$
|
508.1
|
|
Less: items excluded from economic net income
|
|
|
|
|
|
Acquisition-related consideration and pre-acquisition employee equity
|
(70.6
|
)
|
|
(26.5
|
)
|
|
—
|
|
Non-cash Affiliate key employee equity and profit interest revaluations
|
(95.4
|
)
|
|
7.1
|
|
|
(18.5
|
)
|
Amortization of acquired intangible assets
|
(6.6
|
)
|
|
(2.6
|
)
|
|
(0.2
|
)
|
Capital transaction costs
|
—
|
|
|
(6.4
|
)
|
|
(2.3
|
)
|
Restructuring costs
(1)
|
(10.8
|
)
|
|
—
|
|
|
(0.5
|
)
|
Other items excluded from ENI
(2)
|
—
|
|
|
0.1
|
|
|
(1.6
|
)
|
Funds’ operating expenses
|
(2.4
|
)
|
|
(0.2
|
)
|
|
—
|
|
Less: items segregated out of U.S. GAAP operating expense
|
|
|
|
|
|
Variable compensation
(3)(4)
|
(243.4
|
)
|
|
(172.7
|
)
|
|
(201.0
|
)
|
Affiliate key employee distributions
|
(73.1
|
)
|
|
(41.7
|
)
|
|
(38.8
|
)
|
ENI operating expense
|
$
|
314.1
|
|
|
$
|
265.0
|
|
|
$
|
245.2
|
|
|
|
(1)
|
Included in restructuring for the year ended
December 31, 2017
is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs.
|
|
|
(2)
|
Other items primarily include capital transaction costs and expenses (excluding variable compensation) associated with the non-recurring performance fee in 2015.
|
|
|
(3)
|
For the year ended
December 31, 2017
,
$252.2 million
of variable compensation expense is included within U.S. GAAP net income, which includes variable compensation associated with the CEO transition costs presented in “Restructuring costs” in this table.
|
|
|
(4)
|
For the year ended December 31, 2015,
$174.0 million
of variable compensation expense (of the
$201.0 million
) is included within economic net income, which excludes the revenue and the variable compensation attributable to the non-recurring performance fee.
|
The following table identifies the components of ENI operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Fixed compensation & benefits
(1)
|
$
|
172.4
|
|
|
$
|
146.4
|
|
|
$
|
133.2
|
|
General and administrative expenses
(2)
|
129.9
|
|
|
109.2
|
|
|
105.1
|
|
Depreciation and amortization
|
11.8
|
|
|
9.4
|
|
|
6.9
|
|
ENI operating expense
|
$
|
314.1
|
|
|
$
|
265.0
|
|
|
$
|
245.2
|
|
|
|
(1)
|
Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. The following table reconciles U.S. GAAP compensation expense for the years ended
December 31, 2017
,
2016
and
2015
to ENI fixed compensation and benefits expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Total U.S. GAAP compensation expense
|
$
|
682.8
|
|
|
$
|
397.4
|
|
|
$
|
412.8
|
|
Acquisition-related consideration and pre-acquisition employee equity
|
(70.6
|
)
|
|
(26.5
|
)
|
|
—
|
|
Non-cash key employee equity and profit interest revaluations excluded from ENI
|
(95.4
|
)
|
|
7.1
|
|
|
(18.5
|
)
|
Sales-based compensation reclassified to ENI general & administrative expenses
|
(18.6
|
)
|
|
(17.2
|
)
|
|
(19.7
|
)
|
Affiliate key employee distributions
|
(73.1
|
)
|
|
(41.7
|
)
|
|
(38.8
|
)
|
Compensation related to restructuring expenses
(a)
|
(9.3
|
)
|
|
—
|
|
|
—
|
|
Variable compensation
(b)
|
(243.4
|
)
|
|
(172.7
|
)
|
|
(201.0
|
)
|
Other adjustments
(c)
|
—
|
|
|
—
|
|
|
(1.6
|
)
|
ENI fixed compensation and benefits
|
$
|
172.4
|
|
|
$
|
146.4
|
|
|
$
|
133.2
|
|
|
|
(a)
|
Compensation related to restructuring for the year ended
December 31, 2017
are comprised of $0.5 million of fixed compensation and benefits and $8.8 million of variable compensation associated with the CEO transition.
|
|
|
(b)
|
For the year ended December 31, 2015,
$174.0 million
of variable compensation expense (of the
$201.0 million
above) is included within economic net income, which excludes the revenue and the variable compensation attributable to the non-recurring performance fee.
|
|
|
(c)
|
Includes compensation related to restructuring expenses and fixed compensation and benefits associated with the non-recurring performance fee in 2015.
|
|
|
(2)
|
The following table reconciles U.S. GAAP general and administrative expense to ENI general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP general and administrative expense
|
$
|
112.9
|
|
|
$
|
98.3
|
|
|
$
|
88.2
|
|
Sales-based compensation
|
18.6
|
|
|
17.2
|
|
|
19.7
|
|
Capital transaction costs
|
—
|
|
|
(6.4
|
)
|
|
(2.3
|
)
|
Restructuring
(a)
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
Additional ENI adjustments
(b)
|
(0.1
|
)
|
|
0.1
|
|
|
(0.5
|
)
|
ENI general and administrative expense
|
$
|
129.9
|
|
|
$
|
109.2
|
|
|
$
|
105.1
|
|
|
|
(a)
|
Reflects $1.0 million related to the Heitman transaction and $0.5 million of CEO recruiting costs.
|
|
|
(b)
|
Additional ENI adjustments in 2015 primarily include expenses (excluding compensation) associated with the non-recurring performance fee.
|
Key Non-GAAP Operating Metrics
The following table shows our key non-GAAP operating metrics for the years ended
December 31, 2017
,
2016
and
2015
. We present these metrics because they are the measures our management uses to evaluate the profitability of our business and are useful to investors because they represent the key drivers and measures of economic performance within our business model. Please see the footnotes below for an explanation of each ratio, its usefulness in measuring the economics and operating performance of our business, and a reference to the most closely related U.S. GAAP measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Numerator: ENI operating earnings
(1)
|
$
|
343.2
|
|
|
$
|
240.8
|
|
|
$
|
244.7
|
|
Denominator: ENI revenue
|
$
|
900.7
|
|
|
$
|
678.5
|
|
|
$
|
663.9
|
|
ENI operating margin
(2)
|
38.1
|
%
|
|
35.5
|
%
|
|
36.9
|
%
|
|
|
|
|
|
|
Numerator: ENI operating expense
|
$
|
314.1
|
|
|
$
|
265.0
|
|
|
$
|
245.2
|
|
Denominator: ENI management fee revenue
(3)
|
$
|
858.0
|
|
|
$
|
659.9
|
|
|
$
|
637.2
|
|
ENI operating expense ratio
(4)
|
36.6
|
%
|
|
40.2
|
%
|
|
38.5
|
%
|
|
|
|
|
|
|
Numerator: ENI variable compensation
(5)
|
$
|
243.4
|
|
|
$
|
172.7
|
|
|
$
|
174.0
|
|
Denominator: ENI earnings before variable compensation
(1)(6)
|
$
|
586.6
|
|
|
$
|
413.5
|
|
|
$
|
418.7
|
|
ENI variable compensation ratio
(7)
|
41.5
|
%
|
|
41.8
|
%
|
|
41.6
|
%
|
|
|
|
|
|
|
Numerator: Affiliate key employee distributions
|
$
|
73.1
|
|
|
$
|
41.7
|
|
|
$
|
38.9
|
|
Denominator: ENI operating earnings
(1)
|
$
|
343.2
|
|
|
$
|
240.8
|
|
|
$
|
244.7
|
|
ENI Affiliate key employee distributions ratio
(8)
|
21.3
|
%
|
|
17.3
|
%
|
|
15.9
|
%
|
|
|
(1)
|
ENI operating earnings represents ENI earnings before Affiliate key employee distributions and is calculated as ENI revenue, less ENI operating expense, less ENI variable compensation. It differs from economic net income because it does not include the effects of Affiliate key employee distributions, net interest expense or income tax expense.
|
The following table reconciles U.S. GAAP operating income (loss) to ENI operating earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP operating income
|
$
|
71.0
|
|
|
$
|
155.6
|
|
|
$
|
191.2
|
|
Include investment return on equity-accounted Affiliates
|
14.5
|
|
|
15.1
|
|
|
12.7
|
|
Exclude the impact of:
|
|
|
|
|
|
Non-recurring performance fee
|
—
|
|
|
—
|
|
|
(48.1
|
)
|
Affiliate key employee-owned equity and profit interest revaluations
|
95.4
|
|
|
(7.1
|
)
|
|
18.5
|
|
Amortization of acquired intangible assets, acquisition-related consideration
|
77.2
|
|
|
29.1
|
|
|
0.2
|
|
Capital transaction costs
|
—
|
|
|
6.4
|
|
|
2.3
|
|
Restructuring costs
(a)
|
10.8
|
|
|
—
|
|
|
0.5
|
|
Other
(b)
|
0.5
|
|
|
(0.1
|
)
|
|
1.6
|
|
Affiliate key employee distributions
|
73.1
|
|
|
41.7
|
|
|
38.8
|
|
Variable compensation
(c)
|
243.4
|
|
|
172.7
|
|
|
201.0
|
|
Funds’ operating (income) loss
|
0.7
|
|
|
0.1
|
|
|
—
|
|
ENI earnings before variable compensation
|
586.6
|
|
|
413.5
|
|
|
418.7
|
|
Less: ENI variable compensation
(d)
|
(243.4
|
)
|
|
(172.7
|
)
|
|
(174.0
|
)
|
ENI operating earnings
|
343.2
|
|
|
240.8
|
|
|
244.7
|
|
Less: ENI Affiliate key employee distributions
|
(73.1
|
)
|
|
(41.7
|
)
|
|
(38.9
|
)
|
ENI earnings after Affiliate key employee distributions
|
$
|
270.1
|
|
|
$
|
199.1
|
|
|
$
|
205.8
|
|
|
|
(a)
|
Included in restructuring for the year ended
December 31, 2017
is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs.
|
|
|
(b)
|
Other items in 2015 primarily include expenses (excluding variable compensation) associated with the non-recurring performance fee.
|
|
|
(c)
|
For the year ended
December 31, 2017
,
$252.2 million
of variable compensation expense is included within U.S. GAAP net income, which includes variable compensation associated with the CEO transition costs presented in “Restructuring costs” in this table.
|
|
|
(d)
|
For the year ended December 31, 2015, $174.0 million of variable compensation expense is included within economic net income which excludes the revenue and the variable compensation attributable to the non-recurring performance fee.
|
|
|
(2)
|
The ENI operating margin, which is calculated before Affiliate key employee distributions, is used by management and is useful to investors to evaluate the overall operating margin of the business without regard to our various ownership levels at each of the Affiliates. The ENI operating margin is most comparable to our U.S. GAAP operating margin (excluding the effect of consolidated Funds) of
8.1%
for the year ended
December 31, 2017
,
23.5%
for the year ended
December 31, 2016
and
27.3%
for the year ended
December 31, 2015
.
|
The ENI operating margin is important because it gives investors an understanding of the profitability of the total business relative to revenue, irrespective of the ownership position which OMAM has in each of its Affiliates. Management and investors use this ratio when comparing our profitability relative to our peer group and evaluating our ability to manage the cost structure and profitability of our business under different operating environments.
|
|
(3)
|
ENI Management fee revenue corresponds to U.S. GAAP management fee revenue.
|
|
|
(4)
|
The ENI operating expense ratio is used by management and is useful to investors to evaluate the level of operating expense as measured against our recurring management fee revenue. We have provided this ratio since many operating expenses, including fixed compensation and benefits and general and administrative expense, are generally linked to the overall size of the business. We track this ratio as a key measure of scale economies at OMAM because in our profit sharing economic model, scale benefits both the Affiliate employees and OMAM shareholders. The ENI operating expense ratio is most comparable to the U.S. GAAP operating expense / management fee revenue ratio.
|
|
|
(5)
|
Excludes variable compensation associated with the non-recurring performance fee.
|
|
|
(6)
|
ENI earnings before variable compensation is calculated as ENI revenue, less ENI operating expense.
|
|
|
(7)
|
The ENI variable compensation ratio is used by management and is useful to investors to evaluate consolidated variable compensation as measured against our ENI earnings before variable compensation. Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses. Variable compensation is usually awarded based on a contractual percentage of each Affiliate’s ENI earnings before variable compensation and may be paid in the form of cash or non-cash Affiliate equity or profit interests. Center variable compensation includes cash and OMAM equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between
25%
and
35%
. The ENI variable compensation ratio is most comparable to the U.S. GAAP variable compensation ratio.
|
|
|
(8)
|
The ENI Affiliate key employee distribution ratio is used by management and is useful to investors to evaluate Affiliate key employee distributions as measured against our ENI operating earnings. Affiliate key employee distributions represent the share of Affiliate profits after variable compensation that is attributable to Affiliate key employee equity and profit interests holders, according to their ownership interests. The Affiliate key employee distribution ratio at each Affiliate is calculated as Affiliate key employee distributions divided by ENI operating earnings at that Affiliate. At certain Affiliates with tiered equity structures, OMUS and other classes of employee equity holders are entitled to an initial proportionate preference over profits after variable compensation, structured such that before a preference threshold is reached, there would be no required key employee distributions to the tiered equity holders, whereas for profits above the threshold the key employee distribution amount to the tiered equity holders would be calculated based on the tiered key employee ownership percentages. Based on current economic arrangements, employee distributions range from approximately
20%
to
40%
of marginal ENI operating earnings at each of our consolidated Affiliates. The ENI Affiliate key employee distributions ratio is most comparable to the U.S. GAAP Affiliate key employee distributions ratio.
|
Tax on Economic Net Income
The following table reconciles the United States statutory tax to tax on economic net income. All amounts are shown excluding the 2015 non-recurring performance fee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Pre-tax economic net income
(1)
|
$
|
251.3
|
|
|
$
|
190.7
|
|
|
$
|
203.5
|
|
Intercompany interest expense deductible for U.S. tax purposes
|
(78.4
|
)
|
|
(74.0
|
)
|
|
(71.0
|
)
|
Taxable economic net income
|
172.9
|
|
|
116.7
|
|
|
132.5
|
|
Taxes at the U.S. federal and state statutory rates
(2)
|
(69.5
|
)
|
|
(46.9
|
)
|
|
(53.3
|
)
|
Other reconciling tax adjustments
|
(0.9
|
)
|
|
1.3
|
|
|
(0.5
|
)
|
Tax on economic net income
|
(70.4
|
)
|
|
(45.6
|
)
|
|
(53.8
|
)
|
Add back intercompany and OM plc interest expense previously excluded
|
78.4
|
|
|
74.0
|
|
|
71.0
|
|
Economic net income, excluding the non-recurring performance fee
|
$
|
180.9
|
|
|
$
|
145.1
|
|
|
$
|
149.7
|
|
Economic net income effective tax rate
(3)
|
28.0
|
%
|
|
23.9
|
%
|
|
26.4
|
%
|
|
|
(1)
|
Excludes the impact of the non-recurring performance fee and includes interest income and third party ENI interest expense, as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. GAAP interest income
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
U.S. GAAP interest expense
|
(24.5
|
)
|
|
(11.3
|
)
|
|
(3.1
|
)
|
U.S. GAAP net interest expense
|
(23.7
|
)
|
|
(10.9
|
)
|
|
(2.9
|
)
|
Other ENI interest expense exclusions
(a)
|
4.9
|
|
|
2.5
|
|
|
0.6
|
|
ENI net interest income (expense)
|
(18.8
|
)
|
|
(8.4
|
)
|
|
(2.3
|
)
|
ENI earnings after Affiliate key employee distributions
(b)
|
270.1
|
|
|
199.1
|
|
|
205.8
|
|
Pre-tax economic net income
|
$
|
251.3
|
|
|
$
|
190.7
|
|
|
$
|
203.5
|
|
|
|
(a)
|
Other ENI interest expense exclusions in 2017 and 2016 represent cost of financing on seed capital and co-investments and in 2015 represent a portion of the treasury rate lock hedge loss that was reclassified from shareholders’ equity to interest expense.
|
|
|
(b)
|
ENI earnings after Affiliate key employee distributions is calculated as ENI operating income (ENI revenue, less ENI operating expense, less ENI variable compensation), less Affiliate key employee distributions. Refer to “—Key Non-GAAP Operating Metrics” for a reconciliation from U.S. GAAP operating income to ENI earnings after Affiliate key employee distributions, excluding the impact of the non-recurring performance fee.
|
|
|
(2)
|
Taxed at U.S. Federal and State statutory rate of 40.2%
|
|
|
(3)
|
The economic net income effective tax rate is calculated by dividing the tax on economic net income by pre-tax economic net income.
|
As a result of the enactment of the Tax Act, we expect our effective ENI tax rate to decrease from approximately 32% in 2018 to between 23% and 24% and our U.S. aggregate marginal tax rate to decrease from 39% to 26%.
Capital Resources and Liquidity
Working Capital and Long-Term Debt
The following table summarizes certain key financial data relating to our capital resources and liquid net assets. All amounts presented exclude the non-controlling interest portion of consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Balance Sheet Data
(1)
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
186.3
|
|
|
$
|
101.9
|
|
|
$
|
135.9
|
|
Investment advisory fees receivable
|
208.3
|
|
|
163.7
|
|
|
151.8
|
|
Investments
|
101.9
|
|
|
42.5
|
|
|
—
|
|
Total current assets
|
496.5
|
|
|
308.1
|
|
|
287.7
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
54.9
|
|
|
45.8
|
|
|
45.7
|
|
Accrued short-term incentive compensation
|
186.1
|
|
|
132.3
|
|
|
134.0
|
|
Other short-term liabilities
(2)
|
45.2
|
|
|
95.0
|
|
|
1.8
|
|
Total current liabilities
|
286.2
|
|
|
273.1
|
|
|
181.5
|
|
Working Capital
|
$
|
210.3
|
|
|
$
|
35.0
|
|
|
$
|
106.2
|
|
Long-term notes payable and other debt
|
$
|
426.3
|
|
|
$
|
392.3
|
|
|
$
|
90.0
|
|
|
|
(1)
|
Excludes the non-controlling interest portion of consolidated Funds.
|
|
|
(2)
|
Excluded from other short-term liabilities for each of the years presented is an income tax reserve relating to net operating losses that does not represent a current obligation of the Company. Puts related to Affiliate equity and profits interests are also excluded on a short-term basis because they are funded through recycling. Included within other short-term liabilities are payments due to OM plc under the Deferred Tax Asset Deed, as amended, that are due within twelve months.
|
Working capital is defined as current assets less current liabilities, excluding the non-controlling interest portion of consolidated Funds. Our net working capital has been positive over the past several years and was
$210.3 million
at
December 31, 2017
. Our most significant current liabilities have been accounts payable and accrued compensation expense. Total current liabilities at
December 31, 2017
also includes $45.2 million payable to OM plc within twelve months under the Deferred Tax Asset Deed, as amended. Accrued compensation expense has primarily consisted of variable compensation accruals made throughout the year based on contractual arrangements. Our cash management practices generally require that working capital be maintained at each Affiliate at a sufficient level to meet short-term operational needs. Periodic distributions of Affiliate earnings to OMUS and Affiliate key employee equity holders are made according to respective Affiliate distribution policies, with OMUS having the ability to access any surplus cash at each Affiliate as necessary during interim periods.
Long-Term Debt
The following table summarizes our financing arrangements as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts outstanding at
|
|
|
|
|
($ in millions)
|
December 31, 2017
|
|
December 31, 2016
|
|
Interest rate
|
|
Maturity
|
Long-term debt of OMAM, net of issuance costs
|
|
|
|
|
|
|
|
Third party obligations:
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
|
LIBOR + 1.50% plus
0.25% commitment fee
|
|
October 15, 2019
|
Non-recourse seed capital facility
|
33.5
|
|
|
—
|
|
|
LIBOR + 1.55% plus 0.95% commitment fee
|
|
January 17, 2019
|
Long-term bonds:
|
|
|
|
|
|
|
|
4.80% Senior Notes Due 2026
|
271.9
|
|
|
271.6
|
|
|
4.80%
|
|
July 27, 2026
|
5.125% Senior Notes Due 2031
|
120.9
|
|
|
120.7
|
|
|
5.125%
|
|
August 1, 2031
|
Total long-term debt
|
$
|
426.3
|
|
|
$
|
392.3
|
|
|
|
|
|
Revolving Credit Facility
On October 15, 2014, we entered into a revolving credit facility with Citibank, as administrative agent and issuing bank, and Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers and joint book runners (as amended, the “Credit Facility”). Pursuant to the terms of the Credit Facility, we may obtain loans on a revolving credit basis and procure the issuance of letters of credit in an aggregate amount at any time outstanding not in excess of
$350 million
. The Credit Facility has a maturity date of
October 15, 2019
. Borrowings under the facility bear interest, at our option, at either the per annum rate equal to (a) the greatest of (i) the prime rate, (ii) the federal funds effective rate plus
0.5%
and (iii) the one month Adjusted LIBO Rate plus
1.0%
, plus, in each case an additional amount ranging from
0.25%
to
1.00%
, with such additional amount based from time to time on the ratio of our total consolidated indebtedness to Adjusted EBITDA (a “Leverage Ratio”) until either Moody’s Investor Service, Inc. or Standard & Poor’s assigned an initial rating to our senior, unsecured long-term indebtedness for borrowed money that was not subject to credit enhancement, or our credit rating, at which time such additional amount became based on our credit rating or (b) the London interbank offered rate for a period, at our election, equal to one, two, three or six months plus an additional amount ranging from
1.25%
to
2.00%
, with such additional amount based from time to time on our Leverage Ratio until we were assigned a credit rating, at which time such additional amount became based on our credit rating. In addition, we are charged a commitment fee based on the average daily unused portion of the revolving credit facility at a per annum rate ranging from
0.20%
to
0.50%
, with such amount being based from time to time on our Leverage Ratio until we were assigned a credit rating, at which time such amount became based on our credit rating.
Under the Credit Facility, the ratio of third-party borrowings to trailing twelve months Adjusted EBITDA cannot exceed
3.0
x, and the interest coverage ratio must not be less than
4.0
x. At
December 31, 2017
, our ratio of third party borrowings to trailing twelve months Adjusted EBITDA was
1.4
x and our interest coverage ratio was
11.5
x.
In July 2016, Moody’s Investor Service, Inc. and Standard & Poor’s each assigned an initial investment-grade rating to our senior, unsecured long-term indebtedness. As a result of the assignment of the credit ratings, our interest rate on outstanding borrowings was set at
LIBOR
+
1.50%
and the commitment fee on the unused portion of the revolving credit facility was set at
0.25%
. Prior to the assignment of the credit ratings, our interest rate on outstanding borrowings was based on our Leverage Ratio and was set at
LIBOR
+
1.25%
and the commitment fee on the unused portion of the revolving credit facility was set at
0.20%
.
Non-Recourse Seed Capital Facility
In July 2017, we purchased all remaining seed capital investments covered by the Seed Capital Management Agreement from OM plc for $63.4 million. We financed this purchase in part through borrowings under a non-recourse seed capital facility collateralized entirely by our seed capital holdings. We entered into this facility as of July 17, 2017, and may borrow up to $65.0 million, so long as the borrowing does not represent more than 50% of the value of the seed capital collateral. At
December 31, 2017
, amounts outstanding under this non-recourse seed capital facility amounted to
$33.5 million
. Since this facility is non-recourse to us beyond the seed investments themselves, drawdowns under this facility are excluded from our third party debt levels for purposes of calculating our credit ratio covenants under the revolving credit facility.
Long-term Bonds
In July 2016, we issued
$275.0 million
of
4.80%
Senior Notes due 2026, or the 2026 Notes, and
$125.0 million
of
5.125%
Senior Notes due 2031, or the 2031 Notes. We used the net proceeds of these offerings to finance the acquisition of Landmark in August 2016, purchase seed capital from OM plc, settle a Treasury rate lock contract and pay down the balance of the Revolving Credit Facility.
4.80%
Senior Notes Due July 2026
The
$275.0 million
2026 Notes were sold at a discount of
$(0.5) million
and we incurred debt issuance costs of
$(3.0) million
, which are being amortized to interest expense over the
ten
-year term. The 2026 Notes can be redeemed at any time prior to the scheduled maturity in part or in aggregate, at the greater of
100%
of the principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus
0.5%
, together with any related accrued and unpaid interest.
5.125%
Senior Notes Due August 2031
The
$125.0 million
2031 Notes incurred debt issuance costs of
$(4.3) million
, which are being amortized to interest expense over the
fifteen
-year term. The 2031 Notes can be redeemed at any time, on or after August 1, 2019, at a redemption price equal to
100.0%
of the principal amount together with any related accrued and unpaid interest.
Other Long-term Liabilities
Other long-term liabilities principally consist of cash-settled Affiliate equity and profit interests liabilities held by certain Affiliate key employees, and voluntary deferred compensation plans. The following table summarizes our other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
Share-based payments liability
|
$
|
188.8
|
|
|
$
|
53.7
|
|
Affiliate profit interests liability
|
195.0
|
|
|
159.2
|
|
Employee equity
|
383.8
|
|
|
212.9
|
|
Voluntary deferral plan liability
|
95.1
|
|
|
78.0
|
|
Non-current compensation payable
|
0.1
|
|
|
0.1
|
|
Total
|
$
|
479.0
|
|
|
$
|
291.0
|
|
Share-based payments liability represents the value of Affiliate key employee-owned equity that may under certain circumstances be repurchased by us that is considered an equity award under U.S. GAAP based on the terms and conditions attached to these interests. Profit interests represent the value of Affiliate key employee-owned equity that may under certain circumstances be repurchased by us that is not considered an equity award under U.S. GAAP, but rather a form of compensation arrangement, based on the terms and conditions attached to these interests. Our obligation in any given period in respect of funding these potential repurchases of Affiliate equity is limited to only that portion that may be put to us by Affiliate key employees, which is typically capped annually under the terms of these arrangements such that we are not required to repurchase more than we can reasonably recycle by re-granting the interests in lieu of cash variable compensation owed to Affiliate key employees.
Certain of our and our Affiliates’ key employees are eligible to participate in our voluntary deferral plan, or VDP, which provides our senior personnel the opportunity to voluntarily defer a portion of their compensation. There is a voluntary deferral plan investment balance included in investments on the Consolidated Balance Sheets that corresponds to this deferral liability.
For additional discussion of our compensation programs, please refer to the compensation discussions contained within our definitive proxy statement for our
2018
annual meeting of shareholders incorporated herein by reference.
Cash Flows
The following table summarizes certain key financial data relating to cash flows. All amounts presented exclude consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Cash provided by (used in)
(1)(2)
|
|
|
|
|
|
|
|
|
Operating activities
|
$
|
224.9
|
|
|
$
|
123.9
|
|
|
$
|
255.7
|
|
Investing activities
|
(10.8
|
)
|
|
(284.3
|
)
|
|
(62.7
|
)
|
Financing activities
|
(129.8
|
)
|
|
112.9
|
|
|
(230.6
|
)
|
|
|
(1)
|
Excludes consolidated Funds.
|
|
|
(2)
|
Cash flow data shown only includes cash flows from continuing operations.
|
Our most significant uses of cash have included our acquisition of Landmark, third-party interest payments, payments made to OM plc under the Deferred Tax Asset Deed, seed capital purchased from OM plc, repurchases of shares, dividends, and compensation and general and administrative expenses for the Center.
Comparison for the Years Ended
December 31, 2017
,
2016
and
2015
Net cash provided by operating activities of continuing operations excluding consolidated Funds increased
$101.0 million
, or
81.5%
, from
$123.9 million
for the year ended
December 31, 2016
to
$224.9 million
for the year ended
December 31, 2017
. The increase was primarily due to higher amortization and revaluation of non-cash compensation awards and the net impact of the Tax Act, somewhat offset by higher gains on other investments.
Net cash provided by operating activities of continuing operations excluding consolidated Funds decreased
$(131.8) million
, or
(51.5)%
, from
$255.7 million
for the year ended
December 31, 2015
to
$123.9 million
for the year ended
December 31, 2016
. The decrease was primarily due to decreases in amounts due to related parties and decreases in current payables and accruals exclusive of amounts relating to the treasury rate lock.
Net cash (used in) investing activities of continuing operations excluding consolidated Funds consist primarily of investments in a new Affiliate in 2016, seed capital purchased from OM plc, purchases and sales of investment securities as part of our co-investment program and VDP, and purchases of fixed assets for use within our premises. Cash (used in) investing activities was
$(10.8) million
,
$(284.3) million
and
$(62.7) million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Cash (used in) investing activities in 2016 primarily reflects disbursements of
$(219.1) million
, net of cash acquired, related to the Landmark acquisition. Net cash (used in) received from the (purchase) and sale of investments was
$4.8 million
,
$(51.7) million
and
$(49.1) million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Fluctuations are principally due to the timing of investments or redemptions of seed capital as well as acquisitions or disposals of real estate and timber assets in which we are co-investing. Net cash (used in) the purchase of fixed assets was
$(13.7) million
,
$(13.5) million
and
$(13.0) million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Net cash provided by (used in) financing activities excluding consolidated Funds consists of share repurchases, payments made to OM plc, third-party borrowings and dividends paid. Cash provided by (used in) financing activities in
2017
was
$(129.8) million
and in
2016
was
$112.9 million
. We drew net
$33.5 million
against third party borrowings in
2017
and we borrowed net
$302.1 million
in
2016
. In
2017
we made payments of
$(50.4) million
against amounts previously owed to OM plc (including
$(45.6) million
for the deferred tax arrangement and
$(4.8) million
for the co-investment arrangement), funded
$(74.1) million
for share repurchases, and paid out
$(38.8) million
in dividends. In 2016 we paid
$(52.1) million
against amounts previously owed to OM plc (including
$(41.4) million
for the deferred tax arrangement and
$(10.7) million
for the co-investment arrangement),
$(98.6) million
for share repurchases, and
$(38.5) million
in dividends. In 2015 we paid
$(87.0) million
against third party borrowings,
$(104.9) million
against amounts previously owed to OM plc (including
$(37.0) million
for the loan note,
$(53.6) million
for the deferred tax arrangement, and
$(14.3) million
for the co-investment arrangement) and
$(38.7) million
in dividends.
Supplemental Liquidity Measure—Adjusted EBITDA
As supplemental information, we provide information regarding Adjusted EBITDA, which we define as economic net income before interest, income taxes, depreciation and amortization. Adjusted EBITDA is a non-GAAP liquidity measure that we provide in addition to, but not as a substitute for, cash flows from operating activities. It should be noted that our calculation of Adjusted EBITDA may not be consistent with Adjusted EBITDA as calculated by other companies. We believe Adjusted EBITDA is a useful liquidity metric because it indicates our ability to make further investments in our business, service debt and meet working capital requirements. It is also encapsulated in our line of credit as part of our liquidity covenants.
The following table reconciles our U.S. GAAP net income attributable to controlling interests to EBITDA to Adjusted EBITDA to economic net income for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
Net income attributable to controlling interests
|
$
|
4.2
|
|
|
$
|
126.4
|
|
|
$
|
155.5
|
|
Net interest expense
(1)
|
23.7
|
|
|
10.8
|
|
|
2.3
|
|
Income tax expense (including tax expenses related to the non-recurring performance fee and discontinued operations)
|
132.7
|
|
|
44.8
|
|
|
47.2
|
|
Depreciation and amortization (including intangible assets and discontinued operations)
|
18.3
|
|
|
12.0
|
|
|
7.1
|
|
EBITDA
|
$
|
178.9
|
|
|
$
|
194.0
|
|
|
$
|
212.1
|
|
Non-cash compensation costs associated with revaluation of Affiliate key employee-owned equity and profit-sharing interests
|
95.4
|
|
|
(7.1
|
)
|
|
18.5
|
|
Amortization of acquisition-related consideration and pre-acquisition employee equity
|
70.6
|
|
|
26.5
|
|
|
—
|
|
EBITDA of discontinued operations attributable to controlling interests
|
0.2
|
|
|
(10.2
|
)
|
|
(1.3
|
)
|
(Gain) loss on seed and co-investments and investment changes attributable to controlling interests
|
(22.2
|
)
|
|
(1.1
|
)
|
|
(0.3
|
)
|
Non-recurring performance fee before tax
|
—
|
|
|
—
|
|
|
(19.1
|
)
|
Deferred tax asset deed revaluation
|
(51.8
|
)
|
|
—
|
|
|
—
|
|
Restructuring costs
(2)
|
10.8
|
|
|
—
|
|
|
0.5
|
|
Capital transaction costs
|
—
|
|
|
6.4
|
|
|
2.3
|
|
Adjusted EBITDA, excluding non-recurring performance fee
|
$
|
281.9
|
|
|
$
|
208.5
|
|
|
$
|
212.7
|
|
ENI net interest expense to third parties
|
(18.8
|
)
|
|
(8.4
|
)
|
|
(2.3
|
)
|
Depreciation and amortization
|
(11.8
|
)
|
|
(9.4
|
)
|
|
(6.9
|
)
|
Tax on economic net income
|
(70.4
|
)
|
|
(45.6
|
)
|
|
(53.8
|
)
|
Economic net income, excluding non-recurring performance fee
|
$
|
180.9
|
|
|
$
|
145.1
|
|
|
$
|
149.7
|
|
|
|
(1)
|
Interest is shown net of interest incurred in 2015 related to the interest rate hedge.
|
|
|
(2)
|
Included in restructuring for the year ended
December 31, 2017
is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs.
|
For a full discussion regarding the items excluded from Adjusted EBITDA above and the calculation of economic net income, refer to “—Non-GAAP Supplemental Performance Measure—Economic Net Income.”
Limitations of Adjusted EBITDA
As a non-GAAP, unaudited liquidity measure and derivation of EBITDA, Adjusted EBITDA has certain material limitations. It does not include cash costs associated with capital transactions and excludes certain U.S. GAAP expenses that fall outside the definition of EBITDA. Each of these categories of expense represents costs to us of doing business, and therefore any measure that excludes any or all of these categories of expense has material limitations.
Future Capital Needs
We believe that our available cash and cash equivalents to be generated from operations, supplemented by short-term and long-term financing, as necessary, will be sufficient to fund current operations and capital requirements for at least the next twelve months, including our obligations under the amended Deferred Tax Asset Deed and the Landmark earn-out, as well as our day-to-day operations and future investment requirements. Refer to Note 10, Related Party Transactions in our Consolidated Financial Statements included in Item 8 herein, for additional information on the amended agreements with OM plc. Our ability to secure short-term and long-term financing in the future will depend on several factors, including our future profitability, our relative levels of debt and equity and the overall condition of the credit markets.
Commitments, Contingencies and Off-Balance Sheet Obligations
Indemnifications
In the normal course of business, such as through agreements to enter into business combinations with and divestitures of Affiliates, we occasionally enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. Our maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against us that have not yet occurred.
Off-Balance Sheet Obligations
Off-balance sheet arrangements, as defined by the SEC, include certain contractual arrangements pursuant to which a company has an obligation, such as certain contingent obligations, certain guarantee contracts, retained or contingent interests in assets transferred to an unconsolidated entity, certain derivative instruments classified as equity or material variable interests in unconsolidated entities that provide financing, liquidity, market risk or credit risk support. Disclosure is required for any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity or capital resources. We generally do not enter into off-balance sheet arrangements, other than those described in “Contractual Obligations” as well as Note 6 to our Consolidated Financial Statements included in Item 8 herein, “Variable Interest Entities.”
Contractual Obligations
The following table summarizes our contractual obligations as of
December 31, 2017
:
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|
|
|
|
Payments due by period
|
($ in millions)
|
Total
|
|
Less then
1 year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
More than
5 years
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to OM plc
(1)
|
$
|
58.5
|
|
|
$
|
45.2
|
|
|
$
|
13.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recourse borrowings
(2)
|
33.5
|
|
|
—
|
|
|
33.5
|
|
|
—
|
|
|
—
|
|
Other third party borrowings
|
400.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
400.0
|
|
Lease obligations
(2)
|
52.7
|
|
|
11.8
|
|
|
21.3
|
|
|
14.9
|
|
|
4.7
|
|
Co-investment obligations
|
59.7
|
|
|
24.9
|
|
|
29.8
|
|
|
5.0
|
|
|
—
|
|
Other liabilities
(3)
|
1.4
|
|
|
0.2
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
Maximum Affiliate equity and profits interests repurchase obligations
(4)
|
384.2
|
|
|
21.6
|
|
|
182.6
|
|
|
47.6
|
|
|
132.4
|
|
Total contractual obligations
|
$
|
990.0
|
|
|
$
|
103.7
|
|
|
$
|
281.7
|
|
|
$
|
67.5
|
|
|
$
|
537.1
|
|
|
|
(1)
|
Amounts due to OM plc are comprised of
$45.2 million
related to the deferred tax asset liability and $13.3 million related to co-investments. We entered into the Deferred Tax Asset Deed with OM plc in October 2014 and amended the agreement in June 2016. Following the passage of the Tax Act, we made adjustments to re-value the Deferred Tax Asset Deed. The continuation of certain protections provided by OM plc related to the realized tax benefit resulting from the Company's use of deferred tax assets remains unaffected.
|
|
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(2)
|
Under the evergreen renewal option of the non-recourse seed capital facility, in January 2018 the maturity date of this facility was extended from July 2018 to January 2019.
|
|
|
(3)
|
Amounts are shown net of income from subleases and exclude transferred Affiliates.
|
|
|
(4)
|
Represents the mortgage on a building owned by an Affiliate.
|
|
|
(5)
|
Represents amortized amounts putable by Affiliate key employees. Includes amortized portion of Landmark’s contingent payment and employee equity owned pre-acquisition.
|
Critical Accounting Policies and Estimates
Our accompanying Consolidated Financial Statements were prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates or assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Due to their nature, estimates involve judgment based upon available information. Actual results could differ from these estimates or assumptions and may have a material effect on our Consolidated Financial Statements.
Our significant accounting policies are enumerated in Note 2, “Significant Accounting Policies” of our accompanying Consolidated Financial Statements. Of the significant accounting policies discussed in Note 2, we believe that the policies and estimates below constitute our critical accounting policies, as they involve significant estimates or judgment due to the sensitivity of the methods and assumptions used.
Our critical accounting policies are:
|
|
•
|
compensation arrangements
|
|
|
•
|
share-based compensation
|
Recent accounting developments
Revenue from contracts with customers
In May 2014, the FASB issued ASU 2014-9,
Revenue from Contracts with Customers
. ASU 2014-9 modifies existing U.S. GAAP revenue recognition standards to more closely align with international accounting standards. Additionally, the guidance requires improved disclosures around the nature, amount, timing and uncertainty of revenue recognized. Under the standard, a company is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. Since issuing the standard, the FASB has issued several amendments, primarily clarifying certain components of the standard. ASU 2014-9, as amended, was effective for us on January 1, 2018.
The guidance permits two methods of adoption; a full retrospective adoption will apply the standard to each prior reporting period presented and a modified retrospective adoption, where the cumulative effect of initially applying the guidance is recognized at the date of initial application. We will adopt the standard using the modified retrospective method.
We have completed our detailed assessment of contractual arrangements and we have concluded the following related to potential material changes to the timing of when revenue is recognized and the recording of related costs upon transition to ASU 2014-9:
|
|
•
|
Management fee revenue
: We have found no instances where ASC 2014-09, as amended, would cause a change to the method and timing of how we record management fee revenue.
|
|
|
•
|
Performance fee revenue
: We have found no instances where ASC 2014-09, as amended, would cause a change to the method and timing of how we record performance fee revenue.
|
|
|
•
|
Costs of acquiring a contract with a customer
: We have concluded that there are no incremental costs directly and solely attributable to acquiring a contract with a customer. There are therefore no costs of acquiring a contract subject to capitalization and there will be no change to our current accounting.
|
|
|
•
|
Pass-through costs
: We have identified certain instances where we expect we will have to change the accounting in cases where we pay expenses on behalf of a customer, typically a Fund. Where certain expenses and subsequent reimbursements were previously recorded on a net basis, this change may require them to be recorded on a gross basis. While the change in accounting for pass-through costs could increase both our revenues and expenses by identical amounts, it will not cause any changes to our net income attributable to controlling interests.
|
Leases
In January 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 changes existing GAAP by requiring the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases under previous U.S. GAAP. The lease asset would reflect a right-to-use asset and the lease liability would reflect the present value of the future lease payments. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018 and a modified retrospective transition approach is required where companies will have to recognize and measure leases at the beginning of the earliest period presented.
The Company has performed a preliminary assessment of ASU 2016-02 and has begun formulating an implementation plan. The Company is generally able to categorize its leases as either real estate leases (for office space) or as “all other” leases. Recording real estate leases under ASU 2016-02 is expected to create a category of “right-to-use” assets on the balance sheet of the Company to record the value of the leased office space in an amount equal to the net present value of future lease payments due (see Note 8), offset by a liability representing the total amounts due for the current value of future lease obligations. For all other leases, a roster must be assembled and evaluations must be performed, but the Company does not expect there to be a material impact to its Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Our exposure to market risk is directly related to the role of our Affiliates as asset managers. Substantially all of our investment management revenues are derived from our Affiliates’ agreements with their clients. Under these agreements, the revenues we receive are based on the value of our assets under management or the investment performance on client accounts for which we earn performance fees. Accordingly, our revenues and net income may decline as a result of our assets under management decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenues and net income to decline further.
Our model for assessing the impact of market risk on our results uses
December 31, 2017
ending AUM and management fee rates as the basis for management fee revenue calculations. With respect to performance fee revenue, we assume that relative investment performance remains the same as it was on
December 31, 2017
. Therefore, market-driven changes in performance fees, which are typically based on relative performance versus market indices, reflect changes in the underlying AUM used in the calculation rather than differences in relative performance as a result of a changed market environment. The basis for the analysis is performance fees earned for the twelve months ended
December 31, 2017
.
Our profit sharing economic structure, described more fully in “Management’s Discussion and Analysis of Financial Condition and Results of Operation—The Economics of Our Business,” results in a sharing of market risk between us and our employees. Approximately 50% of our ENI cost structure is variable, representing variable compensation and Affiliate key employee distributions. These variable expenses generally are linked in a formulaic manner to the profitability of the business after covering operating expenses, which include base compensation and benefits, general and administrative expenses, and depreciation and amortization. In modeling the impact of market risk, we assume that these operating expenses remain unchanged, but the resulting impact on profit driven by increases or decreases in revenue will change variable compensation and Affiliate key employee distributions in line with their formulaic calculations. Any change in pre-tax profit is tax-effected at our statutory combined state and federal rate of approximately 27% to calculate profit after tax, factoring the impact of the 2017 Tax Cuts and Jobs Act.
The value of our assets under management was
$243.0 billion
as of
December 31, 2017
. A 10% increase or decrease in the value of our assets under management, if proportionally distributed over all of our investment strategies, asset classes and client relationships, would cause an annualized increase or decrease in our gross management fee revenues of approximately
$95.5 million
, including equity-accounted Affiliates, based on our current weighted average fee rate of
39
basis points. Approximately
$56.0 billion
, or
23%
, of our AUM, including equity-accounted Affiliates, are in accounts subject to performance fees. Of these assets, approximately
85%
are in accounts for which performance fees, or management fee adjustments, are calculated based on investment return that differs from the relative benchmark returns. Assuming the market change does not impact our relative performance and high-water mark status of our alternative assets, a 10% increase or decrease in AUM would have approximately a
$2.7 million
impact to our gross performance fees based on our trailing twelve month performance fees of
$26.5 million
as of
December 31, 2017
. The combined impact on our management fees and performance fees would have a direct impact on our earnings and result in an annual change of approximately
$35.8 million
in our post-tax economic net income, given our current cost structure and operating model.
Equity market risk, interest rate risk, and foreign currency risk are the market risks that could have the greatest impact on our management fees, performance fees and our business profitability. Impacts on our management and performance fees can be calculated based on the percentage of AUM constituting equity investments, fixed income investments, or foreign currency denominated investments, respectively, multiplied by the relevant weighted average management fee and performance fee attributable to that asset class.
|
|
•
|
Our equity markets-based AUM includes U.S. equities (including small cap through large cap securities and substantially value or blended investment styles) and global/non-U.S. equities (including global, non-U.S. and emerging markets securities). A 10% increase or decrease in equity markets would cause our
$207.4 billion
of equity assets under management to increase or decrease by
$20.7 billion
, resulting in a change in annualized management fee revenue of
$70.8 million
and an annual change in post-tax economic net income of approximately
$26.8 million
, given our current cost structure, operating model, and weighted average equity fee rates of 34 basis points at the mix of strategies as of
December 31, 2017
. Approximately
$46.5 billion
, or
22%
, of our equity markets-based AUM are in accounts subject to performance fees. Of these assets, approximately
99%
are in accounts for which performance fees are calculated based on investment return in excess of the relative benchmark returns. Assuming the market change does not impact our relative performance, a 10% change in equity markets would have an approximate incremental
$0.7 million
impact from performance fees on our post-tax economic net income, given our current cost structure and operating model.
|
|
|
•
|
Foreign currency AUM includes equity and alternative instruments denominated in foreign currencies. A 10% increase or decrease in foreign exchange rates against the U.S. dollar would cause our
$104.5 billion
of foreign currency denominated AUM to increase or decrease by
$10.5 billion
, resulting in a change in annualized management fee revenue of
$45.2 million
and an annual change in post-tax economic net income of
$17.4 million
, based on weighted average fees earned on our foreign currency denominated AUM of
43
basis points at the mix of strategies as of
December 31, 2017
. Approximately
$13.0 billion
, or
12%
, of our foreign currency denominated AUM are in accounts subject to performance fees. Of these assets, approximately
90%
are in accounts for which performance fees are calculated based on investment return in excess of the relative benchmark returns. Assuming the market change does not impact our relative performance, a 10% change in foreign currency exchange rates would have an approximate incremental
$1.0 million
impact from performance fees on our post-tax economic net income, given our current cost structure and operating model.
|
|
|
•
|
Fixed income AUM includes instruments in government bonds, corporate bonds and other fixed income investments in the United States. A change in interest rates, resulting in a 10% increase or decrease in the value of our total fixed income AUM of
$13.5 billion
, would cause AUM to rise or fall by approximately
$1.4 billion
. Based on our fixed income weighted average fee rates of
21
basis points, annualized management fees would change by
$2.8 million
and post-tax economic net income would change by
$0.9 million
annually. There are currently no material fixed income assets earning performance fees as of the year ended
December 31, 2017
.
|
Our investment income primarily represents investments in Affiliates accounted for under the equity method. Exposure to market risks for Affiliates accounted for under the equity method is immaterial and is included in the analysis above.
While the analysis above assumes that market changes occur in a uniform manner across the relevant portfolio, because of our declining fee rates for larger relationships and differences in our fee rates across asset classes, a change in the composition of our assets under management, in particular an increase in the proportion of our total assets under management attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted average fee rate.
As is customary in the asset management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of such asset classes. We have not adopted a corporate-level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall assets under management and related revenues. Any reduction in the value of our assets under management would result in a reduction in our revenues.
Item 8. Financial Statements and Supplementary Data.
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Page
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Index to financial statements
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
OM Asset Management plc:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of OM Asset Management plc and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2018
,
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ KPMG
Boston, Massachusetts
February 27, 2018
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
OM Asset Management plc:
Opinion on Internal Control Over Financial Reporting
We have audited OM Asset Management plc and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of OM Asset Management plc and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes, and our report dated February 27, 2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG
Boston, Massachusetts
February 27, 2018
OM Asset Management plc
Consolidated Balance Sheets
(in millions)
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
186.3
|
|
|
$
|
101.9
|
|
Investment advisory fees receivable
|
208.3
|
|
|
163.7
|
|
Income taxes receivable
|
30.0
|
|
|
—
|
|
Fixed assets, net
|
41.7
|
|
|
39.8
|
|
Investments (includes balances reported at fair value of $182.6 and $126.1)
|
244.4
|
|
|
233.3
|
|
Acquired intangibles, net
|
78.3
|
|
|
84.9
|
|
Goodwill
|
274.6
|
|
|
272.7
|
|
Other assets
|
33.6
|
|
|
29.0
|
|
Deferred tax assets
|
240.6
|
|
|
332.7
|
|
Assets of consolidated Funds:
|
|
|
|
|
|
Cash and cash equivalents, restricted
|
14.1
|
|
|
0.4
|
|
Investments, at fair value
|
136.7
|
|
|
35.5
|
|
Other assets
|
3.1
|
|
|
0.4
|
|
Total assets
|
$
|
1,491.7
|
|
|
$
|
1,294.3
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
54.9
|
|
|
$
|
45.8
|
|
Accrued incentive compensation
|
186.1
|
|
|
132.3
|
|
Amounts due to OM plc
|
59.1
|
|
|
156.3
|
|
Other compensation liabilities
|
479.0
|
|
|
291.0
|
|
Accrued income taxes
|
96.2
|
|
|
90.2
|
|
Non-recourse borrowings
|
33.5
|
|
|
—
|
|
Third party borrowings
|
392.8
|
|
|
392.3
|
|
Other liabilities
|
8.3
|
|
|
10.1
|
|
Liabilities of consolidated Funds:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
2.5
|
|
|
—
|
|
Securities sold, not yet purchased, at fair value
|
7.9
|
|
|
5.0
|
|
Other liabilities
|
0.1
|
|
|
0.8
|
|
Total liabilities
|
1,320.4
|
|
|
1,123.8
|
|
Commitments and contingencies
|
|
|
|
|
|
Redeemable non-controlling interests in consolidated Funds
|
44.0
|
|
|
5.5
|
|
Equity:
|
|
|
|
|
|
Ordinary shares (nominal value $0.001; 109,720,358 and 114,157,765 shares, respectively, issued)
|
0.1
|
|
|
0.1
|
|
Shareholders’ equity
|
96.9
|
|
|
190.2
|
|
Accumulated other comprehensive loss
|
(21.6
|
)
|
|
(26.3
|
)
|
Non-controlling interests
|
1.3
|
|
|
1.0
|
|
Non-controlling interests in consolidated Funds
|
50.6
|
|
|
—
|
|
Total equity and redeemable non-controlling interests in consolidated Funds
|
171.3
|
|
|
170.5
|
|
Total liabilities and equity
|
$
|
1,491.7
|
|
|
$
|
1,294.3
|
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Operations
(in millions except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
Management fees
|
$
|
858.0
|
|
|
$
|
659.9
|
|
|
$
|
637.2
|
|
Performance fees
|
26.5
|
|
|
2.6
|
|
|
61.8
|
|
Other revenue
|
1.2
|
|
|
0.9
|
|
|
0.3
|
|
Consolidated Funds’ revenue
|
1.7
|
|
|
0.1
|
|
|
—
|
|
Total revenue
|
887.4
|
|
|
663.5
|
|
|
699.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
682.8
|
|
|
397.4
|
|
|
412.8
|
|
General and administrative expense
|
112.9
|
|
|
98.3
|
|
|
88.2
|
|
Amortization of acquired intangibles
|
6.6
|
|
|
2.6
|
|
|
0.2
|
|
Depreciation and amortization
|
11.7
|
|
|
9.4
|
|
|
6.9
|
|
Consolidated Funds’ expense
|
2.4
|
|
|
0.2
|
|
|
—
|
|
Total operating expenses
|
816.4
|
|
|
507.9
|
|
|
508.1
|
|
Operating income
|
71.0
|
|
|
155.6
|
|
|
191.2
|
|
Non-operating income and (expense):
|
|
|
|
|
|
|
|
|
Investment income
|
27.4
|
|
|
17.2
|
|
|
13.0
|
|
Interest income
|
0.8
|
|
|
0.4
|
|
|
0.2
|
|
Interest expense
|
(24.5
|
)
|
|
(11.3
|
)
|
|
(3.1
|
)
|
Revaluation of DTA deed
|
51.8
|
|
|
—
|
|
|
—
|
|
Net consolidated Funds’ investment gains (losses)
|
15.5
|
|
|
(1.1
|
)
|
|
—
|
|
Total non-operating income
|
71.0
|
|
|
5.2
|
|
|
10.1
|
|
Income from continuing operations before taxes
|
142.0
|
|
|
160.8
|
|
|
201.3
|
|
Income tax expense
|
132.8
|
|
|
40.8
|
|
|
46.6
|
|
Income from continuing operations
|
9.2
|
|
|
120.0
|
|
|
154.7
|
|
Gain (loss) on disposal of discontinued operations, net of tax
|
(0.1
|
)
|
|
6.2
|
|
|
0.8
|
|
Net income
|
9.1
|
|
|
126.2
|
|
|
155.5
|
|
Net income (loss) attributable to non-controlling interests in consolidated Funds
|
4.9
|
|
|
(0.2
|
)
|
|
—
|
|
Net income attributable to controlling interests
|
$
|
4.2
|
|
|
$
|
126.4
|
|
|
$
|
155.5
|
|
Earnings per share (basic) attributable to controlling interests
|
$
|
0.04
|
|
|
$
|
1.05
|
|
|
$
|
1.29
|
|
Earnings per share (diluted) attributable to controlling interests
|
0.04
|
|
|
1.05
|
|
|
1.29
|
|
Continuing operations earnings per share (basic) attributable to controlling interests
|
0.04
|
|
|
0.98
|
|
|
1.28
|
|
Continuing operations earnings per share (diluted) attributable to controlling interests
|
0.04
|
|
|
0.98
|
|
|
1.28
|
|
Weighted average ordinary shares outstanding
|
110.7
|
|
|
119.2
|
|
|
120.0
|
|
Weighted average diluted ordinary shares outstanding
|
111.4
|
|
|
119.5
|
|
|
120.5
|
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Comprehensive Income
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
9.1
|
|
|
$
|
126.2
|
|
|
$
|
155.5
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Valuation and amortization related to derivative securities, net of tax
|
1.8
|
|
|
(20.3
|
)
|
|
(6.6
|
)
|
Foreign currency translation adjustment
|
2.9
|
|
|
(3.2
|
)
|
|
(1.5
|
)
|
Total comprehensive income
|
13.8
|
|
|
102.7
|
|
|
147.4
|
|
Comprehensive income (loss) attributable to non-controlling interests in consolidated Funds
|
4.9
|
|
|
(0.2
|
)
|
|
—
|
|
Total comprehensive income attributable to controlling interests
|
$
|
8.9
|
|
|
$
|
102.9
|
|
|
$
|
147.4
|
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2017
,
2016
and
2015
($ in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
shares
(millions)
|
|
Ordinary
shares,
nominal
value
|
|
Shareholders’
equity
(deficit)
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Total
shareholders’
equity
(deficit)
|
|
Non-controlling
interests
|
|
Non-controlling
interests in
consolidated
Funds
|
|
Total
equity
|
|
Redeemable
non-controlling
interests in consolidated Funds
|
|
Total equity and redeemable non-controlling interests in consolidated Funds
|
December 31, 2014
|
120.0
|
|
|
$
|
0.1
|
|
|
$
|
31.1
|
|
|
$
|
5.3
|
|
|
$
|
36.5
|
|
|
$
|
—
|
|
|
$
|
2,459.0
|
|
|
$
|
2,495.5
|
|
|
$
|
61.9
|
|
|
$
|
2,557.4
|
|
Issuance of ordinary shares
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital redemptions
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
Equity-based compensation
|
—
|
|
|
—
|
|
|
13.0
|
|
|
—
|
|
|
13.0
|
|
|
—
|
|
|
—
|
|
|
13.0
|
|
|
—
|
|
|
13.0
|
|
Deferred tax asset revaluation
|
—
|
|
|
—
|
|
|
9.0
|
|
|
—
|
|
|
9.0
|
|
|
—
|
|
|
—
|
|
|
9.0
|
|
|
—
|
|
|
9.0
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.5
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
(1.5
|
)
|
|
—
|
|
|
(1.5
|
)
|
De-consolidation of Funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,459.0
|
)
|
|
(2,459.0
|
)
|
|
(61.9
|
)
|
|
(2,520.9
|
)
|
Valuation of derivative securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.6
|
)
|
|
(6.6
|
)
|
|
—
|
|
|
—
|
|
|
(6.6
|
)
|
|
|
|
|
(6.6
|
)
|
Dividends
|
—
|
|
|
—
|
|
|
(38.7
|
)
|
|
—
|
|
|
(38.7
|
)
|
|
—
|
|
|
—
|
|
|
(38.7
|
)
|
|
—
|
|
|
(38.7
|
)
|
Net income
|
—
|
|
|
—
|
|
|
155.5
|
|
|
—
|
|
|
155.5
|
|
|
—
|
|
|
—
|
|
|
155.5
|
|
|
—
|
|
|
155.5
|
|
December 31, 2015
|
120.5
|
|
|
$
|
0.1
|
|
|
$
|
168.6
|
|
|
$
|
(2.8
|
)
|
|
$
|
165.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165.9
|
|
|
$
|
—
|
|
|
$
|
165.9
|
|
Issuance of ordinary shares
|
0.5
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchase of ordinary shares
|
(6.9
|
)
|
|
—
|
|
|
(98.2
|
)
|
|
—
|
|
|
(98.2
|
)
|
|
—
|
|
|
—
|
|
|
(98.2
|
)
|
|
—
|
|
|
(98.2
|
)
|
Capital redemptions
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
Equity-based compensation
|
—
|
|
|
—
|
|
|
12.8
|
|
|
—
|
|
|
12.8
|
|
|
—
|
|
|
—
|
|
|
12.8
|
|
|
—
|
|
|
12.8
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(3.2
|
)
|
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
—
|
|
|
(3.2
|
)
|
Valuation of derivative securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(20.3
|
)
|
|
(20.3
|
)
|
|
—
|
|
|
—
|
|
|
(20.3
|
)
|
|
—
|
|
|
(20.3
|
)
|
Amendment of Deferred Tax Asset Deed
|
—
|
|
|
—
|
|
|
19.8
|
|
|
—
|
|
|
19.8
|
|
|
—
|
|
|
—
|
|
|
19.8
|
|
|
—
|
|
|
19.8
|
|
Business acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
Net consolidation of Funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
|
5.5
|
|
Dividends
|
—
|
|
|
—
|
|
|
(38.8
|
)
|
|
—
|
|
|
(38.8
|
)
|
|
—
|
|
|
—
|
|
|
(38.8
|
)
|
|
—
|
|
|
(38.8
|
)
|
Net income
|
—
|
|
|
—
|
|
|
126.4
|
|
|
—
|
|
|
126.4
|
|
|
—
|
|
|
—
|
|
|
126.4
|
|
|
—
|
|
|
126.4
|
|
December 31, 2016
|
114.1
|
|
|
$
|
0.1
|
|
|
$
|
190.2
|
|
|
$
|
(26.3
|
)
|
|
$
|
164.0
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
165.0
|
|
|
$
|
5.5
|
|
|
$
|
170.5
|
|
Issuance of ordinary shares
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchase of ordinary shares
|
(5.0
|
)
|
|
—
|
|
|
(73.1
|
)
|
|
—
|
|
|
(73.1
|
)
|
|
—
|
|
|
—
|
|
|
(73.1
|
)
|
|
—
|
|
|
(73.1
|
)
|
Capital contributions (redemptions)
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
33.4
|
|
|
32.3
|
|
Equity-based compensation
|
—
|
|
|
—
|
|
|
15.7
|
|
|
—
|
|
|
15.7
|
|
|
—
|
|
|
—
|
|
|
15.7
|
|
|
—
|
|
|
15.7
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
Valuation of derivative securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
Business acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Net consolidation of Funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50.9
|
|
|
50.9
|
|
|
(0.1
|
)
|
|
50.8
|
|
Dividends
|
—
|
|
|
—
|
|
|
(39.0
|
)
|
|
—
|
|
|
(39.0
|
)
|
|
—
|
|
|
—
|
|
|
(39.0
|
)
|
|
—
|
|
|
(39.0
|
)
|
Net income
|
—
|
|
|
—
|
|
|
4.2
|
|
|
—
|
|
|
4.2
|
|
|
—
|
|
|
(0.3
|
)
|
|
3.9
|
|
|
5.2
|
|
|
9.1
|
|
December 31, 2017
|
109.7
|
|
|
$
|
0.1
|
|
|
$
|
96.9
|
|
|
$
|
(21.6
|
)
|
|
$
|
75.4
|
|
|
$
|
1.3
|
|
|
$
|
50.6
|
|
|
$
|
127.3
|
|
|
$
|
44.0
|
|
|
$
|
171.3
|
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Cash Flows
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
9.1
|
|
|
$
|
126.2
|
|
|
$
|
155.5
|
|
Less: Net (income) loss attributable to non-controlling interests in consolidated Funds
|
(4.9
|
)
|
|
0.2
|
|
|
—
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities from continuing operations:
|
|
|
|
|
|
|
|
|
(Gain) loss from discontinued operations, excluding consolidated Funds
|
0.1
|
|
|
(6.2
|
)
|
|
(0.8
|
)
|
Amortization of acquired intangibles
|
6.6
|
|
|
2.6
|
|
|
0.2
|
|
Depreciation and amortization
|
11.7
|
|
|
9.4
|
|
|
6.9
|
|
Amortization of debt-related costs
|
3.1
|
|
|
1.3
|
|
|
—
|
|
Loss on disposal of fixed assets
|
—
|
|
|
0.1
|
|
|
—
|
|
Amortization and revaluation of non-cash compensation awards
|
192.3
|
|
|
45.1
|
|
|
44.4
|
|
Net earnings from Affiliates accounted for using the equity method
|
(14.5
|
)
|
|
(15.1
|
)
|
|
(12.7
|
)
|
Distributions received from equity method Affiliates
|
15.4
|
|
|
13.5
|
|
|
8.6
|
|
Revaluation of DTA Deed
|
(51.8
|
)
|
|
—
|
|
|
—
|
|
Impact of Tax Act on deferred income taxes
|
121.1
|
|
|
—
|
|
|
—
|
|
Deferred income taxes
|
(30.1
|
)
|
|
13.3
|
|
|
(11.1
|
)
|
(Gains) losses on other investments
|
(37.4
|
)
|
|
(3.0
|
)
|
|
—
|
|
Changes in operating assets and liabilities (excluding discontinued operations):
|
|
|
|
|
|
|
|
|
(Increase) decrease in investment advisory fees receivable and other amounts due from related parties
|
(44.7
|
)
|
|
(3.1
|
)
|
|
12.8
|
|
(Increase) decrease in other receivables, prepayments, deposits and other assets
|
(31.6
|
)
|
|
(17.6
|
)
|
|
(1.4
|
)
|
Increase (decrease) in accrued incentive compensation and other liabilities and amounts due to OM plc
|
65.2
|
|
|
(14.0
|
)
|
|
15.4
|
|
Increase (decrease) in accounts payable, accrued expenses and accrued income taxes
|
15.3
|
|
|
(28.8
|
)
|
|
37.9
|
|
Net cash flows from operating activities of continuing operations, excluding consolidated Funds
|
224.9
|
|
|
123.9
|
|
|
255.7
|
|
Net income (loss) attributable to non-controlling interests in consolidated Funds
|
4.9
|
|
|
(0.2
|
)
|
|
—
|
|
Adjustments to reconcile net income (loss) attributable to non-controlling interests in consolidated Funds to net cash provided by (used in) operating activities from continuing operations of consolidated Funds:
|
|
|
|
|
|
|
|
|
(Gains) losses on other investments
|
(5.6
|
)
|
|
0.1
|
|
|
—
|
|
(Increase) decrease in receivables and other assets
|
(0.8
|
)
|
|
(0.1
|
)
|
|
—
|
|
Increase (decrease) in accounts payable and other liabilities
|
2.1
|
|
|
0.5
|
|
|
—
|
|
Net cash flows from operating activities of continuing operations of consolidated Funds
|
0.6
|
|
|
0.3
|
|
|
—
|
|
Net cash flows from operating activities of continuing operations
|
225.5
|
|
|
124.2
|
|
|
255.7
|
|
Net cash flows from operating activities of discontinued operations
|
—
|
|
|
13.5
|
|
|
(2.1
|
)
|
Total net cash flows from operating activities
|
225.5
|
|
|
137.7
|
|
|
253.6
|
|
OM Asset Management plc
Consolidated Statements of Cash Flows (Continued)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets, excluding discontinued operations
|
(13.7
|
)
|
|
(13.5
|
)
|
|
(13.0
|
)
|
Payments for Affiliate and joint venture equity
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
Business acquisitions, net of cash acquired
|
(1.9
|
)
|
|
(219.1
|
)
|
|
—
|
|
Purchase of investment securities
|
(84.6
|
)
|
|
(65.0
|
)
|
|
(67.6
|
)
|
Sale of investment securities
|
89.4
|
|
|
13.3
|
|
|
18.5
|
|
Cash flows from investing activities of consolidated Funds:
|
|
|
|
|
|
|
|
|
Purchase of investments
|
(145.6
|
)
|
|
(11.6
|
)
|
|
—
|
|
Redemption of investments
|
59.8
|
|
|
11.2
|
|
|
—
|
|
Consolidation (de-consolidation) of Funds
|
65.6
|
|
|
0.5
|
|
|
(93.0
|
)
|
Net cash flows from investing activities of continuing operations
|
(31.0
|
)
|
|
(284.2
|
)
|
|
(155.7
|
)
|
Net cash flows from investing activities of discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
Total net cash flows from investing activities
|
(31.0
|
)
|
|
(284.2
|
)
|
|
(155.7
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from third party and non-recourse borrowings
|
76.0
|
|
|
450.1
|
|
|
—
|
|
Repayment of third party borrowings
|
(42.5
|
)
|
|
(148.0
|
)
|
|
(87.0
|
)
|
Repayment of related party borrowings
|
—
|
|
|
—
|
|
|
(37.0
|
)
|
Payment to OM plc for deferred tax arrangement
|
(45.6
|
)
|
|
(41.4
|
)
|
|
(53.6
|
)
|
Payment to OM plc for co-investment redemptions
|
(4.8
|
)
|
|
(10.7
|
)
|
|
(14.3
|
)
|
Repurchase of ordinary shares
|
(74.1
|
)
|
|
(98.6
|
)
|
|
—
|
|
Dividends paid to shareholders
|
(27.5
|
)
|
|
(13.1
|
)
|
|
(10.9
|
)
|
Dividends paid to related parties
|
(11.3
|
)
|
|
(25.4
|
)
|
|
(27.8
|
)
|
Cash flows from financing activities of consolidated Funds
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest capital raised
|
33.4
|
|
|
—
|
|
|
—
|
|
Net cash flows from financing activities of continuing operations
|
(96.4
|
)
|
|
112.9
|
|
|
(230.6
|
)
|
Net cash flows from financing activities of discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
Total net cash flows from financing activities
|
(96.4
|
)
|
|
112.9
|
|
|
(230.6
|
)
|
Net increase (decrease) in cash and cash equivalents
|
98.1
|
|
|
(33.6
|
)
|
|
(132.7
|
)
|
Cash and cash equivalents at beginning of period
|
102.3
|
|
|
135.9
|
|
|
268.6
|
|
Cash and cash equivalents at end of period (including cash at consolidated Funds classified as restricted)
|
$
|
200.4
|
|
|
$
|
102.3
|
|
|
$
|
135.9
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid (excluding consolidated Funds)
|
$
|
22.1
|
|
|
$
|
3.1
|
|
|
$
|
3.7
|
|
Income taxes paid
|
$
|
71.2
|
|
|
$
|
23.5
|
|
|
$
|
9.5
|
|
Net consolidation (de-consolidation) of Funds
|
$
|
50.8
|
|
|
$
|
5.5
|
|
|
$
|
(2,520.9
|
)
|
Non-cash capital contribution to OM plc
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
1) Organization and Description of the Business
OM Asset Management plc (“OMAM” or the “Company”), through its subsidiaries, is a global asset management business with interests in a diverse group of boutique investment management firms (the “Affiliates”) individually headquartered in the United States. The Company provides investment management services globally to predominantly institutional investors, in asset classes that include U.S. and global equities, fixed income, alternative assets, real estate, timber and secondary Funds. Fees for services are largely asset-based and, as a result, the Company’s revenue fluctuates based on the performance of financial markets and investors’ asset flows in and out of the Company’s products.
The Company’s Affiliates are organized as limited liability companies. The Company generally utilizes a profit-sharing model in structuring its compensation and ownership arrangements with Affiliates. The Affiliates’ variable compensation is generally based on each firm’s profitability. OMAM and Affiliate key employees share in profits after variable compensation according to their respective ownership interests. The profit-sharing model results in the alignment of OMAM and Affiliate key employee economic interests, which is critical to the Company’s talent management strategy and long-term growth of the business.
Prior to 2014, the Company was a wholly-owned subsidiary of Old Mutual plc (“OM plc”), an international long-term savings, protection and investment group, listed on the London Stock Exchange. On October 15, 2014, the Company completed the initial public offering (the “Offering”) by OM plc pursuant to the Securities Act of 1933, as amended. Additionally, between the Offering and December 31, 2017, the Company and/or OM plc completed the following transactions in the Company’s shares, including a two-step transaction announced on March 25, 2017 for a sale by OM plc of a
24.95%
shareholding in the Company to HNA Capital US (“HNA”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership percentage following the transactions for:
|
|
|
Date
|
|
Transaction description
|
|
Total shares
|
|
OM plc
|
|
HNA
|
|
Note
|
October 15, 2014
|
|
IPO of OMAM shares by OM plc
|
|
24,231,375
|
|
|
78.8
|
%
|
|
—
|
%
|
|
(1)
|
June 22, 2015
|
|
Secondary public offering by OM plc
|
|
15,295,000
|
|
|
65.8
|
%
|
|
—
|
%
|
|
(2)
|
December 16, 2016
|
|
Secondary public offering by OM plc
|
|
14,950,000
|
|
|
—
|
|
|
—
|
|
|
(3)
|
December 16, 2016
|
|
Repurchase and retirement of shares by OMAM
|
|
6,000,000
|
|
|
51.1
|
%
|
|
—
|
%
|
|
(4)
|
May 12, 2017
|
|
Sale of shares from OM plc to HNA
|
|
11,414,676
|
|
|
40.9
|
%
|
|
9.95
|
%
|
|
(5)
|
May 19, 2017
|
|
Secondary public offering by OM plc
|
|
19,895,000
|
|
|
—
|
|
|
—
|
|
|
(6)
|
May 19, 2017
|
|
Repurchase and retirement of shares by OMAM
|
|
5,000,000
|
|
|
20.1
|
%
|
|
10.4
|
%
|
|
(4)
|
November 10, 2017
|
|
Sale of shares from OM plc to HNA
|
|
15,960,553
|
|
|
5.51
|
%
|
|
24.95
|
%
|
|
(7)
|
November 17, 2017
|
|
Secondary public offering by OM plc
|
|
6,039,630
|
|
|
—
|
%
|
|
24.95
|
%
|
|
(8)
|
|
|
(1)
|
Includes
2,231,375
shares purchased by the underwriters of the offering under their overallotment option.
|
|
|
(2)
|
Includes
1,995,000
shares purchased by the underwriters of the offering under their overallotment option.
|
|
|
(3)
|
Includes
1,950,000
shares purchased by the underwriters of the offering under their overallotment option.
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
1) Organization and Description of the Business (cont.)
|
|
(4)
|
Purchased pursuant to the share repurchase program described below. All shares repurchased by the Company were retired.
|
|
|
(5)
|
Following the
May 12, 2017
sale of shares from OM plc to HNA, on May 24, 2017, OM plc appointed Dr. Guang Yang of HNA as an OM plc director.
|
|
|
(6)
|
Includes
2,595,000
shares purchased by the underwriters of the offering under their overallotment option.
|
|
|
(7)
|
Following the
November 10, 2017
sale of shares from OM plc to HNA, HNA acquired the right to appoint two directors to the Company’s board.
|
|
|
(8)
|
Upon completion of the
November 17, 2017
offering, OM plc indirectly owned
1,000
of the Company’s outstanding ordinary shares.
|
Share Repurchase Program
On February 3, 2016, the Company’s Board of Directors authorized a
$150 million
share repurchase program, which was approved by shareholders on March 15, 2016. In 2016, the Company purchased
921,740
shares on the open market at a weighted average price of
$13.22
/share. In 2017, the Company did not purchase shares on the open market.
On April 29, 2016, at the Company’s Annual General Meeting, shareholders (excluding OM plc) authorized a form of contract by which the Company would be permitted to repurchase shares directly from OM plc. The shareholder authorization does not contain a maximum dollar or share amount for such purchases individually or in aggregate from OM plc. On
December 16, 2016
in connection with the secondary offering by OM plc, the Company repurchased
6,000,000
shares directly from OM plc at a price of
$14.25
/share. On
May 19, 2017
in connection with the secondary offering by OM plc, the Company repurchased
5,000,000
shares directly from OM plc at a price of
$14.55
/share.
All shares repurchased by the Company were retired.
Segment Information
The Company operates
one
business segment that provides investment management services and products to predominantly institutional clients. The primary measure used by the Chief Operating Decision Maker (“CODM”) in measuring performance and allocating resources is economic net income. As of each of
December 31, 2017
, and
2016
, all of the Company’s material long-lived assets were domiciled in the United States. For each of the years ended
December 31, 2017
,
2016
and
2015
,
100%
of the Company’s revenue from external customers was attributed to the United States.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Basis of presentation
These Consolidated Financial Statements reflect the historical balance sheets; statements of operations; statements of comprehensive income; statements of changes in shareholders’ equity; and statements of cash flows of the Company. Within these Consolidated Financial Statements, entities that are part of OM plc’s consolidated results, but are not part of OMAM, as defined above, as well as HNA and its related entities, are referred to as “related parties.”
The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All dollar amounts, except per share data in the text and tables herein, are stated in millions unless otherwise indicated. Transactions between the Company and OM plc are included in the Consolidated Financial Statements, however material intercompany balances and transactions among the Company, its consolidated Affiliates and consolidated Funds are eliminated in consolidation.
Revenue recognition
The Company’s consolidated revenue primarily represents management fees billed monthly, quarterly and annually by Affiliates for managing the assets of clients. Asset-based management fees are recognized monthly as services are rendered and are primarily based upon a percentage of the market value of client assets managed. Affiliates that manage tangible property may also earn transaction fees at the time the underlying property is bought and sold. Any fees collected in advance are deferred and recognized as income over the period earned. Dividend income received is recorded on the ex-dividend date. Performance fees are generally assessed as a percentage of the investment performance realized on a client’s account. Additionally, separate accounts or other products which primarily earn management fees are potentially subject to performance adjustment up or down based on investment performance versus benchmark. Performance fees, including those that are subject to clawback are recognized when they (i) become billable to customers (based on contractual terms of agreements), (ii) are not subject to contingent repayment and (iii) when collection is reasonably assured. Other income and revenues include interest income on cash and cash equivalents of Funds and revenue from marketing, distribution and consulting services.
The revenue of consolidated Funds that invest in Timber (the “Timber Funds”) is recognized from log and fiber sales upon delivery to the customer. The Company is typically responsible for all logging and hauling costs. However, under pay-as-cut timber contracts, title and risk of loss from stumpage sales transfer to the buyer as the trees are cut. Revenue is recognized as timber is harvested. The buyer is typically responsible for all logging and hauling costs.
Compensation arrangements
The Company operates short term variable compensation arrangements where generally, a percentage of each Affiliate’s annual pre-variable compensation earnings, as defined in each arrangement, is allocated to a “pool” of each respective Affiliate’s key employees, and subsequently distributed to individuals subject to recommendation and approval of a remuneration committee comprised of both the Company’s and each respective Affiliate’s management. Variable compensation expense is accrued and recognized in the Consolidated Statements of Operations as services are provided by individual employees.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
The Company operates longer term profit-interest plans whereby certain Affiliate key employees are granted (or have a right to purchase) awards representing a profits interest in their respective Affiliate, as distinct from an equity interest due to the lack of pari passu voting rights. Under these plans, the Company may award a portion of the aforementioned variable compensation arrangement through issuance of a profits interest in the Affiliate. The awards generally have a
three
to
five
year vesting period from the grant date, and the service period begins at the commencement of the financial period to which the variable compensation relates. Under these plans, Affiliate key employees are eligible to share in the profits of their respective Affiliates based on their respective percentage interest held.
In addition, under certain circumstances, Affiliate key employees are eligible to receive a series of repurchase payments upon exiting the plans based on a multiple of the last
twelve months
profits of their respective Affiliate, as defined. Profits allocated and movements in the potential repurchase value, determined based on a fixed multiple times trailing twelve month profits, as defined, are recognized as compensation expense. Profit interests compensation liabilities are re-measured at each reporting date at the current trailing twelve month earnings multiple, with movements treated as compensation expense in the Company’s Consolidated Statements of Operations.
Share-based compensation plans
The Company recognizes the cost of all share-based payments to directors, senior management and employees, including grants of restricted stock, as compensation expense in the Consolidated Statements of Operations over the respective vesting periods. Awards made previously under OM plc’s restricted stock and stock options plans are accounted for as equity settled, and the grant date fair value is recognized as compensation expense over the requisite service period, with a corresponding contribution to capital recorded.
Awards made under the Company’s equity plans are accounted for as equity settled, and the grant date fair value is recognized as compensation expense over the requisite service period, with a corresponding contribution to capital recorded. Valuation of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is determined based on the Company’s closing share price as quoted on the New York Stock Exchange on the measurement date. For performance-based awards, a Monte-Carlo simulation model is used to determine the fair value. Key inputs for the model include: assumed reinvestment of dividends, risk-free interest rate and expected volatility. All excess tax benefits and deficiencies on share-based payment awards are recognized as income tax expense or benefit in the Consolidated Statements of Operations. In addition, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur and excess tax benefits or deficiencies are classified with other income tax cash flows as an operating activity in the statement of cash flows. The Company recognizes forfeitures as they occur.
Awards of equity made to Affiliate key employees are accounted for as cash settled, with the fair value recognized as compensation expense over the requisite service period, with a corresponding liability carried within other compensation liabilities on the Consolidated Balance Sheet until the award is settled by the Company. The fair value of the liability is based on the expected cash to be paid. The liability is revalued at each reporting period, with any movements recorded within compensation expense.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Consolidation
Affiliates
The Company evaluates each of its Affiliates and other operating entities to determine the appropriate method of accounting. Generally, majority-owned entities or otherwise controlled investments in which the Company holds a controlling financial interest as the principal shareholder, managing member, or general partner are consolidated.
Funds
In the normal course of business, the Company’s Affiliates sponsor and manage certain investment vehicles (the “Funds”). The Company assesses consolidation requirements with respect to its Funds pursuant to Accounting Standards Codification (“ASC”) Topic 810, Consolidation
(“ASC 810”) relating to the consolidation of VIEs.
In evaluating whether or not a legal entity must be consolidated, the Company determines if such entity is a variable interest entity (“VIE”) or a voting interest entity (“VOE”). A VOE is considered an entity in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns, and the right to direct the activities of the entity that most significantly impact the entity’s economic performance. A VIE is an entity that lacks one or more of the characteristics of a VOE. Assessing whether an entity is a VIE or VOE involves judgment and analysis. Factors considered in this assessment include the entity’s legal organization, the entity’s capital structure and equity ownership and any related party or de-facto agent implications of the Company’s involvement with the entity. Investments that are determined to be VIEs are consolidated if the Company or a consolidated Affiliate is the primary beneficiary of the investment. VOEs are typically consolidated if the Company holds the majority voting interest or otherwise controls the entity.
In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The primary beneficiary of the VIE is defined as the variable interest holder that has a controlling financial interest. A controlling financial interest is defined as (i) the power to direct the activities of the VIE that most significantly impacts its economic performance and (ii) 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. If no single party satisfies both criteria, but the Company and its related parties satisfy the criteria on a combined basis, then the primary beneficiary is the entity out of the related party group that is most closely associated to the VIE. The consolidation analysis can generally be performed qualitatively, however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed. The Company generally is not the primary beneficiary of Fund VIEs created to manage assets for clients unless the Company’s ownership interest in the fund, including interests of related parties, is substantial.
The Company consolidates VOEs when it has control over significant operating, financial and investing decisions of the entity or holds the majority voting interest. For VOEs organized as limited partnerships or as an entity with governance structures similar to a limited partnership (e.g., limited liability company with a managing member), the Company consolidates an entity when it holds the controlling general partnership interest and the limited partners do not hold substantive participating rights or rights to remove and replace the general partner or rights that could provide the limited partners with the ability to impact the ongoing governance and operating activities of the entity.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Upon the occurrence of certain events (such as contributions and redemptions, either by the Company, its Affiliates, or third parties, or amendments to the governing documents of the Company’s investees or sponsored Funds) management reviews and reconsiders its previous conclusion regarding the status of an entity as a VIE or a VOE. Additionally, management continually reconsiders whether the Company is deemed to be a VIE’s primary beneficiary who consolidates such entity. In the third quarter of 2016, following the purchase of certain seed capital investments from OM plc, the Company began consolidating certain Funds pursuant to ASC 810. Additional funds have been consolidated in 2017 as additional seed and co-investment capital has been deployed.
Investments and Investment Transactions
Valuation of investments held at fair value
Valuation of Fund investments is evaluated pursuant to the fair value methodology discussed below. Other investments are categorized as trading and recorded at estimated fair value. Realized and unrealized gains and losses arising from changes in fair value of investments are reported within investment income in the Consolidated Statements of Operations. See Note 5 for a summary of the fair value inputs utilized to determine the fair value of other investments held at fair value.
Valuation of investments held at cost
Valuations of co-investments in Funds investing in timber (the “Timber Funds”) or other similar operating entities are stated at historical cost and are reported within investment income in the Consolidated Statements of Operations. Timber assets and timber lease rights of consolidated Timber Funds are stated at historical cost less depletion for timber previously harvested and less accumulated amortization and depreciation for lease rights and roads. Consolidated Timber Fund investment values are adjusted for capital additions made to the property subsequent to the valuation date. All initial silviculture costs, including site preparation and planting costs are capitalized as stand establishment costs. Stand establishment costs are transferred to a merchantable timber classification as trees reach a certain size. Generally, costs incurred subsequent to two years after planting, such as fertilization, vegetation, insect control and pre-commercial thinning are considered to be maintenance and are expensed as incurred.
Security transactions
The Company generally records securities transactions on a trade-date basis. Realized gains and losses on securities transactions are generally determined on the average-cost method (net of foreign capital gain taxes) and for certain transactions determined based on the specific identification method.
Income and expense recognition
The Company records interest income on an accrual basis and includes amortization of premiums and accretion of discounts. Dividend income and expense on dividends sold short are recorded on the ex-dividend date, net of applicable withholding taxes. Expenses are recorded on an accrual basis.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Foreign currency translation
The books and records of the Company, its Affiliates and its consolidated Funds are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars on the date of valuation. Income and expense transactions denominated in foreign currencies are translated into U.S. dollars using the average exchange rate over the period presented. The portion of realized or unrealized gains and losses resulting from changes in foreign exchange rates and from fluctuations arising from changes in the market prices of the underlying securities are included in the net realized and unrealized gain and loss on investments on the Consolidated Statement of Operations. Net realized and unrealized gains and losses on foreign currency transactions represent net foreign exchange gains or losses from forward foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses between the trade and settlement date on security transactions, and the difference between the amount of the investment income and foreign withholding taxes recorded on the Funds’ books and the U.S. dollar equivalent amounts actually received or paid.
Short sales
Certain Funds may sell a security they do not own in anticipation of a decline in the fair value of that security. When a Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. The short sales are secured by the long portfolio and available cash. The Fund records a gain, limited to the price at which the Fund sold the security short, or a loss, unlimited in size, upon the termination of a short sale. The amount of the gain or loss will be equal to the proceeds received in entering into the short sale less the cost of buying back the short security to close the short position. While the transaction is open, the Fund will incur an expense for any accrued dividends or interest which is paid to the lender of the securities. These short sales may involve a level of risk in excess of the liability recognized in the accompanying Consolidated Balance Sheet. The extent of such risk cannot be quantified.
Funds’ Derivatives
Certain Funds may use derivative instruments. The Funds’ derivative instruments may include foreign currency exchange contracts, credit default swaps, interest rate swaps, financial futures contracts and warrants. The fair values of derivative instruments are recorded as other assets of consolidated Funds or other liabilities of consolidated Funds on the Company’s Consolidated Balance Sheets. The Company has used foreign exchange forwards to hedge the risk of movement in exchange rates on financial assets on a limited basis.
The Company’s Funds have not designated any financial instruments for hedge accounting, as defined in the accounting literature, during the periods presented. The gains or losses on Fund’s derivative instruments not designated for hedge accounting are included as net consolidated Funds gains or losses in the Company’s Consolidated Statements of Operations.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Equity method investments
The Company uses the equity method of accounting for investments that provide the Company with the ability to exercise significant influence over an entity, but that do not meet the requirements for consolidation. Equity method investments include two Affiliates, Heitman LLC (through November 30, 2017) and Investment Counselors of Maryland, LLC, as well as all unconsolidated Funds over which the Company exercises significant influence. In August 2017, the Company agreed in principle to sell its stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, OMAM entered into a redemption agreement on November 17, 2017. Heitman continued to be recorded as an equity method investment through November 30, 2017, at which point the Company reclassified its investment in Heitman to a cost-method investment. The transaction closed on January 5, 2018.
The Company’s share of earnings from equity method investments is included in investment income in the Consolidated Statements of Operations. The carrying amounts of equity method investments are reflected in Investments in the Consolidated Balance Sheets. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value and its estimated fair value is recognized as impairment when the loss is deemed other than temporary. Other investments, in which OMAM or an Affiliate do not exercise significant influence are accounted for under the cost method. Under the cost method, income is recognized as dividends are declared.
Fair value measurements
In accordance with the provisions of FASB ASC 820, “Fair Value Measurement” (“ASC 820”), fair value is the price that the Company expects to be paid upon the sale of an asset or expects to pay upon the transfer of a liability in an orderly transaction between market participants. Pursuant to ASC 820, there is a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the Company’s own conclusions about the assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation. Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
•
Level I—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed derivatives. As required by U.S. GAAP, the Company does not adjust the quoted price for these investments.
•
Level II—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies utilizing observable market inputs other than quoted prices. Investments which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
•
Level III—Pricing inputs are unobservable for the asset or liability and include assets and liabilities where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include general and limited partner interests in corporate private equity, real estate funds, and funds of hedge funds.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. In cases in which the fair value of an investment is established using the net asset value (or its equivalent) as a practical expedient, the investment is not categorized within the fair value hierarchy.
Use of estimates
The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from those estimates.
Operating segment
The Company operates in
one
operating segment that provides investment management services and products primarily to institutional clients. The Company’s determination that it operates one business segment is based on the fact that the Chief Operating Decision Maker (“CODM”) reviews the Company’s financial performance on an aggregate level.
Derivatives and Hedging
The Company may utilize derivative financial instruments to hedge the risk of movement of interest rates and foreign currency on financial assets and liabilities. These derivative financial instruments may or may not qualify as hedges for accounting purposes. The Company records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value. For a derivative financial instrument that qualifies as a hedge for accounting purposes and is designated as a hedging instrument, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into earnings over the life of the hedge. The ineffective portion of the gain or loss is reported in earnings immediately.
Cash and cash equivalents
The Company considers all highly liquid investments, including money market mutual funds, with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Cash held by consolidated Funds is not available to fund general liquidity needs of the Company and is therefore classified as restricted cash.
Investment advisory fees receivable
The Company earns management and performance fees which are billed monthly, quarterly and annually in arrears, according to the terms of the relevant investment management agreement. Management and performance fees that have been earned, but have not yet been collected are presented as investment advisory fees receivable on the Consolidated Balance Sheets. Due to the short-term nature and liquidity of these receivables, the carrying amounts approximate their fair values. The Company typically does not record an allowance for doubtful accounts or bad debt expense, or any amounts recorded have been immaterial.
Fixed assets
Fixed assets are recorded at historical cost and depreciated using the straight-line method over its estimated useful lives. The estimated useful lives of office equipment and furniture and fixtures range from
three
to
five years
. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the lease. Computer software developed or obtained for internal use is amortized using the straight-line method over the estimated useful life of the software, which is generally
three years
or less. The estimated useful life of building assets is
thirty-nine years
. The costs of improvements that extend the life of a fixed asset are capitalized, while the costs of repairs and maintenance are expensed as incurred.
Intangible assets
Acquired Affiliates have identifiable intangible assets arising from contractual or other legal rights with their clients. In determining the value of acquired intangibles, the Company analyzes the net present value of each acquired Affiliate’s existing client relationships based on a number of factors. The Company analyzes the Affiliate’s historical and potential future operating performance, the Affiliate’s historical and potential future rates of attrition among existing clients, the stability and longevity of existing client relationships, the Affiliate’s recent and long-term investment performance, the characteristics of the firm’s products and investment styles, the stability and depth of the Affiliate’s management team and the Affiliate’s history and perceived franchise or brand value. The Company’s acquired intangible assets are predominately definite-life intangible assets and are generally amortized on a straight line basis over their estimated useful lives, ranging from
five
to
sixteen years
, reflecting the expected duration of such relationships. The Company also holds an indefinite-life intangible asset related to the trade name associated with the Landmark acquisition.
The Company tests for the possible impairment of definite-life intangibles whenever events or changes in circumstances indicate that the carrying amount of the asset is not recoverable. If such indicators exist, the Company compares the undiscounted cash flows related to the asset to the carrying value of the asset. If the carrying value is greater than the undiscounted cash flow amount, an impairment charge is recorded in the Consolidated Statements of Operations for amounts necessary to reduce the carrying value of the asset to fair value. Indefinite-life intangible assets are tested for impairment annually as of the first business day of the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Goodwill
The Company records goodwill when the consideration paid in a business acquisition exceeds the fair value of the net total of tangible assets acquired, identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if events or circumstances occur that indicate impairment may exist. Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the Company’s use of the acquired assets in a business combination or the strategy for the Company’s overall business, and significant negative industry or economic trends.
The Company performs its assessment for impairment of goodwill during the fourth quarter annually as of the first business day in October, or as necessary, and the Company has determined that it has
six
reporting units, consisting of the
six
consolidated Affiliates. The Company first considers various qualitative factors to determine if it is more likely than not that the fair value of each of the reporting units is greater than its respective carrying amount, including goodwill. If based on the qualitative assessment it is determined that it is more likely than not that the fair value of any reporting unit is below its respective carrying amount, therefore indicating that impairment may exist, the impact would be determined at that point through a quantitative assessment. For purposes of assessing potential impairment, the fair value of the reporting unit is estimated and compared to the carrying value of the reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s estimates of future growth rates, operating cash flows, discount rates and terminal value. These assumptions and estimates can change in future periods based on market movement and factors impacting the expected business performance. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit. If it is determined that the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the goodwill in the same manner used to determine the amount of goodwill in a business combination. If the carrying value of goodwill exceeds the implied fair value of the goodwill, an impairment charge is recognized in the amount equal to that excess. Based on the Company’s most recent annual goodwill impairment test, the Company concluded that the fair value of each of its reporting units was more likely than not in excess of their carrying values. At the close of each year, management assessed whether there were any conditions present during the fourth quarter that would indicate impairment subsequent to the initial assessment date and concluded that no such conditions were present.
During 2017, the Company changed the goodwill and indefinite life intangible assets impairment assessment date from the last day of the third quarter to the first business day of the fourth quarter of the fiscal year, or October 2, 2017. The Company believes that changing the annual goodwill impairment assessment date does not result in a material change in the method of applying the accounting requirements.
Leases
The Company and its Affiliates currently lease office space and equipment under various leasing arrangements, classified as operating leases. Some lease agreements contain renewal options, rent escalation clauses or other inducements provided by the landlord. Rent expense is accrued to recognize lease escalation provisions and inducements provided by the landlord, if any, on a straight-line basis over the lease term.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Earnings per share
The Company calculates basic and diluted earnings per share (“EPS”) by dividing net income by its shares outstanding as outlined below. Basic EPS attributable to the Company’s shareholders is calculated by dividing “Net income attributable to controlling interests” by the weighted-average number of shares outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of potential ordinary shares unless they are antidilutive. For periods with a net loss, potential ordinary shares are considered antidilutive.
The Company considers two ways to measure dilution to earnings per share: (a) calculate the net number of shares that would be issued assuming any related proceeds are used to buy back outstanding shares (the treasury stock method), or (b) assume the gross number of shares are issued and calculate any related effects on net income available for shareholders (the if-converted or two-class method). As appropriate, the Company’s policy is to apply the more dilutive methodology upon issuance of such instruments.
Deferred financing costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as other assets until such financings are consummated. After consummation of the equity financing, these costs are recorded in total equity as a reduction of Shareholders’ equity generated as a result of the offering. At the time in which the equity financing is no longer considered probable of being consummated, the deferred financing costs are expensed immediately as a charge to operating expenses in the Consolidated Statement of Operations.
The Company records debt issuance costs of term loans as a direct deduction from the carrying amount of the associated debt liability. For debt issuance costs of revolving credit loans, the Company presents debt issuance costs as an asset and subsequently amortizes the deferred costs ratably over the term of the agreement.
Income taxes
The Company uses the asset and liability method of accounting for income taxes on a “separate return” basis. Under this method, a subsidiary is assumed to file a separate return with the taxing authority, thereby reporting its taxable income or loss and paying the applicable tax to or receiving the appropriate refund from the subsidiary’s parent. The rules followed by the subsidiary in computing its tax or refund should be the same as those followed by a taxpayer filing directly with the taxing authority.
The Company files tax returns directly with the U.K., U.S. and state tax authorities and therefore, the computations under the separate return method follow the Company’s filings.
Deferred income taxes are recognized for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company’s deferred tax assets have been attributable to federal and state loss carry forwards, interest deductions, and accrued liabilities.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Deferred income tax assets are subject to a valuation allowance if, in management’s opinion, it is not more-likely-than-not that these benefits will be realized. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including its past operating results, the existence of cumulative earnings or losses in the most recent years and its forecast of future taxable income. In estimating future taxable income, the Company develops assumptions including the amount of future pre-tax operating income and the reversal of temporary differences. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses.
A tax benefit should only be recognized if it is more-likely-than-not that the position will be sustained based on its technical merits. The Company recognizes the financial statement benefit of a tax position only after considering the probability that a tax authority would uphold the position in an examination. For tax positions meeting a “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest amount of benefit greater than
50%
likely of being sustained. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of the benefit. Unrecognized tax benefits and related interest and penalties, are adjusted periodically to reflect changing facts and circumstances. The Company’s accounting policy is to classify interest and related charges as a component of income tax expense.
Non-controlling interests
For certain entities that are consolidated, but not 100% owned, the Company reports non-controlling interests as equity on its Consolidated Balance Sheets. The Company's consolidated net income on the Consolidated Statements of Operations includes the income (loss) attributable to non-controlling interest holders of the Company's consolidated Affiliates and Funds. Ownership interests held by Affiliate key employees are categorized as liabilities on the Consolidated Balance Sheets and are revalued each reporting date, with movements treated as compensation expense in the Consolidated Statements of Operations.
Non-controlling interests in consolidated Funds on the Consolidated Balance Sheets include undistributed income owned by the investors in the respective Funds. The Company’s consolidated net income on the Consolidated Statements of Operations includes the income (loss) attributable to non-controlling interest holders of these consolidated entities.
Redeemable non-controlling interests
The Company includes redeemable non-controlling interests related to certain consolidated Funds as temporary equity on the Consolidated Balance Sheets. Non-controlling interests in certain consolidated Funds are subject to monthly or quarterly redemption by the investors. When redeemable amounts become legally payable to investors, they are classified as a liability and included in total liabilities of consolidated Funds on the Consolidated Balance Sheets.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Other comprehensive income (loss)
Other comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For the Company’s purposes, comprehensive income (loss) represents net income (loss), as presented in the accompanying Consolidated Statements of Operations, adjusted for net foreign currency translation adjustments and adjustments to the valuation of certain derivative securities, net of tax.
Restructuring costs
A liability for restructuring is recognized only after management has developed a formal plan, approved by the Board of Directors, to which it has committed. The costs included in a restructuring liability are those costs that are either incremental or incurred as a direct result of the plan, or are the result of a continuing contractual obligation with no continuing economic benefit to the Company, or a penalty incurred to cancel the contractual obligation. Refer to Note 22 for details of the Company’s restructuring activities.
Allocated Costs from OM plc
OM plc historically provided the Company with various services, including governance through the board of directors and executive committees, investor relations, procurement of insurance coverage, human resources, financial reporting, internal audit, treasury, systems, risk and tax services. All of these services have been transitioned to the Company and therefore the cost charged by OM plc has decreased. The costs associated with the services which have been (i) directly attributable to the Company, (ii) have been charged directly to the Company by OM plc, and (iii) have been paid to OM plc by the Company have been reflected in the Company’s Consolidated Financial Statements. During the years ended
December 31, 2017
,
2016
and
2015
, the amount of expenses charged directly to the Company from OM plc were
$0.4 million
,
$0.9 million
and
$1.8 million
, respectively.
3) Acquisitions
On August 18, 2016, the Company acquired a majority of the equity interests in Landmark Partners, LLC, (“Landmark”) a leading global secondary private equity, real estate and real asset investment firm. The Company acquired a
60%
interest in Landmark in exchange for
$242.7 million
. There is also the potential for an additional payment of up to
$225.0 million
on or around December 31, 2018, subject to service and other conditions. The equity interests of Landmark purchased by the Company entitle the Company to participate in the earnings of Landmark. Certain key members of the management team of Landmark retained the remaining
40%
interest in Landmark, subject to certain vesting conditions. The Company financed the acquisition through proceeds from multiple note offerings, including
$275.0 million
of
4.80%
senior notes due July 27, 2026 and
$125.0 million
of
5.125%
senior notes due August 1, 2031. (see Note 13)
The Company accounted for the acquisition of Landmark as a business combination which requires assets acquired and liabilities assumed to be recorded at fair value. The following table presents a summary of the acquisition-date fair values of the assets acquired and liabilities assumed for OMAM’s acquisition of Landmark (in millions):
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
3) Acquisitions (cont.)
|
|
|
|
|
|
|
|
Landmark
|
Purchase price
|
|
|
Cash
|
|
$
|
239.2
|
|
Seller’s expenses
|
|
3.5
|
|
Total consideration
|
|
242.7
|
|
Identifiable assets and liabilities
|
|
|
Cash
|
|
23.4
|
|
Receivables
|
|
8.5
|
|
Indefinite-life trade name
|
|
1.0
|
|
Amortizable intangible asset management contracts
|
|
85.0
|
|
Fixed assets
|
|
5.1
|
|
Other current assets (liabilities), net
|
|
(26.7
|
)
|
Assets (liabilities), net
|
|
(1.7
|
)
|
Total identifiable assets and liabilities
|
|
94.6
|
|
Goodwill
|
|
$
|
148.1
|
|
The primary aspects of the purchase price allocation relate to amortizable intangible asset management contracts, the indefinite-life trade name and goodwill, which is the amount by which the purchase price exceeds the fair value of the net assets acquired. Certain measurement period adjustments were recorded to the provisional values recorded as of December 31, 2016. These adjustments primarily related to updated estimates, which resulted in an increase to the total consideration paid of
$0.3 million
, a decrease to the fair value of the identifiable net assets acquired of
$1.6 million
and an increase to the amount recorded to goodwill of
$1.9 million
.
The fair value of the amortizable intangible asset management contracts was determined using the excess earnings method, a form of the income approach. The principle behind the excess earnings method is that the value of the intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset only. Excess earnings represent the earnings remaining after applying post-tax contributory asset charges to reflect the return required on other assets that contribute to the generation of the forecast cash flows of the intangible asset. The fair value of the trade name intangible asset was determined utilizing a relief-from-royalty method. The principle behind this method is that the value of the intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset.
The fair value for all identifiable intangible assets was based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This fair value estimate could include assets that are not intended to be used, may be sold or are intended to be used in a manner other than their best use.
The fair value of the acquired amortizable intangible asset management contracts had a useful life estimate of approximately
13.4
years at acquisition. Purchase price allocated to intangible assets and goodwill is expected to be deductible for U.S. tax purposes over a period of
15
years. Goodwill was calculated as the excess of the fair value of
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
3) Acquisitions (cont.)
the consideration paid and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed.
During the year ended December 31, 2016, the Company incurred
$6.1 million
of transaction costs related to the acquisition of Landmark. These costs are recorded within general and administrative expense in the Consolidated Statements of Operations. There were
no
transaction costs incurred during the year ended
December 31, 2017
.
In conjunction with the acquisition, the Company entered into compensation arrangements with employees of Landmark where pre-acquisition equity units held by Landmark employees became subject to a service condition. These units are accounted for as stock-based compensation, were fair valued as of the closing date of the acquisition and vest over varying increments from December 31, 2018 through December 31, 2024. These units contain put rights that provide liquidity to the employees upon vesting. The aforementioned additional payment of up to
$225.0 million
could be paid based on the growth of Landmark’s business. This arrangement is also accounted for as stock-based compensation, fair valued as of the closing date of the acquisition, and vests on December 31, 2018. Both the pre-acquisition equity units and the potential future payment are remeasured at the end of each reporting period.
The financial results of Landmark included in the Company’s consolidated financial results for the year ended
December 31, 2017
include revenues of
$131.0 million
, with
$(54.7) million
of net loss included in net income attributable to the Company, which includes amortization of intangible assets recorded in purchase accounting and compensation expense for the arrangements with employees of Landmark noted above.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined financial results of OMAM and Landmark, as though the acquisition had occurred as of January 1, 2015. The unaudited pro forma financial information reflects certain adjustments for amortization expense related to the fair value of acquired intangible assets, interest expense related to debt incurred to finance the acquisition, amortization related to stock-based compensation arrangements entered into in conjunction with the acquisition, and the income tax impact of the pro forma adjustments. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the financial results that would have been achieved had the acquisition actually occurred at the beginning of the first period presented (in millions, except per-share amounts):
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2016
|
|
2015
|
Revenues
|
$
|
713.5
|
|
|
$
|
780.1
|
|
Total operating expenses
|
594.7
|
|
|
651.9
|
|
Income from continuing operations before taxes
|
109.2
|
|
|
114.8
|
|
Net income attributable to OMAM
|
91.7
|
|
|
97.6
|
|
Net income per share attributable to OMAM shareholders:
|
|
|
|
Basic
|
$0.77
|
|
$0.81
|
Diluted
|
$0.77
|
|
$0.81
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
4) Investments
Investments are comprised of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Investments of consolidated Funds held at fair value
|
$
|
136.7
|
|
|
$
|
35.5
|
|
Equity-accounted investments in unconsolidated Funds (Note 7)
|
—
|
|
|
30.5
|
|
Other investments held at fair value
|
87.4
|
|
|
17.5
|
|
Investments related to long-term incentive compensation plans held at fair value
|
95.2
|
|
|
78.1
|
|
Total investments held at fair value
|
$
|
319.3
|
|
|
$
|
161.6
|
|
Equity-accounted investments in Affiliates (Note 7)
|
1.6
|
|
|
55.2
|
|
Investments in Affiliates carried at cost
|
53.8
|
|
|
—
|
|
Other investments*
|
6.4
|
|
|
52.0
|
|
Total investments per Consolidated Balance Sheets
|
$
|
381.1
|
|
|
$
|
268.8
|
|
* Other investments represent cost-basis investments made by one of our Affiliates, including investments in timber and timberlands. At December 31, 2016,
$50.1 million
of these investments were recorded at the lower of cost or fair value less costs to sell, and subsequently sold in January 2017 for a net gain of approximately
$1.7 million
.
In September 2016, the Company purchased approximately
$39.6 million
of seed investments from OM plc under the terms of the seed capital management agreement, as amended (the “Seed Capital Management Agreement”). In July 2017, the Company purchased all remaining seed capital investments covered by the Seed Capital Management Agreement from OM plc for
$63.4 million
. OMAM financed this purchase in part through borrowings under a non-recourse seed capital facility collateralized entirely by its seed capital holdings. See Note 13 for a further discussion of borrowings and debt.
In August 2017, the Company executed a non-binding term sheet to sell its stake in Heitman LLC to Heitman’s management for cash consideration totaling
$110 million
. Pursuant to this term sheet, OMAM entered into a redemption agreement on November 17, 2017 and Heitman continued to be recorded as an equity method investment through November 30, 2017, at which point the Company reclassified its investment in Heitman to a cost-method investment. Heitman continued to contribute to the Company’s financial results of operations through November 30, 2017 and the transaction closed on January 5, 2018. The carrying value of OMAM’s interest in Heitman as of December 31, 2017 was
$53.8 million
and is included in “Investments in Affiliates carried at cost” in the table above. OMAM will retain its co-investment interests in Heitman-managed funds as well as any carried interest associated with these investments.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
4) Investments (cont.)
Investment income is comprised of the following for the years ended December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Investment return of equity-accounted investments in unconsolidated Funds (Note 7)
|
$
|
1.8
|
|
|
$
|
1.2
|
|
|
$
|
0.3
|
|
Realized and unrealized gains on other investments held at fair value
|
9.4
|
|
|
0.8
|
|
|
—
|
|
Investment return of held for sale investments
|
1.7
|
|
|
0.1
|
|
|
—
|
|
Total return on OMAM investments
|
12.9
|
|
|
2.1
|
|
|
0.3
|
|
Investment return of equity-accounted investments in Affiliates (Note 7)*
|
14.5
|
|
|
15.1
|
|
|
12.7
|
|
Total investment income per Consolidated Statement of Operations
|
$
|
27.4
|
|
|
$
|
17.2
|
|
|
$
|
13.0
|
|
* As previously noted, the Company reclassified its investment in Heitman to a cost-method investment as of November 30, 2017, therefore earnings from Heitman as an equity-accounted investment are included in the table above for the first eleven months of 2017.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements
The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis at
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices
in active
markets
(Level I)
|
|
Significant
other
observable
inputs
(Level II)
|
|
Significant
unobservable
inputs
(Level III)
|
|
Uncategorized
|
|
Total value,
December 31,
2017
|
Assets of OMAM and consolidated Funds
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
$
|
83.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83.8
|
|
Short-term investment funds
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Other investments
|
0.4
|
|
|
—
|
|
|
—
|
|
|
51.5
|
|
|
51.9
|
|
Derivatives
|
0.3
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Consolidated Funds total
|
85.0
|
|
|
0.2
|
|
|
—
|
|
|
51.5
|
|
|
136.7
|
|
Investments in separate accounts
(2)
|
46.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46.1
|
|
Investments related to long-term incentive compensation plans
(3)
|
95.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
95.2
|
|
Investments in unconsolidated Funds
(4)
|
—
|
|
|
—
|
|
|
—
|
|
|
41.3
|
|
|
41.3
|
|
OMAM total
|
141.3
|
|
|
—
|
|
|
—
|
|
|
41.3
|
|
|
182.6
|
|
Total fair value assets
|
$
|
226.3
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
92.8
|
|
|
$
|
319.3
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of consolidated Funds
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
$
|
(7.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7.2
|
)
|
Derivatives
|
(0.5
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
Consolidated Funds total
|
(7.7
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
(7.9
|
)
|
Total fair value liabilities
|
$
|
(7.7
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7.9
|
)
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements (cont.)
The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis at
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices
in active
markets
(Level I)
|
|
Significant
other
observable
inputs
(Level II)
|
|
Significant
unobservable
inputs
(Level III)
|
|
Uncategorized
|
|
Total value,
December 31,
2016
|
Assets of OMAM and consolidated Funds
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
$
|
35.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35.1
|
|
Short-term investment funds
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Consolidated Funds total
|
35.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35.5
|
|
Investments in separate accounts
(2)
|
7.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.5
|
|
Investments related to long-term incentive compensation plans
(3)
|
78.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
78.1
|
|
Investments in unconsolidated Funds
(4)
|
—
|
|
|
—
|
|
|
—
|
|
|
40.5
|
|
|
40.5
|
|
OMAM total
|
85.6
|
|
|
—
|
|
|
—
|
|
|
40.5
|
|
|
126.1
|
|
Total fair value assets
|
$
|
121.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40.5
|
|
|
$
|
161.6
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of OMAM and consolidated Funds
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
$
|
(5.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5.0
|
)
|
Consolidated Funds total
|
(5.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.0
|
)
|
Derivative securities
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
OMAM total
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Total fair value liabilities
|
$
|
(5.0
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5.1
|
)
|
|
|
(1)
|
Assets and liabilities measured at fair value are comprised of financial investments managed by the Company’s Affiliates.
$136.7 million
in assets and
$7.9 million
in liabilities at
December 31, 2017
and
$35.5 million
in assets and
$5.0 million
in liabilities at
December 31, 2016
are the result of the consolidation of Funds sponsored by the Company’s Affiliates.
|
The fair value of investments estimated based on quoted market prices of similar investments, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level II. The Company obtains prices from independent pricing services that may utilize broker quotes, but generally the independent pricing services will use various other pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data. The Company has not made adjustments to the prices provided. If the pricing services are only able to (a) obtain a single broker quote or (b) utilize a pricing model, such securities are classified as Level III. If the pricing services are unable to provide prices, the Company attempts to obtain one or more broker quotes directly from a dealer or values such securities at the last bid price obtained. In either case, such securities are classified as Level III. The Company performs due diligence procedures over third party pricing vendors to understand their methodology and controls to support their use in the valuation process to ensure compliance with required accounting disclosures.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements (cont.)
Equity, short-term investment funds and derivatives which are traded on a national securities exchange are stated at the last reported sales price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level I. These securities that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs obtained by the Company from independent pricing services are classified as Level II.
|
|
(2)
|
Investments in separate accounts of
$46.1 million
at
December 31, 2017
consist of approximately
1%
of cash equivalents and
99%
of equity securities. Investments in separate accounts of
$7.5 million
at
December 31, 2016
, consist of approximately
28%
of cash equivalents and
72%
of equity securities. The Company has valued these using the published price as of the measurement date. Accordingly, the Company has classified these investments as Level I.
|
|
|
(3)
|
Investments related to long-term compensation plans of
$95.2 million
and
$78.1 million
at
December 31, 2017
and
2016
, respectively, are investments in publicly registered daily redeemable funds (some managed by Affiliates), which the Company has classified as trading securities and valued using the published price as of the measurement dates. Accordingly, the Company has classified these investments as Level I.
|
|
|
(4)
|
The uncategorized amounts of
$41.3 million
and
$40.5 million
at
December 31, 2017
and
December 31, 2016
, respectively, relate to investments in unconsolidated Funds which consist primarily of investments in Funds advised by Affiliates and are valued using NAV which the Company relies on to determine their fair value as a practical expedient and has therefore not classified these investments in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to amounts presented in the Consolidated Balance Sheets. These unconsolidated Funds consist primarily of real estate investments Funds and UCITS. The NAVs that have been provided by investees have been derived from the fair values of the underlying investments as of the measurement dates.
|
These investments are subject to longer than monthly or quarterly redemption restrictions, and due to their nature, distributions are received only as cash flows are generated from underlying assets over the life of the Funds. The range of time over which the underlying assets are expected to be liquidated by the investees is approximately
one
to
eight
years from
December 31, 2017
. The valuation process for the underlying real estate investments held by the real estate investment Funds begins with each property or loan being valued by the investment teams. The valuations are then reviewed and approved by the valuation committee, which consists of senior members of the portfolio management, acquisitions, and research teams. For certain properties and loans, the valuation process may also include a valuation by independent appraisers. In connection with this process, changes in fair-value measurements from period to period are evaluated for reasonableness, considering items such as market rents, capitalization and discount rates, and general economic and market conditions.
Not included in the above are
$60.2 million
and
$52.0 million
at
December 31, 2017
and
December 31, 2016
, respectively, of various investments carried at cost, including the Company’s investment in Heitman at December 31, 2017 and investments in timber and timberlands. In January 2018,
$50.1 million
of these timber and timberlands investments were sold for a net gain of approximately
$1.7 million
, and in January, 2018 the Heitman sale transaction was completed and the Company will recognize a net gain of approximately
$50.0 million
during 2018 in the Consolidated Statement of Operations.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements (cont.)
There were no significant transfers of financial assets or liabilities among Levels I, II or III during the years ended
December 31, 2017
and
2016
.
6) Variable Interest Entities
The Company, through its Affiliates, sponsors the formation of various entities considered to be VIEs. These VIEs are primarily Funds managed by Affiliates that are typically owned entirely by third-party investors, however, certain Funds are capitalized with seed capital investments from the Company and its related parties and may be owned partially by Affiliate key employees and/or individuals that own minority interests in an Affiliate.
The Company’s determination of whether it is the primary beneficiary of a Fund that is a VIE is based in part on an assessment of whether or not the Company and its related parties are exposed to the majority of the risks and rewards of the entity. Typically the Fund’s investors are entitled to substantially all of the economics of these VIEs with the exception of the management fees and performance fees, if any, earned by the Company or any investment the Company has made into the Funds. The Company generally is not the primary beneficiary of Fund VIEs created to manage assets for clients unless the Company’s ownership interest, including interests of related parties, is substantial.
The following table presents the assets and liabilities of Funds that are VIEs and consolidated by the Company at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Assets
|
|
|
|
|
|
Investments at fair value
|
$
|
106.7
|
|
|
$
|
14.9
|
|
Other assets of consolidated Funds
|
16.8
|
|
|
0.6
|
|
Total Assets
|
$
|
123.5
|
|
|
$
|
15.5
|
|
Liabilities
|
|
|
|
|
|
Other liabilities of consolidated Funds
|
$
|
3.3
|
|
|
$
|
0.7
|
|
Total Liabilities
|
$
|
3.3
|
|
|
$
|
0.7
|
|
“Investments at fair value” consist of investments in securities and investments in related parties. The Company has also consolidated Funds that are not VIEs, and therefore the assets and liabilities of those Funds are not included in the table above.
The assets of consolidated VIEs presented in the table above belong to the investors in those Funds, are available for use only by the Fund to which they belong, and are not available for use by the Company to the extent they are held by non-controlling interests. Any debt or liabilities held by consolidated Funds have no recourse to the Company's general credit.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
6) Variable Interest Entities (cont.)
The Company’s involvement with Funds that are VIEs and not consolidated by the Company is generally limited to that of an investment manager and its investment in the unconsolidated VIE, if any. The Company’s investment in any unconsolidated VIE generally represents an insignificant interest of the Fund’s net assets and assets under management, such that the majority of the VIE’s results are attributable to third parties. The Company’s exposure to risk in these entities is generally limited to any capital contribution it has made or is required to make and any earned but uncollected management fees. The Company has not issued any investment performance guarantees to these VIEs or their investors.
The following information pertains to unconsolidated VIEs for which the Company holds a variable interest at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Unconsolidated VIE assets
|
$
|
6,001.1
|
|
|
$
|
6,006.3
|
|
Unconsolidated VIE liabilities
|
$
|
3,843.7
|
|
|
$
|
3,740.2
|
|
Equity interests on the Consolidated Balance Sheet
|
$
|
54.4
|
|
|
$
|
54.2
|
|
Maximum risk of loss
(1)
|
$
|
58.5
|
|
|
$
|
58.5
|
|
|
|
(1)
|
Includes equity investments the Company has made or is required to make and any earned but uncollected management/incentive fees. The Company does not record performance/incentive allocations until the respective measurement period has ended.
|
In addition to the multiple unconsolidated VIE Funds, the Company determined that Heitman LLC, one of the Company’s Affiliates, is a VIE. The Company concluded that it is not the primary beneficiary of Heitman LLC because it does not hold the power to direct its most economically significant activities. The Company aggregated Heitman LLC with the Company’s other unconsolidated VIE Funds due to their similar risk profiles given that the risks and rewards are driven by changes in investment values and the Affiliates’ ability to manage those assets.
In August 2017, the Company agreed in principle to sell its stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, OMAM entered into a redemption agreement on November 17, 2017. Heitman continued to contribute to the Company’s financial results of operations through November 30, 2017 and the transaction closed on January 5, 2018.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
7) Equity Accounted Investees
The following tables present summarized financial information for Affiliates and Funds accounted for under the equity method (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
Statements of Income
|
|
2017
|
|
2016
|
|
2015
|
Net revenues
(1)
|
|
$
|
318.9
|
|
|
$
|
340.9
|
|
|
$
|
342.6
|
|
Operating income
|
|
94.1
|
|
|
98.4
|
|
|
114.8
|
|
Other income, net
|
|
197.4
|
|
|
161.9
|
|
|
97.8
|
|
Income before income taxes
|
|
291.5
|
|
|
260.3
|
|
|
212.6
|
|
Less income tax expense
|
|
5.5
|
|
|
8.2
|
|
|
5.9
|
|
Exclude: non-controlling interests income
|
|
247.6
|
|
|
213.7
|
|
|
177.6
|
|
Net income attributable to controlling interests
|
|
$
|
38.4
|
|
|
$
|
38.4
|
|
|
$
|
29.1
|
|
OMAM equity in net income of equity method investees
|
|
$
|
16.3
|
|
|
$
|
16.3
|
|
|
$
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Balance Sheets
|
2017
|
|
2016
|
Total assets
|
$
|
3.5
|
|
|
$
|
2,661.5
|
|
Total liabilities
|
1.6
|
|
|
1,105.9
|
|
Non-controlling interests in subsidiaries
|
0.3
|
|
|
1,477.9
|
|
Members’ equity
|
$
|
1.6
|
|
|
$
|
77.7
|
|
OMAM equity investment and undistributed earnings of affiliated companies, before consolidating and reconciling adjustments
|
$
|
1.6
|
|
|
$
|
55.9
|
|
Consolidating and reconciling adjustments:
|
|
|
|
|
Goodwill attributable to equity method investment
|
—
|
|
|
29.8
|
|
OMAM investment in equity method investees
|
$
|
1.6
|
|
|
$
|
85.7
|
|
|
|
(1)
|
Net revenues include advisory fees for asset management services and investment income, including interest and dividends from consolidated investment partnerships.
|
As disclosed in Note 4, as of November 30, 2017, the Company reclassified its investment in Heitman to a cost-method investment. Heitman contributed to the Company’s financial results of operations for the eleven-month period from January 1, 2017 through November 30, 2017. The financial results of operations from Heitman for this eleven-month period are therefore included in the summarized statements of income table above.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
8) Fixed Assets and Lease Commitments
Fixed assets consisted of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Leasehold improvements
|
$
|
32.4
|
|
|
$
|
31.7
|
|
Office equipment
|
28.2
|
|
|
25.6
|
|
Furniture and fixtures
|
7.2
|
|
|
7.0
|
|
Building
|
2.9
|
|
|
2.9
|
|
Software and web development
|
38.7
|
|
|
28.6
|
|
Fixed assets, at cost
|
109.4
|
|
|
95.8
|
|
Accumulated depreciation and amortization
|
(67.7
|
)
|
|
(56.0
|
)
|
Fixed assets, net
|
$
|
41.7
|
|
|
$
|
39.8
|
|
Depreciation and amortization expense for continuing operations was
$11.7 million
,
$9.4 million
and
$6.9 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The Company and its Affiliates lease office space for their operations. At
December 31, 2017
, the Company’s aggregate future minimum payments for operating leases having initial or non-cancelable lease terms greater than one year are (in millions):
|
|
|
|
|
|
Future
minimum
rentals
|
2018
|
$
|
11.8
|
|
2019
|
10.8
|
|
2020
|
10.5
|
|
2021
|
9.8
|
|
2022
|
5.1
|
|
Thereafter
|
4.7
|
|
Total
|
$
|
52.7
|
|
The Company is responsible for other expenses under these leases as well. Such expenses include operating costs, insurance, taxes and broker fees. Consolidated rent and occupancy expenses for
2017
,
2016
and
2015
were
$12.0 million
,
$11.6 million
and
$10.9 million
respectively.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
9) Goodwill and Intangible Assets
The following table presents the changes in goodwill in
2017
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Book Value
|
|
Accumulated
Impairment
|
|
Net Book
Value
|
December 31, 2015
|
$
|
160.4
|
|
|
$
|
(33.9
|
)
|
|
$
|
126.5
|
|
Additions
|
146.2
|
|
|
—
|
|
|
146.2
|
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
Disposals
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2016
|
$
|
306.6
|
|
|
$
|
(33.9
|
)
|
|
$
|
272.7
|
|
Additions
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
Disposals
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2017
|
$
|
308.5
|
|
|
$
|
(33.9
|
)
|
|
$
|
274.6
|
|
The additional goodwill recorded in 2016 relates to the acquisition of Landmark, which closed in August 2016. Certain measurement period adjustments were recorded in
2017
that resulted in a
$1.9 million
increase in goodwill. Refer to Note 3 for additional information.
The following table presents the change in definite-lived acquired intangible assets in
2017
and
2016
, comprised of client relationships (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Book Value
|
|
Accumulated
Amortization &
Impairment
|
|
Net Book
Value
|
December 31, 2015
|
$
|
23.3
|
|
|
$
|
(21.8
|
)
|
|
$
|
1.5
|
|
Additions
|
85.0
|
|
|
—
|
|
|
85.0
|
|
Amortization
|
—
|
|
|
(2.6
|
)
|
|
(2.6
|
)
|
Disposals
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2016
|
$
|
108.3
|
|
|
$
|
(24.4
|
)
|
|
$
|
83.9
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
|
—
|
|
|
(6.6
|
)
|
|
(6.6
|
)
|
Disposals
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2017
|
$
|
108.3
|
|
|
$
|
(31.0
|
)
|
|
$
|
77.3
|
|
The Company’s definite-lived acquired intangibles are amortized over their expected useful lives. As of
December 31, 2017
, these assets were being amortized over remaining useful lives of
five
to
twelve
years. The Company recorded amortization expense of
$6.6 million
,
$2.6 million
and
$0.1 million
, respectively, for the years ended
December 31, 2017
,
2016
and
2015
.
The Company also acquired a
$1.0 million
indefinite-lived intangible trade name in the acquisition of Landmark, included in acquired intangibles, net, on the Company’s Consolidated Balance Sheet at
December 31, 2017
and
2016
.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
9) Goodwill and Intangible Assets (cont.)
The Company estimates that its consolidated annual amortization expense, assuming no useful life changes or additional investments in new or existing Affiliates, for each of the next five fiscal years is as follows (in millions):
|
|
|
|
|
2018
|
$
|
6.6
|
|
2019
|
6.6
|
|
2020
|
6.6
|
|
2021
|
6.6
|
|
2022
|
6.5
|
|
Thereafter
|
44.4
|
|
Total
|
$
|
77.3
|
|
10) Related Party Transactions
Amounts due from related parties were comprised of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
(1)
|
|
2016
|
Fees receivable from unconsolidated Funds
|
$
|
59.0
|
|
|
$
|
40.8
|
|
Fees receivable from OM plc business units
|
—
|
|
|
2.0
|
|
Other amounts due from related parties
|
—
|
|
|
2.8
|
|
Total amounts due from related parties
|
$
|
59.0
|
|
|
$
|
45.6
|
|
Amounts due to related parties were comprised of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
(1)
|
|
2016
|
Other amounts due to related parties
|
$
|
—
|
|
|
$
|
0.4
|
|
Other amounts due to OM plc
(3)
|
—
|
|
|
97.0
|
|
Total current payables to related parties
|
—
|
|
|
97.4
|
|
Other amounts due to OM plc
(3)
|
—
|
|
|
58.9
|
|
Total long-term payables to related parties
|
—
|
|
|
58.9
|
|
Total amounts due to related parties
|
$
|
—
|
|
|
$
|
156.3
|
|
Investments in related parties consisted of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Investments in equity-accounted investees (Note 7)
|
1.6
|
|
|
85.7
|
|
Total related party investments
|
$
|
1.6
|
|
|
$
|
85.7
|
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
10) Related Party Transactions (cont.)
Related party transactions included in the Company’s Consolidated Statement of Operations for the years ended December 31 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
2017
|
|
2016
|
|
2015
|
Management fees collected from OM plc business units
(1)
|
$
|
8.5
|
|
|
$
|
7.8
|
|
|
$
|
9.3
|
|
Management fees collected from unconsolidated Funds
(2)
|
274.9
|
|
|
131.0
|
|
|
107.0
|
|
Performance fees collected from unconsolidated Funds
(2)
|
0.1
|
|
|
4.2
|
|
|
1.9
|
|
Total related party revenues (including discontinued operations)
|
$
|
283.5
|
|
|
$
|
143.0
|
|
|
$
|
118.2
|
|
Expenses:
|
|
|
|
|
|
Rent and administrative costs recharged by OM plc business units
(4)
|
0.2
|
|
|
1.0
|
|
|
1.7
|
|
Restricted stock grants of OM plc equity to OMAM employees (Note 18)
|
—
|
|
|
0.1
|
|
|
0.5
|
|
Recharged OM plc operational costs
(5)
|
0.4
|
|
|
0.9
|
|
|
1.8
|
|
Total related party expenses (including discontinued operations)
|
$
|
0.6
|
|
|
$
|
2.0
|
|
|
$
|
4.0
|
|
|
|
(1)
|
OM plc was considered a related party through November 17, 2017, at which point OM plc sold all but a deminimus amount of the Company’s ordinary shares (see Note 1). Therefore, revenue and expenses reported in the table above reflect OM plc as a related party through November 17, 2017. OM plc was not considered a related party at
December 31, 2017
.
|
|
|
(2)
|
Transactions with unconsolidated Affiliate-sponsored Funds are considered related party items on the basis of the Company’s significant influence over the activities of such entities in its capacity as investment advisor thereto. These transactions are comprised of fees for advisory services and investments in unconsolidated “master” Funds held by consolidated “feeder” Funds.
|
|
|
(3)
|
During 2016, the Company and OM plc agreed to amend the Deferred Tax Asset Deed. Under the terms of the Deferred Tax Asset Deed, as amended, the Company agreed to make a payment of the net present value of the future tax benefits due to OM plc valued as of December 31, 2016. This payment, originally valued at
$142.6 million
, was to be made over
three
installments, on June 30, 2017, December 31, 2017 and June 30, 2018. The initial payment of
$45.5 million
was paid on June 30, 2017, however as a result of the Tax Act, no additional payments have been made pending the continued evaluation of the Tax Act’s impact on the value of the Deferred Tax Asset Deed. The reduction of the corporate tax rate and other provisions of the Tax Act resulted in a decrease to the Deferred Tax Asset Deed of approximately
$51.8 million
for the year ended
December 31, 2017
, however there remains a possibility for additional reductions pending continued evaluation of the Tax Act’s impact on the value of the Deferred Tax Asset Deed.
|
During
2014
, the Company entered into a Seed Capital Management Agreement, a Co-investment Deed and a shareholder agreement with OM plc and/or OM plc’s subsidiaries. During
2016
, the Company and OM plc agreed to amend the Seed Capital Management Agreement. As a result of the amendment, the Company purchased approximately
$39.6 million
of seed investments from OM plc in September 2016. The Company purchased the remaining seed capital investments covered by the Seed Capital Management Agreement valued at
$63.4 million
in July 2017, financed in part by borrowings under a non-recourse loan facility (see Note 13) and two promissory notes due and payable on March 31, 2018 in the amount of
$4.5 million
. Amounts owed to OM plc associated with the Co-investment Deed were
$11.3 million
at
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
10) Related Party Transactions (cont.)
December 31, 2017
, net of tax. As of
December 31, 2017
, the Company had recorded
$2.0 million
for redemptions and estimated taxes due under the Co-investment Deed. Amounts withheld in excess of the future tax liability will be payable to OM plc upon settlement.
|
|
(4)
|
The Company conducts a portion of its distribution activities out of Asia and the United Kingdom, and has entered into contractual arrangements with Related Business Units domiciled there to share their premises and leverage certain of their administrative functions. With respect to premises in Asia, such arrangements ended in the first half of 2016.
|
|
|
(5)
|
OM plc has historically provided the Company with various oversight services, including governance, which includes compensation for board and executive committees, investor relations, procurement of insurance coverage, human resources, financial reporting, internal audit, treasury, systems, risk and tax services. All of these services have been transitioned to the Company and therefore the cost charged by OM plc has decreased. That portion of the above costs which (i) were directly attributable to the Company, (ii) have been charged to the Company by OM plc and (iii) have been paid to OM plc by the Company, have been recorded in the Company’s Consolidated Financial Statements and were
$0.4 million
,
$0.9 million
, and
$1.8 million
for the years ended
December 31,
2017
,
2016
and
2015
, respectively.
|
Other related party arrangements
During
2016
, the Company made a loan to an equity-method Affiliate that was used to make co-investments in Affiliate Funds. Amounts due to the Company in connection with this loan are included in other assets on the Company’s Consolidated Balance Sheet and were
$3.6 million
and for
$2.7 million
at
December 31, 2017
and
December 31, 2016
, respectively. The Company uses the equity-method to account for its interests in Affiliates where it exercises significant influence over their operations, but does not hold a controlling interest. During
2017
,
2016
and
2015
, the Company recorded earnings in respect of these investees of
$14.5 million
,
$15.1 million
and
$12.5 million
, respectively. The Company also exercises significant influence over unconsolidated Funds; however in order to report in a manner consistent with consolidated Funds, it has elected to apply the fair value option for its investments therein. Additional information with respect to equity-accounted investees is disclosed in Note 7.
During the years ended
December 31, 2017
,
2016
and
2015
, the Company paid dividends to OM plc of
$8.8 million
,
$25.4 million
and
$27.8 million
, respectively. During the year ended
December 31, 2017
, the Company paid dividends to HNA of
$2.5 million
.
As the Company is a member of a group of related businesses, it is possible that the terms of certain related party transactions are not the same as those that would result from transactions with wholly unrelated parties.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
11) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accounts payable
|
5.2
|
|
|
5.1
|
|
Accrued expenses
|
39.9
|
|
|
29.8
|
|
Accrued interest payable
|
7.6
|
|
|
8.4
|
|
Other
|
2.2
|
|
|
2.5
|
|
Total accounts payable and accrued expenses
|
$
|
54.9
|
|
|
$
|
45.8
|
|
12) Other Compensation Liabilities
Other compensation liabilities consisted of the following at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Share-based payments liability (Note 18)
|
$
|
188.8
|
|
|
$
|
53.7
|
|
Non-current compensation payable
|
0.1
|
|
|
0.1
|
|
Profit interests compensation liability (Note 2)
|
195.0
|
|
|
159.2
|
|
Voluntary deferral plan liability (Note 17)
|
95.1
|
|
|
78.0
|
|
Total other compensation liabilities
|
$
|
479.0
|
|
|
$
|
291.0
|
|
Profit interests compensation expense amounted to
$41.5 million
in
2017
,
$16.2 million
in
2016
, and
$31.4 million
in
2015
. Issuances of additional profit sharing interests to Affiliate key employees for cash amounted to
$0.0 million
in
2017
,
$0.4 million
in
2016
, and
$0.2 million
in
2015
. Redemption of profit sharing interests by OMAM from Affiliate key employees for cash were
$5.7 million
in
2017
,
$12.7 million
in
2016
, and
$2.9 million
in
2015
.
The share-based payments liability includes the Landmark compensation arrangements and potential additional payment disclosed in Note 3 which combined amounted to
$146.8 million
at December 31, 2017 and
$26.0 million
at December 31, 2016.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
13) Borrowings and Debt
The Company’s long-term debt at
December 31, 2017
was comprised of a revolving credit facility, non-recourse seed capital financing and long-term bonds.
Revolving credit facility
On October 15, 2014, the Company entered into a revolving credit facility with Citibank, as administrative agent and issuing bank, and Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers and joint book runners (as amended, the “Credit Facility”). Pursuant to the terms of the Credit Facility, the Company may obtain loans on a revolving credit basis and procure the issuance of letters of credit in an aggregate amount at any time outstanding not in excess of
$350 million
. The Credit Facility has a maturity date of
October 15, 2019
. Borrowings under the credit facility bear interest, at OMAM’s option, at either the per annum rate equal to (a) the greatest of (i) the prime rate, (ii) the federal funds effective rate plus
0.5%
and (iii) the one month Adjusted LIBO Rate plus
1.0%
, plus, in each case an additional amount ranging from
0.25%
to
1.00%
, with such additional amount based from time to time on the ratio of the Company’s total consolidated indebtedness to Adjusted EBITDA (a “Leverage Ratio”) until either Moody’s Investor Service, Inc. or Standard & Poor’s assigned an initial rating to the Company’s senior, unsecured long-term indebtedness for borrowed money that was not subject to credit enhancement, or its credit rating, at which time such additional amount became based on its credit rating or (b) the London interbank offered rate for a period, at the Company’s election, equal to one, two, three or six months plus an additional amount ranging from
1.25%
to
2.00%
, with such additional amount based from time to time on the Company’s Leverage Ratio until it was assigned a credit rating, at which time such additional amount became based on its credit rating. In addition, the Company is charged a commitment fee based on the average daily unused portion of the revolving credit facility at a per annum rate ranging from
0.20%
to
0.50%
, with such amount based from time to time on its Leverage Ratio until it was assigned a credit rating, at which time such amount became based on the Company’s credit rating.
In July 2016, Moody’s Investor Service, Inc. and Standard & Poor’s each assigned an initial investment-grade rating to the Company’s senior, unsecured long-term indebtedness. As a result of the assignment of the credit ratings, the Company’s interest rate on outstanding borrowings was set at
LIBOR
+
1.50%
and the commitment fee on the unused portion of the revolving credit facility was set at
0.25%
. Prior to the assignment of the credit ratings, the Company’s interest rate on outstanding borrowings was based on the Company’s Leverage Ratio and was set at
LIBOR
+
1.25%
and the commitment fee on the unused portion of the revolving credit facility was set at
0.20%
. Under the Credit Facility, the ratio of third-party borrowings to trailing twelve months Adjusted EBITDA cannot exceed
3.0
x, and the interest coverage ratio must not be less than
4.0
x.
At
December 31, 2017
, the outstanding balance of the facility was
$0.0 million
(
$350.0 million
of undrawn revolving credit facility capacity). Including
$392.8 million
of long-term bonds and per the terms of the revolving credit facility, which excludes non-recourse debt (see below), the Company’s ratio of third-party borrowings to trailing twelve months Adjusted EBITDA was
1.4
x, and interest coverage ratio was
11.5
x. The fair value of borrowings on the revolving credit facility approximated the net cost basis as of
December 31, 2017
.
At
December 31, 2016
the outstanding balance of the facility was
$0.0 million
(
$350.0 million
of undrawn revolving credit facility capacity). Including
$392.3 million
of long-term bonds (see below), the Company’s ratio of third-party borrowings to trailing twelve months Adjusted EBITDA was
1.9
x and interest coverage ratio was
18.5
x.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
13) Borrowings and Debt (cont.)
Non-recourse seed capital facility
In July 2017, the Company purchased all remaining seed capital investments covered by the Seed Capital Management Agreement from OM plc for
$63.4 million
. OMAM financed this purchase in part through borrowings under a non-recourse seed capital facility collateralized entirely by its seed capital holdings. The Company entered into this facility as of July 17, 2017, and may borrow up to
$65.0 million
, so long as the borrowing does not represent more than
50%
of the value of the permitted seed capital collateral. The non-recourse seed facility bears interest at
LIBOR
+
1.55%
with a commitment fee on the unused portion of this facility of
0.95%
. The facility currently has a maturity date of
January 17, 2019
and includes a six-month evergreen renewal option. At
December 31, 2017
, amounts outstanding under this non-recourse seed capital facility amounted to
$33.5 million
. Per the terms of the Company’s revolving credit facility, drawdowns under this facility are excluded from the Company’s third party debt levels for purposes of calculating the Company’s credit ratio covenants. The fair value of borrowings on the non-recourse seed capital facility approximated the net cost basis as of
December 31, 2017
.
Long-term bonds
The Company’s long-term bonds were comprised of the following as of the dates indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(in millions)
|
Maturity amount
|
|
Discount and debt issuance costs
|
|
Carrying value
|
|
Fair Value
|
|
Carrying value
|
|
Fair Value
|
Long-term bonds:
|
|
|
|
|
|
|
|
|
|
|
|
4.80% Senior Notes Due 2026
|
$
|
275.0
|
|
|
$
|
(3.1
|
)
|
|
$
|
271.9
|
|
|
$
|
285.7
|
|
|
$
|
271.6
|
|
|
$
|
271.0
|
|
5.125% Senior Notes Due 2031
|
125.0
|
|
|
(4.1
|
)
|
|
120.9
|
|
|
124.6
|
|
|
120.7
|
|
|
107.9
|
|
Total long-term bonds
|
$
|
400.0
|
|
|
$
|
(7.2
|
)
|
|
$
|
392.8
|
|
|
$
|
410.3
|
|
|
$
|
392.3
|
|
|
$
|
378.9
|
|
In July 2016, the Company issued
$275.0 million
of
4.80%
Senior Notes due 2026 (the “2026 Notes”) and
$125.0 million
of
5.125%
Senior Notes due 2031 (the “2031 Notes”). The Company used the net proceeds of these offerings to finance the acquisition of Landmark in August 2016, settle an outstanding interest rate lock, purchase seed capital from OM plc and pay down the balance of the Revolving Credit Facility.
4.80%
Senior Notes Due July 2026
The
$275.0 million
2026 Notes were sold at a discount of
$(0.5) million
and the Company incurred debt issuance costs of
$(3.0) million
, which are being amortized to interest expense over the
ten
-year term. The 2026 Notes can be redeemed at any time prior to the scheduled maturity in part or in aggregate, at the greater of the related
100%
principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus
0.5%
, together with any related accrued and unpaid interest.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
13) Borrowings and Debt (cont.)
5.125%
Senior Notes Due August 2031
The
$125.0 million
2031 Notes incurred debt issuance costs of
$(4.3) million
, which are being amortized to interest expense over the
fifteen
-year term. The 2031 Notes can be redeemed at any time, on or after August 1, 2019 at a redemption price equal to
100.0%
of the principal amount together with any related accrued and unpaid interest.
The fair value of the long-term bonds was determined using broker quotes and any recent trading activity for each of the notes listed above, which are considered Level II inputs.
Interest expense
Interest expense incurred amounted to
$24.5 million
,
$11.3 million
and
$3.1 million
for the years ended
December 31, 2017
,
2016
and
2015
respectively. Interest expense consists of interest accrued on the long-term debt, commitment fees and amortization of debt-related costs. The weighted average interest rate on all debt obligations, excluding consolidated Funds, was
6.02%
,
5.16%
and
1.40%
in each of
2017
,
2016
and
2015
, respectively.
As of
December 31, 2017
, the aggregate maturities of debt commitments, based on their contractual terms, are as follows:
|
|
|
|
|
|
|
|
Future minimum
debt commitments
|
2018
|
|
$
|
—
|
|
2019
|
|
33.5
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
2022
|
|
—
|
|
Thereafter
|
|
400.0
|
|
Total
|
|
$
|
433.5
|
|
The Company was in compliance with the required covenants related to borrowings and debt facilities as of
December 31, 2017
.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes
The components of income tax expense from continuing operations for the years ended December 31 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
30.0
|
|
|
$
|
17.3
|
|
|
$
|
40.8
|
|
State
|
5.9
|
|
|
2.6
|
|
|
7.4
|
|
Foreign
|
3.6
|
|
|
1.4
|
|
|
1.3
|
|
Total current
|
39.5
|
|
|
21.3
|
|
|
49.5
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
102.7
|
|
|
19.6
|
|
|
(4.5
|
)
|
State
|
(9.3
|
)
|
|
(0.2
|
)
|
|
(4.5
|
)
|
Foreign
|
(0.1
|
)
|
|
0.1
|
|
|
6.1
|
|
Total deferred
|
93.3
|
|
|
19.5
|
|
|
(2.9
|
)
|
Total tax expense
|
$
|
132.8
|
|
|
$
|
40.8
|
|
|
$
|
46.6
|
|
Included in gain (loss) on disposal of discontinued operations is income tax expense of
$(0.1) million
,
$4.0 million
and
$0.5 million
in the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The provision for income taxes in
2017
,
2016
and
2015
included benefits of
$1.2 million
,
$4.7 million
and
$4.0 million
, respectively, related to the utilization of net operating loss carryforwards.
The reconciliation of the difference between the Company’s U.S. Federal statutory income tax rate and the effective income tax rate for continuing operations for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Tax at U.S. federal statutory income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
1.7
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Non-deductible expenses
|
0.2
|
%
|
|
—
|
%
|
|
—
|
%
|
DTA Deed liability revaluation adjustment
|
(12.8
|
)%
|
|
—
|
%
|
|
—
|
%
|
Interest expense
|
(10.2
|
)%
|
|
(12.1
|
)%
|
|
(9.3
|
)%
|
Dividends from foreign subsidiaries
|
—
|
%
|
|
—
|
%
|
|
0.3
|
%
|
Adjustment to liabilities for uncertain tax positions
|
(1.2
|
)%
|
|
0.9
|
%
|
|
(0.4
|
)%
|
Change in valuation allowance
|
1.1
|
%
|
|
(0.6
|
)%
|
|
(3.4
|
)%
|
Effect of foreign operations
|
(4.0
|
)%
|
|
(0.7
|
)%
|
|
(1.0
|
)%
|
Effect of changes in tax law
|
86.4
|
%
|
|
—
|
%
|
|
(0.5
|
)%
|
Effect of income from non-controlling interest
|
(1.3
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
(1.4
|
)%
|
|
(0.2
|
)%
|
|
(0.5
|
)%
|
Effective income tax rate for continuing operations
|
93.5
|
%
|
|
25.3
|
%
|
|
23.2
|
%
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
On November 16, 2017, the U.K. Finance (No.2) Bill 2017 (the “Finance Bill”) received Royal Assent and enacted amendments to the hybrid mismatch rules which are effective from July 13, 2017. Accordingly, the Company has recognized incremental U.K. taxes of
$2.7 million
in 2017 due to reduced benefits from its intercompany financing arrangements as of the effective date.
During 2017, the Company recorded an additional
$3.1 million
valuation allowance against its state net operating loss carryforwards as management concluded it is unlikely the tax benefits will be realized largely due to Pennsylvania legislation enacted during 2017 which limits the Company’s annual usage of net operating losses within the state.
During 2015 and 2016, the Company released
$2.0 million
and
$0.9 million
of its valuation allowance relating to state net operating loss carryforwards as management has concluded that the tax benefits will be realized due to increases of income apportioned to the applicable states.
During 2015, the Company released
$4.5 million
of its valuation allowance relating to foreign tax credit carryforwards, as management has concluded that the tax benefits will be realized primarily due to forecasted taxable income resulting from the utilization of substantially all the Company’s remaining federal net operating loss carryforwards. As of
December 31, 2017
the Company has fully realized its deferred tax asset for foreign tax credit carryforwards.
In general, it is the practice and intention of the Company to reinvest earnings of its non-U.S. subsidiaries in those operations. Management has no intention of repatriating earnings of its non-U.S. subsidiaries in the foreseeable future. At
December 31, 2017
, the Company has not recorded any deferred tax liabilities relating to additional taxes such as foreign withholding and state taxes which could arise on the repatriation of unremitted earnings of its non-U.S. subsidiaries.
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law and is effective January 1, 2018. The Tax Act enacted various measures of domestic corporate tax reform that were impactful to the Company including reduction of the federal statutory corporate tax rate from 35% to 21%, limitations on the deductibility of interest expense and introduced several measures of international tax reform including the one-time tax on mandatory deemed repatriation of non-U.S. earnings.
In accordance with ASC 740-10-45-15, the Company has recognized the effect of the tax law in the period of enactment. As a result of the enactment of the Tax Act, the Company has recognized a one-time tax charge of approximately
$122.7 million
during 2017, which has increased the Company’s overall effective tax rate for the period, predominately related to the Company’s revaluation of its deferred tax assets to the reduced federal statutory corporate tax rate of 21%.
The amounts owed by the Company to OM plc at December 31, 2017 under the Deferred Tax Asset Deed were reduced by
$51.8 million
due to enactment of the Tax Act. The revaluation of the deed has been reflected as a component of income from continuing operations before taxes.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
Status of the Company’s Assessment
Passage of the Tax Act represents the first major tax reform to the U.S. federal corporate income tax system in over thirty years. The newly introduced domestic and international provisions require the gathering and aggregation of new information and performance of complex computations not routinely performed by the Company in the past.
Due to the rapid development of U.S. tax reform in the fourth quarter of 2017, substantial regulatory and interpretive guidance from the U.S. Department of Treasury and other applicable taxing authorities has not been released yet, although it is expected to be forthcoming.
The SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to assist companies by addressing some of the uncertainty in applying ASC 740 with respect to 2017 financial statements. Under SAB 118, the Company is permitted to provide provisional amounts for recording the tax effects of the enacted tax law during a specified measurement period, ending one year after the enactment date.
Accordingly, the Company has provided provisional estimates on the effect of the Tax Act in its 2017 financial statements to the extent the necessary information is not available, prepared, or analyzed to accurately complete the tax accounting.
The Company determined reasonable estimates based on currently available information and published guidance, however the Company’s accounting for the effect of the Tax Act remains incomplete under SAB 118 with respect to the following:
Section 965 toll charge tax liability:
The Company has determined a preliminary estimate of its Section 965 toll charge tax liability on the mandatory deemed repatriation of post-1986 undistributed foreign earnings of its non-U.S. subsidiaries. As of December 31, 2017, the Company has accrued income tax liabilities of
$1.5 million
relating to the toll charge. Starting in 2018, the liability will be paid over an eight-year period and will not accrue interest. The Company has made a reasonable estimate based on currently available information, however the accounting is incomplete and subject to finalization of estimates and amounts related to earnings and profits of its foreign subsidiaries and the filing of 2017 tax returns. U.S. Treasury regulations, administrative interpretations of the Tax Act may require further adjustments to the preliminary estimate.
The Company will continue to evaluate the Tax Act during the measurement period and record adjustments to provisional amounts in the period in which they are completed as information becomes available and further clarifying, interpretive guidance on the application of the tax law is released.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
Deferred tax assets and liabilities reflect the expected future tax consequences of temporary differences between the book carrying amounts and tax bases of the Company’s assets and liabilities.
The significant components of deferred tax assets and deferred tax liabilities for the years ended December 31 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Interest expense
|
$
|
80.9
|
|
|
$
|
150.5
|
|
Federal net operating loss
|
1.8
|
|
|
3.7
|
|
State net operating loss carry forwards
|
8.6
|
|
|
7.6
|
|
Investment in partnerships
|
140.3
|
|
|
140.1
|
|
Foreign tax credit carry forwards
|
—
|
|
|
9.1
|
|
Intangible assets
|
0.9
|
|
|
1.4
|
|
Employee compensation
|
8.9
|
|
|
16.5
|
|
Other
|
2.6
|
|
|
5.6
|
|
Cash flow hedge
|
5.1
|
|
|
5.9
|
|
Investments
|
0.1
|
|
|
—
|
|
Total deferred tax assets
|
249.2
|
|
|
340.4
|
|
Valuation allowance
|
(8.6
|
)
|
|
(5.5
|
)
|
Deferred tax assets, net of valuation allowance
|
240.6
|
|
|
334.9
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Investments
|
—
|
|
|
2.2
|
|
Net deferred tax asset
|
$
|
240.6
|
|
|
$
|
332.7
|
|
Due to the enactment of the Tax Act, The Company has revalued its deferred tax assets and related liabilities as of the enactment date of December 22, 2017, resulting in a write-down of
$121.1 million
.
At
December 31, 2017
, the Company has tax attributes that carry forward for varying periods. The Company’s federal net operating loss carryforward of
$8.5 million
originated during 2004 and 2006 and will expire over a
seven
to
nine
-year period. State net operating losses of
$160.8 million
expire over a
four
to
twelve
-year period. The Company has recorded a valuation allowance in connection with state net operating loss carryforwards for which the Company believes it is more-likely-than-not that the tax benefits will not be recognized. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including the existence of cumulative income in the most recent fiscal years, changes in the business in which the Company operates, and the Company’s ability to forecast future taxable income. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence that is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. The Company has three years of cumulative earnings as of December 31, 2017, 2016, and 2015. As of December 31, 2017, management believes it is more likely than not that the balance of the deferred tax asset will be realized based on forecasted taxable income.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
A reconciliation of the change in gross unrecognized tax benefits for the years ended December 31 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance as of January 1
|
$
|
91.3
|
|
|
$
|
93.5
|
|
|
$
|
93.9
|
|
Additions based on current year tax positions
|
0.9
|
|
|
—
|
|
|
—
|
|
Reductions related to lapses of statutes of limitations
|
(3.5
|
)
|
|
(2.2
|
)
|
|
(0.4
|
)
|
Balance as of December 31
|
$
|
88.7
|
|
|
$
|
91.3
|
|
|
$
|
93.5
|
|
The Company’s liability for uncertain tax positions includes unrecognized benefits of
$96.9 million
and
$96.4 million
at
December 31, 2017
and
2016
, respectively, that if recognized would affect the effective tax rate on income from continuing operations.
The Company recognized
$2.5 million
,
$3.6 million
, and
$1.4 million
in interest and penalties in its income tax provision for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as income tax expense. The Company’s liability for uncertain tax benefits at
December 31, 2017
,
2016
, and
2015
includes accrued interest and penalties of
$8.6 million
,
$6.1 million
and
$2.8 million
, respectively.
The Company believes that it is reasonably possible that a decrease of up to
$46.0 million
in unrecognized tax benefits may be necessary within the next twelve months, as the result of a lapse of statute of limitations.
The Company is periodically under examination by various taxing authorities. Examinations are inherently uncertain, may result in payment of additional taxes or the recognition of tax benefits and may be in process for extended periods of time. At
December 31, 2017
, there were no open examinations in process.
The Company and its subsidiaries file tax returns in U.K., U.S. federal, state, local and other foreign jurisdictions. As of
December 31, 2017
, the Company is generally no longer subject to income tax examinations by U.K., U.S. federal, state, local, or foreign tax authorities for calendar years prior to 2007.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
15) Commitments and Contingencies
Operational commitments
The Company had unfunded commitments to invest up to approximately
$60 million
in co-investments with its Affiliates as of
December 31, 2017
. These commitments will be funded as required through the end of the respective investment periods ranging through fiscal 2022.
Certain Affiliates operate under regulatory authorities that require that they maintain minimum financial or capital requirements. Management is not aware of any violations of such financial requirements occurring during the period.
Litigation
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. If an insurance claim or other indemnification for a litigation accrual is available to the Company, the associated gain will not be recognized until all contingencies related to the gain have been resolved. As of
December 31, 2017
, there were no material accruals for claims, legal proceedings or other contingencies.
Indemnifications
In the normal course of business, such as through agreements to enter into business combinations and divestitures of Affiliates, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred.
Foreign tax contingency
The Company has clients in non-U.S. jurisdictions which require entities that are conducting certain business activities in such jurisdictions to collect and remit tax assessed on certain fees paid for goods and services provided. The Company does not believe this requirement is applicable based on its limited business activities in these jurisdictions. However, given the fact that uncertainty exists around the requirement, the Company has chosen to evaluate its potential exposure related to non-collection and remittance of these taxes. At
December 31, 2017
, management of the Company has estimated the potential maximum exposure and concluded that it is not material. No accrual for the potential exposure has been recorded as the probability of incurring any potential liability relating to this exposure is not probable at
December 31, 2017
.
Considerations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments. The Company maintains cash and cash equivalents and short term investments with various financial institutions. These financial institutions are typically located in cities in which the Company and its Affiliates operate. For the Company and certain Affiliates, cash deposits at a financial institution may exceed Federal Deposit Insurance Corporation insurance limits.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
16) Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to controlling interests by the weighted average number of shares outstanding. Diluted earnings per share is similar to basic earnings per share, but is adjusted for the effect of potentially issuable ordinary shares, except when inclusion is antidilutive.
The calculation of basic and diluted earnings per ordinary share for the years ended
December 31, 2017
,
2016
and
2015
is as follows (dollars in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests
|
$
|
4.2
|
|
|
$
|
126.4
|
|
|
$
|
155.5
|
|
Less: Total income available to participating unvested securities
(1)
|
(0.2
|
)
|
|
(0.9
|
)
|
|
(0.6
|
)
|
Total net income attributable to ordinary shares
|
$
|
4.0
|
|
|
$
|
125.5
|
|
|
$
|
154.9
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding—basic
|
110,708,598
|
|
|
119,236,370
|
|
|
120,000,000
|
|
Potential ordinary shares
|
|
|
|
|
|
Restricted stock units
|
672,544
|
|
|
283,743
|
|
|
497,997
|
|
Weighted-average ordinary shares outstanding—diluted
|
111,381,142
|
|
|
119,520,113
|
|
|
120,497,997
|
|
Earnings per ordinary share attributable to controlling interests:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.04
|
|
|
$
|
1.05
|
|
|
$
|
1.29
|
|
Diluted
|
$
|
0.04
|
|
|
$
|
1.05
|
|
|
$
|
1.29
|
|
|
|
(1)
|
Income available to participating unvested securities includes dividends paid on unvested restricted shares and their proportionate share of undistributed earnings.
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
17) Employee Benefits
The Company has various defined contribution plans covering substantially all of its full-time employees and several of its Affiliates. In addition to pre-tax contributions made by employees, the Company also makes contributions to the qualified plans annually.
The Company also has non-qualified defined contribution plans covering certain senior employees. The Company has established a Deferred Compensation Plan under which the Board of Directors makes awards that may be invested by the recipient in investments deemed available under the plan. Vesting of awards under the Deferred Compensation Plan is based on the number of years of service already provided by the employee at the date of the grant. In addition, the Company has established a Voluntary Deferral Plan that provides officers of the Company the opportunity to voluntarily defer a portion of their compensation. The compensation deferred is deemed to be invested in one or more investment options available under the plan. These non-qualified plans are unfunded, although the Company does make contributions to a Rabbi Trust to hedge its risks in terms of providing returns to employees on their deemed investments held in the plan.
As of
December 31, 2017
and
2016
, a total of
$95.1 million
and
$78.0 million
, respectively, had been recorded as long-term compensation liabilities and a total of
$95.2 million
and
$78.1 million
had been invested under the Deferred Compensation and Voluntary Deferral plans, respectively. The change in the fair value of long-term compensation liabilities and the change in fair value of the assets invested under the Deferred Compensation and Voluntary Deferral plans was
$9.0 million
and
$9.0 million
, respectively, for the year ended
December 31, 2017
,
$2.4 million
and
$2.4 million
, respectively, for the year ended
December 31, 2016
, and
$0.6 million
, and
$0.5 million
, respectively, for the year ended
December 31, 2015
. The Company recorded total expenses in relation to its qualified and non-qualified plans within compensation and benefits in its Consolidated Statements of Operations for the years ended
December 31, 2017
,
2016
and
2015
of
$14.8 million
,
$12.3 million
and
$12.5 million
, respectively.
18) Equity-based Compensation
Cash-settled Affiliate awards
The Company has entered into compensation arrangements with certain of its Affiliates whereby in exchange for continued service, Affiliate equity is either purchased by or granted to Affiliate key employees subject to a limit imposed by the Company, and may be repurchased either by Affiliate key employees or by the Company at a future date at the then applicable fair value, subject to service requirements having been met. Compensation expense is recognized over the requisite service period equal to the cumulative vested fair value of the award at the end of each period up to vesting date.
The Company accounts for these arrangements as “cash settled” share based payments, and accordingly a corresponding share-based payments liability is recorded. Vested share-based payments liabilities are revalued at each period end until settlement date, with changes in the liabilities included within compensation expense.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
As described within Note 3, in conjunction with the Landmark acquisition, OMAM entered into compensation arrangements with employees of Landmark where pre-acquisition equity units held by Landmark employees became subject to a service condition. These units are accounted for as stock-based compensation, were fair valued as of the closing date of the acquisition and vest over varying increments from December 31, 2018 through December 31, 2024. These units contain put rights that provide liquidity to the employees upon vesting. An additional payment of up to
$225.0 million
could be paid based on the growth of Landmark’s business. This arrangement is also accounted for as stock-based compensation, fair valued as of the closing date of the acquisition, and vests on December 31, 2018. Both the pre-acquisition equity units and the potential future payment are remeasured at the end of each reporting period.
The following table presents the changes in the share-based payments liability for the years ended December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of period
|
$
|
53.7
|
|
|
$
|
38.5
|
|
|
$
|
42.3
|
|
Amortization and revaluation of granted awards
|
135.8
|
|
|
15.6
|
|
|
0.2
|
|
Reclassification to profit interests award
|
—
|
|
|
—
|
|
|
(2.8
|
)
|
Repurchases (cash settled)
|
(0.7
|
)
|
|
(0.4
|
)
|
|
(1.2
|
)
|
Balance, end of period
|
$
|
188.8
|
|
|
$
|
53.7
|
|
|
$
|
38.5
|
|
Equity-settled corporate awards
OM Asset Management equity incentive plan
In connection with the IPO, certain employees who held unvested OM plc restricted shares were given the opportunity to exchange their OM plc restricted shares for restricted shares of OMAM held by OM Group (UK) Limited with vesting conditions similar to those to which they were currently subject. These restricted shares were awarded to employees as part of the annual incentive process and a one-time Value Incentive Plan. This exchange program was intended to provide employees who elected to participate with restricted share awards of OMAM ordinary shares of equivalent value to the OM plc restricted shares they currently held. The exchange valued OMAM ordinary shares at the price sold to investors in the IPO. The exchange valued OM plc’s ordinary shares using the weighted-average sale price over the
three
consecutive trading days on the London Stock Exchange up to and including the date of the exchange. The exchange occurred following the effectiveness of the OMAM registration statement on October 8, 2014. OM Group (UK) Limited transferred
559,709
unvested restricted OM Asset Management ordinary shares (Equivalent to
5,914,981
OM plc restricted shares) to employees as part of this exchange program. These awards have vested in prior years and the impact to the periods presented is not material.
Prior to the Offering,
two
equity plans were implemented at OMAM; one for the employees and one for non-executive directors. The plans are maintained to provide equity based compensation arrangements, including restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance based restricted stock awards (“Performance-based RSAs”) and performance based restricted stock units (“Performance-based RSUs”). Equity ownership encourages employees and directors to act in the best long-term interests of the Company.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
Compensation expense recognized by the Company for the year ended
December 31, 2017
,
2016
, and
2015
in relation to these plans was
$14.6 million
,
$13.1 million
, and
$11.8 million
respectively. The related income tax benefit recognized for years ended
December 31,
2017
,
2016
and
2015
was
$5.7 million
,
$5.1 million
and
$4.6 million
respectively. Unamortized compensation expense related to unvested RSAs, RSUs, Performance-based RSAs and Performance-based RSUs at
December 31, 2017
of
$6.1 million
is expected to be recognized over a weighted-average period of
1.7
years. The grant date for annual awards granted in
2017
is deemed to be January 1,
2016
. It is anticipated that the annual awards for
2017
with a fair value of
$5.0 million
will be granted during
2018
with a deemed grant date of January 1,
2017
.
The following summarizes the grant date fair value of the instruments granted by the Company during the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
OM Asset Management plc awards
|
|
Shares granted
|
|
Weighted average fair value
|
|
Shares granted
|
|
Weighted average fair value
|
|
Shares granted
|
|
Weighted average fair value
|
RSAs
|
|
342,637
|
|
|
$
|
15.13
|
|
|
506,640
|
|
|
$
|
10.89
|
|
|
559,709
|
|
|
$
|
17.60
|
|
RSUs
|
|
51,779
|
|
|
14.45
|
|
|
54,556
|
|
|
11.25
|
|
|
47,055
|
|
|
17.65
|
|
Performance-based RSAs
|
|
175,586
|
|
|
10.26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Performance-based RSUs
|
|
—
|
|
|
—
|
|
|
189,335
|
|
|
10.92
|
|
|
451,657
|
|
|
24.65
|
|
Grants of restricted shares in OM Asset Management plc
The following table summarizes the activity related to restricted share awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
OM Asset Management plc RSAs
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
Outstanding at beginning of the year
|
|
1,375,201
|
|
|
$
|
13.77
|
|
|
1,566,647
|
|
|
$
|
15.28
|
|
|
1,212,766
|
|
|
$
|
14.00
|
|
Converted during the year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Granted during the year
|
|
342,637
|
|
|
15.13
|
|
|
506,640
|
|
|
10.89
|
|
|
559,709
|
|
|
17.60
|
|
Forfeited during the year
|
|
(802
|
)
|
|
17.65
|
|
|
(7,288
|
)
|
|
13.65
|
|
|
(2,128
|
)
|
|
17.65
|
|
Exercised during the year
|
|
(1,294,109
|
)
|
|
13.97
|
|
|
(680,573
|
)
|
|
15.10
|
|
|
(203,700
|
)
|
|
14.00
|
|
Other transfers
|
|
—
|
|
|
—
|
|
|
(10,225
|
)
|
|
14.00
|
|
|
—
|
|
|
—
|
|
Outstanding at end of the year
|
|
422,927
|
|
|
$
|
14.26
|
|
|
1,375,201
|
|
|
$
|
13.77
|
|
|
1,566,647
|
|
|
$
|
15.28
|
|
The grant date fair value per share, calculated based on the closing price as quoted on the New York Stock Exchange on the measurement date, is used to determine the fair value of restricted shares granted to employees. Restricted shares under the plan generally have a vesting period of
one
to
three
years.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
Grants of restricted stock units in OM Asset Management plc
The following table summarizes the activity related to restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
OM Asset Management plc RSUs
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
Outstanding at beginning of the year
|
|
85,923
|
|
|
$
|
13.59
|
|
|
47,055
|
|
|
$
|
17.65
|
|
|
—
|
|
|
$
|
—
|
|
Granted during the year
|
|
51,779
|
|
|
14.45
|
|
|
54,556
|
|
|
11.25
|
|
|
47,055
|
|
|
17.65
|
|
Forfeited during the year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised during the year
|
|
(61,479
|
)
|
|
12.93
|
|
|
(15,688
|
)
|
|
17.65
|
|
|
—
|
|
|
—
|
|
Other transfers
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at end of the year
|
|
76,223
|
|
|
$
|
14.70
|
|
|
85,923
|
|
|
$
|
13.59
|
|
|
47,055
|
|
|
$
|
17.65
|
|
The grant date fair value per share, calculated based on the closing price as quoted on the New York Stock Exchange on the measurement date, is used to determine the fair value of restricted shares granted to employees. Restricted stock units under the plan generally have a vesting period of
one
to
three
years.
Grants of Performance-based restricted stock awards in OM Asset Management plc
The following table summarizes the activity related to performance-based restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
OM Asset Management plc
Performance-based RSAs
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
Outstanding at beginning of the year
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted during the year
|
|
175,586
|
|
|
10.26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited during the year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised during the year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other transfers
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at end of the year
|
|
175,586
|
|
|
$
|
10.26
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
The Performance-based RSAs granted by the Company have a market vesting condition; therefore a Monte-Carlo simulation model was used to determine the fair value of the restricted units granted to employees. Significant assumptions utilized in the Monte-Carlo simulation model include assumed reinvestment of dividends, a risk-free interest rate of
1.57%
, and an expected volatility of
28.19%
. Restricted units under the plan have a vesting period of
three
years.
Grants of Performance-based restricted stock units in OM Asset Management plc
The following table summarizes the activity related to performance-based restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
OM Asset Management plc Performance-based RSUs
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
|
Number of shares
|
|
Weighted average grant date fair value per share
|
Outstanding at beginning of the year
|
|
640,992
|
|
|
$
|
20.59
|
|
|
451,657
|
|
|
$
|
24.65
|
|
|
—
|
|
|
—
|
|
Granted during the year
|
|
—
|
|
|
—
|
|
|
189,335
|
|
|
10.92
|
|
|
451,657
|
|
|
24.65
|
|
Forfeited during the year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised during the year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other transfers
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at end of the year
|
|
640,992
|
|
|
$
|
20.59
|
|
|
640,992
|
|
|
$
|
20.59
|
|
|
451,657
|
|
|
$
|
24.65
|
|
The Performance-based RSUs granted by the Company have a market vesting condition; therefore a Monte-Carlo simulation model was used to determine the fair value of the restricted units granted to employees. Significant assumptions utilized in the Monte-Carlo simulation model include assumed reinvestment of dividends, a risk-free interest rate of
1.57%
, and an expected volatility of
28.19%
. Restricted units under the plan have a vesting period of
three
years.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
OM plc equity compensation plans
OM plc maintains various equity-based compensation arrangements, including stock options and restricted stock awards, in which the Company’s employees participated in the periods presented. The cost of these equity-based programs has been included in the Company’s financial results where applicable. Compensation expense recognized by the Company in respect of these arrangements was
$0.0 million
for the year ended
December 31, 2017
,
$0.1 million
for the year ended
December 31, 2016
, and
$0.5 million
for the year ended
December 31, 2015
. A corresponding capital contribution was recognized in each period. The related income tax benefit recognized for the years ended
December 31, 2017
,
2016
, and
2015
was
$0.0 million
,
$0.0 million
, and
$0.2 million
, respectively.
The following disclosures represent the Company’s portion of the various equity compensation arrangements maintained by OM plc in which the Company’s employees participated.
The following table summarizes the activity related to restricted shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Number of
shares
|
|
Weighted average grant date fair value per share GBP
|
|
Weighted average grant date fair value per share USD
|
|
Number of
shares
|
|
Weighted average grant date fair value per share GBP
|
|
Weighted average grant date fair value per share USD
|
|
Number of
shares
|
|
Weighted average grant date fair value per share GBP
|
|
Weighted average grant date fair value per share USD
|
Outstanding at the beginning of the year
|
155,132
|
|
|
£
|
2.03
|
|
|
$
|
2.53
|
|
|
209,801
|
|
|
£
|
2.00
|
|
|
$
|
3.00
|
|
|
682,346
|
|
|
£
|
1.77
|
|
|
$
|
2.92
|
|
Granted during the year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited during the year
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,885
|
)
|
|
2.03
|
|
|
2.53
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised during the year
|
(155,132
|
)
|
|
2.03
|
|
|
2.72
|
|
|
(113,559
|
)
|
|
1.98
|
|
|
2.47
|
|
|
(472,545
|
)
|
|
1.67
|
|
|
2.50
|
|
Other transfers
|
—
|
|
|
n/a
|
|
|
n/a
|
|
|
67,775
|
|
|
n/a
|
|
|
n/a
|
|
|
—
|
|
|
0
|
|
|
—
|
|
Outstanding at the end of the year
|
—
|
|
|
£
|
—
|
|
|
$
|
—
|
|
|
155,132
|
|
|
£
|
2.03
|
|
|
$
|
2.53
|
|
|
209,801
|
|
|
£
|
2.00
|
|
|
$
|
3.00
|
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
19) Accumulated Other Comprehensive Income
The following tables show the tax effects allocated to each component of other comprehensive income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
Pre-Tax
|
|
Tax Benefit (Expense)
|
|
Net of Tax
|
Foreign currency translation
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
Change in net realized and unrealized gain (loss) on derivative securities
|
2.6
|
|
|
(0.8
|
)
|
|
1.8
|
|
Other Comprehensive income (loss)
|
$
|
5.5
|
|
|
$
|
(0.8
|
)
|
|
$
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
Pre-Tax
|
|
Tax Benefit (Expense)
|
|
Net of Tax
|
Foreign currency translation adjustment
|
$
|
(3.2
|
)
|
|
$
|
—
|
|
|
$
|
(3.2
|
)
|
Change in net realized and unrealized gain (loss) on derivative securities
|
(24.6
|
)
|
|
4.3
|
|
|
(20.3
|
)
|
Other comprehensive income (loss)
|
$
|
(27.8
|
)
|
|
$
|
4.3
|
|
|
$
|
(23.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
Pre-Tax
|
|
Tax Benefit (Expense)
|
|
Net of Tax
|
Foreign currency translation adjustment
|
$
|
(1.5
|
)
|
|
$
|
—
|
|
|
$
|
(1.5
|
)
|
Change in net realized and unrealized gain (loss) on derivative securities
|
(8.2
|
)
|
|
1.6
|
|
|
(6.6
|
)
|
Other comprehensive income (loss)
|
$
|
(9.7
|
)
|
|
$
|
1.6
|
|
|
$
|
(8.1
|
)
|
The components of accumulated other comprehensive income (loss) for the years ended
December 31, 2017
and
2016
were as follows (in millions) including proportions attributable to non-controlling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
Valuation of derivative securities
|
|
Total
|
Balance, as of December 31, 2015
|
|
$
|
3.8
|
|
|
$
|
(6.6
|
)
|
|
$
|
(2.8
|
)
|
Other comprehensive income (loss)
|
|
(3.2
|
)
|
|
(20.3
|
)
|
|
(23.5
|
)
|
Balance, as of December 31, 2016
|
|
$
|
0.6
|
|
|
(26.9
|
)
|
|
$
|
(26.3
|
)
|
Other comprehensive income (loss)
|
|
2.9
|
|
|
1.8
|
|
|
4.7
|
|
Balance, as of December 31, 2017
|
|
$
|
3.5
|
|
|
$
|
(25.1
|
)
|
|
$
|
(21.6
|
)
|
The Company reclassified
$2.6 million
,
$1.1 million
, and
$0.6 million
from accumulated other comprehensive income (loss) to interest expense on the Consolidated Statements of Income for the twelve months ended
December 31, 2017
,
2016
and
2015
respectively.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
20) Non-controlling interests
Non-controlling interests on the Consolidated Balance Sheets include capital and undistributed profits of certain entities that are consolidated, but not 100% owned, which amounted to
$1.3 million
at
December 31, 2017
and
$1.0 million
at
December 31, 2016
.
Non-controlling interests in consolidated Funds
Net income (loss) attributable to non-controlling interests in consolidated Funds in the Consolidated Statements of Operations is comprised of the net income or loss and net gains and losses allocated to equity-holders, other than OMAM, of consolidated Funds. For the years ended
December 31, 2017
,
2016
and
2015
this net income (loss) was
$4.9 million
,
$(0.2) million
, and
$0.0 million
, respectively. Non-controlling interests in consolidated Funds on the Consolidated Balance Sheets represents the share of net assets of the Funds attributable to those equity holders who are restricted in their ability to redeem their interests, which amounted to
$50.6 million
at
December 31, 2017
, and
$0.0 million
at
December 31, 2016
.
Redeemable non-controlling interests in consolidated Funds on the Consolidated Balance Sheets represents the share of net assets of the Funds attributable to those equity holders who are not restricted in their ability to redeem their interests, which amounted to
$44.0 million
at
December 31, 2017
, and
$5.5 million
at
December 31, 2016
.
21) Derivatives and Hedging
Cash flow hedge
In July 2015, the Company entered into a
$300.0 million
notional Treasury rate lock contract which was designated and qualified as a cash flow hedge. The Company documented its hedging strategy and risk management objective for this contract in anticipation of a future debt issuance. The Treasury rate lock contract eliminated the impact of fluctuations in the underlying benchmark interest rate for future forecasted debt issuances. The Company assessed the effectiveness of the hedging contract at inception and on a quarterly basis thereafter. In November 2015, at the Treasury rate lock termination date, the Company de-designated the Treasury rate lock and entered into an extension for the same
$300.0 million
notional through early July 2016. In July 2016, the Company entered into a second extension to the Treasury rate lock in conjunction with the issuances of the previously forecasted debt. The forecasted debt issuances occurred in July 2016 and the Treasury rate lock, which had an accumulated fair value of
$(34.4) million
, was settled. Refer to Note 13, Borrowings and Debt, for additional information on the debt issuances.
Consistent with the original Treasury rate lock, the extended Treasury rate locks were designated and qualified as cash flow hedges. The Company documented its hedging strategy and risk management objective for these contracts in anticipation of the July 2016 debt issuance. The extended Treasury rate locks effectively eliminated the impact of fluctuations in the underlying benchmark interest rate for the debt issuances. The Company assessed the effectiveness of the hedging contracts at each of the extended Treasury rate locks’ inception dates and on a quarterly basis thereafter, where applicable. At the rate lock settlement, the hedging contracts were evaluated to be highly effective in offsetting changes in cash flows associated with the hedged items. The Company did not record any hedge ineffectiveness in 2016.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
21) Derivatives and Hedging (cont.)
Amounts recorded in accumulated other comprehensive income in connection with the settled Treasury rate lock were
$2.6 million
, net of tax of
$(0.8) million
for the year ended
December 31, 2017
. As of
December 31, 2017
, the balance in accumulated other comprehensive income (loss) in connection with the Treasury rate lock contract amounted to
$(25.1) million
, net of tax. This balance will be reclassified to earnings through interest expense over the life of the issued debt. Amounts of
$2.6 million
and
$1.1 million
have been reclassified for the years ended
December 31,
2017
, and
2016
, respectively. During the next twelve months the Company expects to reclassify approximately
$2.8 million
to interest expense.
Derivatives of consolidated Funds
In the normal course of business, the Company’s consolidated Funds may enter into transactions involving derivative financial instruments in connection with Funds’ investing activities. Derivative instruments may be used as substitutes for securities in which the Funds can invest; to hedge portfolio investments or to generate income or gain to the Funds. The Funds may also use derivatives to manage duration; sector and yield curve exposures and credit and spread volatility. Derivative financial instruments base their value upon an underlying asset, index or reference rate. These instruments are subject to various risks, including leverage, market, credit, liquidity and operational risks. The Funds manage the risks associated with derivatives on an aggregate basis, along with the risks associated with its trading and as part of its overall risk management policies.
22) Discontinued Operations and Restructuring
All of the Company’s discontinued operations were wound down or transferred to OM plc prior to 2016.
The Company recognized a gain (loss) on disposal, net of taxes, of
$(0.1) million
,
$6.2 million
, and
$0.8 million
, with basic and diluted discontinued operations earnings per share of
$0.00
,
$0.07
, and
$0.01
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Gains and losses on disposal of discontinued operations represent the Company’s rights or obligations related to contractual residual interests in previously discontinued operations.
Liabilities associated with discontinued operations and restructuring included in other liabilities on the Company’s Consolidated Balance Sheets are summarized as follows as of December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Beginning balance at January 1
|
$
|
1.1
|
|
|
$
|
4.1
|
|
Abandoned lease liability principal payments
|
(0.8
|
)
|
|
(1.1
|
)
|
Adjustment to sub-lease arrangement on abandoned lease
|
0.1
|
|
|
0.2
|
|
Drawdowns on committed funding
|
—
|
|
|
(2.1
|
)
|
Ending balance at December 31
|
$
|
0.4
|
|
|
$
|
1.1
|
|
No additional costs are expected to be incurred in connection with discontinued operations for the events described above.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
23) Selected Quarterly Financial Data (unaudited)
The following is a summary of the quarterly results of operations of the Company for the years ended
December 31, 2017
and
2016
($ in millions, unless otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
196.2
|
|
|
$
|
218.8
|
|
|
$
|
223.2
|
|
|
$
|
249.2
|
|
Operating income
|
23.5
|
|
|
12.9
|
|
|
8.3
|
|
|
26.3
|
|
Income from continuing operations before income taxes
|
28.0
|
|
|
14.6
|
|
|
14.8
|
|
|
84.6
|
|
Net income (loss)
|
22.3
|
|
|
13.6
|
|
|
19.9
|
|
|
(46.7
|
)
|
Net income (loss) attributable to controlling interests
|
21.4
|
|
|
12.9
|
|
|
18.7
|
|
|
(48.8
|
)
|
Basic earnings (loss) per share ($)
|
$
|
0.19
|
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
(0.45
|
)
|
Diluted earnings (loss) per share ($)
|
$
|
0.19
|
|
|
$
|
0.11
|
|
|
$
|
0.17
|
|
|
$
|
(0.45
|
)
|
Basic shares outstanding (in millions)
|
113.5
|
|
|
111.3
|
|
|
109.0
|
|
|
109.0
|
|
Diluted shares outstanding (in millions)
|
114.4
|
|
|
111.8
|
|
|
109.7
|
|
|
109.0
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
149.6
|
|
|
$
|
156.5
|
|
|
$
|
170.8
|
|
|
$
|
186.6
|
|
Operating income
|
41.0
|
|
|
44.0
|
|
|
40.2
|
|
|
30.4
|
|
Income from continuing operations before income taxes
|
44.0
|
|
|
48.0
|
|
|
41.7
|
|
|
27.1
|
|
Net income
|
30.8
|
|
|
36.3
|
|
|
34.0
|
|
|
25.1
|
|
Net income attributable to controlling interests
|
30.8
|
|
|
36.3
|
|
|
34.0
|
|
|
25.3
|
|
Basic earnings per share ($)
|
$
|
0.26
|
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
Diluted earnings per share ($)
|
$
|
0.26
|
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
Basic shares outstanding (in millions)
|
120.0
|
|
|
119.4
|
|
|
119.3
|
|
|
118.2
|
|
Diluted shares outstanding (in millions)
|
120.0
|
|
|
119.6
|
|
|
119.7
|
|
|
118.8
|
|
|
|
(1)
|
During periods of net loss, diluted shares are the same as basic shares.
|