OM ASSET MANAGEMENT PLC, 10-Q filed on 11/24/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Nov. 21, 2014
Document and Entity Information
 
 
Entity Registrant Name
OM Asset Management plc 
 
Entity Central Index Key
0001611702 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2014 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
No 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
120,000,000 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Assets
 
 
Cash and cash equivalents
$ 278.3 
$ 282.2 
Total assets
7,767.3 
8,551.8 
Liabilities and stockholders' equity
 
 
Total liabilities
5,212.2 
6,015.9 
Commitments and contingencies
   
   
Equity:
 
 
Total equity and redeemable non-controlling interest in consolidated Funds
2,555.1 
2,535.9 
Total liabilities and equity
7,767.3 
8,551.8 
Consolidated Entity Excluding Consolidated Funds
 
 
Assets
 
 
Cash and cash equivalents
183.8 
194.2 
Investment advisory fees receivable
135.1 
154.9 
Property and equipment, net
23.3 
24.1 
Investments (includes balances reported at fair value of $100.4 and $95.2)
156.3 
148.1 
Acquired intangibles, net
1.1 
1.2 
Goodwill
126.5 
117.8 
Other assets
41.7 
24.8 
Note receivable due from related party
 
32.2 
Deferred tax assets
279.9 
294.2 
Liabilities and stockholders' equity
 
 
Accounts payable and accrued expenses
39.5 
43.9 
Accrued incentive compensation
107.8 
128.7 
Interest payable to related parties
 
14.6 
Other amounts due to related parties
334.4 
1.0 
Long-term compensation liabilities
260.0 
216.6 
Accrued income taxes
2.4 
6.7 
Notes payable to related parties
212.0 
1,040.7 
Third party borrowings
 
2.5 
Other liabilities
4.7 
6.4 
Equity:
 
 
Ordinary shares
0.1 
 
Parent equity (deficit)
(15.3)
(449.8)
Other comprehensive income
6.1 
3.0 
Non-controlling interests
 
0.1 
Consolidated Funds
 
 
Assets
 
 
Cash and cash equivalents
94.5 
88.0 
Restricted cash in Timber Funds
2,487.7 
2,557.0 
Investments (includes balances reported at fair value of $100.4 and $95.2)
60.6 
406.2 
Timber assets
4,089.5 
4,422.1 
Other assets
87.3 
87.0 
Liabilities and stockholders' equity
 
 
Accounts payable and accrued expenses
52.2 
33.5 
Notes payable to related parties
338.7 
604.7 
Third party borrowings
3,784.9 
3,783.1 
Securities sold, not yet purchased, at fair value
16.4 
24.6 
Other liabilities
59.2 
108.9 
Redeemable non-controlling interests in consolidated Funds
60.4 
403.3 
Equity:
 
 
Non-controlling interests
$ 2,503.8 
$ 2,579.3 
Condensed Consolidated Balance Sheets (Parenthetical) (Consolidated Entity Excluding Consolidated Funds, USD $)
In Millions, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Consolidated Entity Excluding Consolidated Funds
 
 
Investments, fair value (in dollars)
$ 100.4 
$ 95.2 
Condensed Consolidated Statements of Operations (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Revenue:
 
 
 
 
Total revenue
$ 260.0 
$ 209.7 
$ 789.8 
$ 680.3 
Operating expenses:
 
 
 
 
Total operating expenses
278.2 
214.9 
847.9 
750.7 
Operating loss
(18.2)
(5.2)
(58.1)
(70.4)
Non-operating income and (expense):
 
 
 
 
Total non-operating income
2.50 
3.00 
6.70 
0.40 
Loss from continuing operations before taxes
(15.7)
(2.2)
(51.4)
(70.0)
Income tax expense (benefit)
(6.0)
4.9 
10.2 
10.8 
Loss from continuing operations
(9.7)
(7.1)
(61.6)
(80.8)
Gain (loss) from discontinued operations, net of tax
 
2.0 
(2.0)
(4.6)
Gain (loss) on disposal of discontinued operations, net of tax
1.3 
 
3.7 
(1.0)
Net loss
(8.4)
(5.1)
(59.9)
(86.4)
Net loss attributable to non-controlling interests in consolidated Funds
(6.7)
(12.0)
(77.3)
(105.0)
Net income (loss) attributable to controlling interests
(1.7)
6.9 
17.4 
18.6 
Pro forma earnings (loss) per share (basic) attributable to controlling interests (in dollars per share)
$ (0.01)
$ 0.06 
$ 0.15 
$ 0.15 
Pro forma earnings (loss) per share (diluted) attributable to controlling interests (in dollars per share)
$ (0.01)
$ 0.06 
$ 0.15 
$ 0.15 
Pro forma continuing operations earnings (loss) per share (basic) attributable to controlling interests (in dollars per share)
$ (0.03)
$ 0.06 
$ 0.17 
$ 0.12 
Pro forma continuing operations earnings (loss) per share (diluted) attributable to controlling interests (in dollars per share)
$ (0.03)
$ 0.06 
$ 0.17 
$ 0.12 
Pro forma weighted average ordinary shares outstanding (in shares)
120,000,000 
120,000,000 
120,000,000 
120,000,000 
Pro forma weighted average diluted ordinary shares outstanding (in shares)
120,000,000 
120,000,000 
120,000,000 
120,000,000 
Consolidated Entity Excluding Consolidated Funds
 
 
 
 
Revenue:
 
 
 
 
Management fees
147.4 
114.3 
422.8 
347.6 
Performance fees
2.9 
2.5 
5.3 
10.8 
Other revenue
1.2 
0.2 
1.5 
1.4 
Operating expenses:
 
 
 
 
Compensation and benefits
128.7 
82.9 
310.0 
248.8 
General and administrative expense
21.7 
17.1 
58.8 
49.1 
Amortization of acquired intangibles
 
 
0.1 
0.1 
Depreciation and amortization
1.6 
1.2 
4.4 
3.6 
Non-operating income and (expense):
 
 
 
 
Investment income
3.1 
2.5 
8.9 
6.1 
Interest income
 
 
0.1 
0.3 
Interest expense
(16.6)
(17.4)
(49.8)
(55.2)
Consolidated Funds
 
 
 
 
Revenue:
 
 
 
 
Other revenue
7.6 
5.9 
19.9 
23.9 
Revenue from timber
100.9 
86.8 
340.3 
296.6 
Operating expenses:
 
 
 
 
Interest and dividend expense
32.3 
24.5 
99.5 
107.9 
Timber expense
56.1 
49.1 
201.0 
172.8 
Other expense
37.8 
40.1 
174.1 
168.4 
Non-operating income and (expense):
 
 
 
 
Net consolidated Funds gains
16.0 
17.9 
47.5 
49.2 
Net loss attributable to non-controlling interests in consolidated Funds
$ (6.7)
$ (12.0)
$ (77.3)
$ (105.0)
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Net loss
$ (8.4)
$ (5.1)
$ (59.9)
$ (86.4)
Foreign currency translation adjustment
(1.7)
5.3 
1.2 
(17.3)
Total other comprehensive loss
(10.1)
0.2 
(58.7)
(103.7)
Total comprehensive income (loss) attributable to controlling interests
(3.0)
9.0 
18.9 
18.8 
Consolidated Funds
 
 
 
 
Comprehensive loss attributable to non-controlling interests in consolidated Funds
$ (7.1)
$ (8.8)
$ (77.6)
$ (122.5)
Condensed Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions, except Share data, unless otherwise specified
Total
Consolidated Entity Excluding Consolidated Funds
Consolidated Entity Excluding Consolidated Funds
Ordinary shares
Consolidated Entity Excluding Consolidated Funds
Total parent company deficit
Consolidated Entity Excluding Consolidated Funds
Parent company's deficit
Consolidated Entity Excluding Consolidated Funds
Accumulated other comprehensive income (loss)
Consolidated Entity Excluding Consolidated Funds
Non-controlling interests
Consolidated Funds
Consolidated Funds
Non-controlling interests
Balance at Dec. 31, 2012
$ 2,343.1 
 
 
$ (482.2)
$ (483.8)
$ 1.6 
$ 0.9 
 
$ 2,824.4 
Balance at Dec. 31, 2012
2,432.0 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2012
 
 
 
 
 
 
 
88.9 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Capital contributions (redemptions)
(67.4)
 
 
0.1 
0.1 
 
 
 
(67.5)
Equity-based compensation
2.5 
 
 
3.4 
3.4 
 
(0.9)
 
 
Foreign currency translation adjustment
(17.3)
 
 
0.2 
 
0.2 
 
 
(17.5)
Parent company corporate cost allocation
2.2 
(2.2)
 
2.2 
2.2 
 
 
 
 
Net loss
(86.4)
 
 
18.6 
18.6 
 
 
 
(100.4)
Increase (Decrease) in redeemable non-controlling interest in consolidated Funds
 
 
 
 
 
 
 
 
 
Capital contributions (redemptions)
 
 
 
 
 
 
 
149.9 
 
Net consolidation (deconsolidation) of funds
 
 
 
 
 
 
 
0.1 
 
Net income (loss)
 
 
 
 
 
 
 
(4.6)
 
Increase (Decrease) in total equity and redeemable non-controlling interest in consolidated Funds
 
 
 
 
 
 
 
 
 
Capital contributions (redemptions)
82.5 
 
 
 
 
 
 
 
 
Equity-based compensation
2.5 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(17.3)
 
 
 
 
 
 
 
 
Parent company corporate cost allocation
2.2 
 
 
 
 
 
 
 
 
Net consolidation (deconsolidation) of funds
0.1 
 
 
 
 
 
 
 
 
Net income (loss)
(86.4)
 
 
 
 
 
 
 
 
Balance at Sep. 30, 2013
2,181.3 
 
 
(457.7)
(459.5)
1.8 
 
 
2,639.0 
Balance at Sep. 30, 2013
2,415.6 
 
 
 
 
 
 
 
 
Balance at Sep. 30, 2013
 
 
 
 
 
 
 
234.3 
 
Balance at Dec. 31, 2013
2,132.6 
 
 
(446.8)
(449.8)
3.0 
0.1 
 
2,579.3 
Balance at Dec. 31, 2013
2,535.9 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2013
 
 
 
 
 
 
 
403.3 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Transfer of subsidiary to Parent
(14.0)
 
 
(14.0)
(15.6)
1.6 
 
 
 
Tax on gain from transfer of subsidiary to Parent
(3.4)
 
 
(3.4)
(3.4)
 
 
 
 
Issuance of ordinary shares
0.2 
 
0.1 
0.2 
0.1 
 
 
 
 
Issuance of ordinary shares (in shares)
 
 
120,000,000 
 
 
 
 
 
 
Capital contributions (redemptions)
923.2 
 
 
973.1 
973.1 
 
 
 
(49.9)
Equity-based compensation
6.0 
 
 
6.0 
6.0 
 
 
 
 
Transfer of IPO share award
1.8 
 
 
1.8 
1.8 
 
 
 
 
Foreign currency translation adjustment
1.2 
 
 
1.5 
 
1.5 
 
 
(0.3)
Parent company corporate cost allocation
3.4 
(3.4)
 
3.4 
3.4 
 
 
 
 
Assignment of deferred tax assets and coinvestments
(332.6)
 
 
(332.6)
(332.6)
 
 
 
 
Repurchase of Affiliate equity
(3.8)
 
 
(3.7)
(3.7)
 
(0.1)
 
 
Net consolidation (deconsolidation) of funds
60.2 
 
 
 
 
 
 
 
60.2 
Dividends
(212.0)
 
 
(212.0)
(212.0)
 
 
 
 
Net loss
(59.9)
 
 
17.4 
17.4 
 
 
 
(85.5)
Increase (Decrease) in redeemable non-controlling interest in consolidated Funds
 
 
 
 
 
 
 
 
 
Transfer of subsidiary to Parent
 
 
 
 
 
 
 
(327.4)
 
Capital contributions (redemptions)
 
 
 
 
 
 
 
5.1 
 
Net consolidation (deconsolidation) of funds
 
 
 
 
 
 
 
(28.8)
 
Net income (loss)
 
 
 
 
 
 
 
8.2 
 
Increase (Decrease) in total equity and redeemable non-controlling interest in consolidated Funds
 
 
 
 
 
 
 
 
 
Transfer of subsidiary to Parent
(341.4)
 
 
 
 
 
 
 
 
Tax on gain from transfer of subsidiary to Parent
(3.4)
 
 
 
 
 
 
 
 
Issuance of ordinary shares
0.2 
 
 
 
 
 
 
 
 
Capital contributions (redemptions)
928.3 
 
 
 
 
 
 
 
 
Equity-based compensation
6.0 
 
 
 
 
 
 
 
 
Transfer of IPO share award
1.8 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
1.2 
 
 
 
 
 
 
 
 
Parent company corporate cost allocation
3.4 
 
 
 
 
 
 
 
 
Assignment of deferred tax assets and coinvestments
(332.6)
 
 
 
 
 
 
 
 
Repurchase of Affiliate equity
 
 
 
 
 
 
 
(3.8)
 
Net consolidation (deconsolidation) of funds
31.4 
 
 
 
 
 
 
 
 
Dividends
(212.0)
 
 
 
 
 
 
 
 
Net income (loss)
(59.9)
 
 
 
 
 
 
 
 
Balance at Sep. 30, 2014
2,494.7 
 
0.1 
(9.1)
(15.3)
6.1 
 
 
2,503.8 
Balance (in shares) at Sep. 30, 2014
 
 
120,000,000 
 
 
 
 
 
 
Balance at Sep. 30, 2014
2,555.1 
 
 
 
 
 
 
 
 
Balance at Sep. 30, 2014
 
 
 
 
 
 
 
$ 60.4 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flow from operating activities:
 
 
Net loss
$ (59.9)
$ (86.4)
Less: Net loss attributable to non-controlling interests in consolidated Funds
(77.3)
(105.0)
Adjustments to reconcile net profit (loss) attributable to non-controlling interest in Consolidated funds to net cash provided by (used in) operating activities from continuing operations of consolidated Funds:
 
 
Net (income) loss from discontinued operations
3.0 
(3.9)
Parent company corporate cost allocation
(3.4)
(2.2)
Net earnings from affiliates accounted for using the equity method
(64.0)
(59.0)
Changes in operating assets and liabilities (excluding discontinued operations):
 
 
Net cash flows from operating activities of continuing operations
156.5 
4.0 
Net cash flows from operating activities of discontinued operations
(34.6)
33.8 
Total net cash flows from operating activities
121.9 
37.8 
Cash flow from investing activities:
 
 
Net cash flows from investing activities of continuing operations
(32.5)
204.2 
Net cash flows from investing activities of discontinued operations
(7.1)
(166.5)
Total net cash flows from investing activities
(39.6)
37.7 
Cash flow from financing activities:
 
 
Net cash flows from financing activities of continuing operations
(84.9)
(50.5)
Net cash flows from financing activities of discontinued operations
(1.2)
146.6 
Total net cash flows from financing activities
(86.1)
96.1 
Effect of foreign exchange rate changes on cash and cash equivalents
(0.1)
(1.2)
Net increase (decrease) in cash and cash equivalents
(3.9)
170.4 
Cash and cash equivalents at beginning of period
282.2 
268.6 
Cash and cash equivalents at end of period
278.3 
439.0 
Supplemental disclosure of cash flow information:
 
 
Interest paid (excluding consolidated Funds)
63.2 
71.7 
Income taxes paid
5.2 
5.8 
Non-cash capital contribution to Parent
14.0 
 
Non-cash contribution from Parent
428.5 
 
Consolidated Entity Excluding Consolidated Funds
 
 
Adjustments to reconcile net profit (loss) attributable to non-controlling interest in Consolidated funds to net cash provided by (used in) operating activities from continuing operations of consolidated Funds:
 
 
Net (income) loss from discontinued operations
3.0 
(3.9)
Amortization of acquired intangibles
0.1 
0.1 
Depreciation and other amortization
4.4 
3.6 
Amortization and revaluation of non-cash compensation awards
68.5 
41.9 
Parent company corporate cost allocation
3.4 
2.2 
Net earnings from affiliates accounted for using the equity method
(6.3)
(5.5)
Distributions received from equity method affiliates
6.9 
15.3 
Deferred income taxes
12.3 
12.0 
(Gains) losses on other investments
(2.6)
(0.6)
Changes in operating assets and liabilities (excluding discontinued operations):
 
 
(Increase) decrease in investment advisory fees receivable
 
5.4 
(Increase) decrease in other receivables, prepayments, deposits and other assets
(22.5)
(3.3)
Increase (decrease) in accrued incentive compensation and other liabilities
(9.4)
(6.5)
Increase (decrease) in accounts payable and accruals and accrued income taxes
(10.1)
(8.0)
Net cash flows from operating activities of continuing operations
65.1 
71.3 
Cash flow from investing activities:
 
 
Purchase of fixed assets, excluding discontinued operations
(4.6)
(6.1)
Contingent payments for affiliate equity
(11.0)
 
Dispositions of Affiliates
(3.7)
 
Purchase of investment securities
(7.9)
(2.7)
Sale of investment securities
18.6 
6.7 
Cash flow from financing activities:
 
 
Repayment of related party borrowings
(37.1)
(59.8)
Capital contribution from parent company
 
0.1 
Cash and cash equivalents at beginning of period
194.2 
 
Cash and cash equivalents at end of period
183.8 
 
Consolidated Funds
 
 
Cash flow from operating activities:
 
 
Less: Net loss attributable to non-controlling interests in consolidated Funds
(77.3)
(105.0)
Adjustments to reconcile net profit (loss) attributable to non-controlling interest in Consolidated funds to net cash provided by (used in) operating activities from continuing operations of consolidated Funds:
 
 
Net (income) loss from discontinued operations
4.7 
(9.4)
(Gains) losses on other investments
(4.6)
(5.9)
Changes in operating assets and liabilities (excluding discontinued operations):
 
 
(Increase) decrease in receivables other assets
155.4 
95.1 
Increase (decrease) in accounts payable and other liabilities
13.2 
(42.1)
Net cash flows from operating activities of continuing operations
91.4 
(67.3)
Cash flow from investing activities:
 
 
Purchase of investment securities
(97.1)
(157.3)
Sale of investment securities
87.4 
235.5 
Deconsolidation of funds
(14.2)
128.1 
Cash flow from financing activities:
 
 
Release of restricted cash
 
86.2 
Deposits of restricted cash
31.5 
 
Proceeds from debt raised
4.1 
 
Repayment of debt
(4.8)
(12.8)
Non-controlling interest capital raised
 
4.9 
Non-controlling interest capital redeemed
(25.0)
(12.9)
Redeemable non-controlling interest capital raised
10.7 
12.1 
Redeemable non-controlling interest capital redeemed
(6.9)
(8.8)
Distributions to non-controlling interests
(55.5)
(59.5)
Distributions to redeemable non-controlling interests
(1.9)
 
Cash and cash equivalents at beginning of period
88.0 
 
Cash and cash equivalents at end of period
$ 94.5 
 
Organization and Description of the Business
Organization and Description of the Business

 

 

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, real estate and timber. 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 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. The Company operates in one reportable segment.

 

The Company is a majority-owned subsidiary of Old Mutual plc (the “Parent”), an international long-term savings, protection and investment group, listed on the London Stock Exchange.

 

Reorganization

 

At September 30, 2014, the Company’s U.S. holding company, Old Mutual (US) Holdings Inc. (“OMUSH”) was a subsidiary of OM Group (UK) Limited (“OMGUK”) which was and is in turn wholly owned by the Parent. The board of directors of the Parent elected to undertake an initial public offering of the Company’s business (the “Offering”) which was completed on October 15, 2014.

 

The Company and the Parent determined that certain transactions (the “Reorganization”) should be undertaken in preparation for the Offering. Specifically, the pre-Offering restructuring steps described below were completed by the Company and the Parent prior to October 1, 2014:

 

1.       OMGUK incorporated OMAM in the United Kingdom as a direct, wholly-owned subsidiary of OMGUK.

2.       OMAM incorporated OMAM US, Inc. in the State of Delaware (“U.S. Sub”) as a direct, wholly-owned subsidiary of OMAM.

3.       US Sub incorporated OMAM UK Limited in the United Kingdom (“U.K. Sub”) as a direct, wholly-owned subsidiary of U.S. Sub.

4.       The Company’s existing intercompany debt, which was owed by OMUSH to OMGUK, was refinanced with new intercompany debt.

5.       OMGUK contributed its shares in OMUSH and the new intercompany debt to OMAM in return for an issuance of shares by OMAM resulting in the elimination of existing intercompany debt of $1,003.5 million and the redemption of a $32.2 million intercompany receivable via a capital distribution back to OMGUK, for a net reduction of existing intercompany debt of $971.3 million.

6.       The OMUSH shares were transferred to U.K. Sub via a series of share exchanges, and the new intercompany debt was contributed among OMAM, U.S. Sub and U.K. Sub.

7.       OMAM underwent a reduction of share capital to maximize distributable reserves, re-registered in the United Kingdom as a public limited company, amended its articles of association to reflect the same and organized its share capital for purposes of the Offering.

8.       OMAM declared a $175.0 million pre-Offering dividend to OMGUK. OMAM also issued a non-interest bearing promissory note to OMGUK in the principal amount of $37.0 million which will be paid as funds become available from Affiliate distributions, subject to the maintenance of a minimum level of cash holdings.

9.       OMAM entered into arrangements with OMGUK for the payment of future realizable benefits (estimated to total $289.8 million at September 30, 2014) associated with certain deferred tax assets existing as of the date of the Offering, as well as co-investments (with a carrying value of $39.9 million and a fair value of $48.5 million) made by the Company in real-estate and timber strategies of its Affiliates. In accordance with the deferred tax asset arrangement, in December 2014, OMAM will begin to make quarterly payments to OMGUK.  In the fourth quarter of 2014, OMAM will adjust the balance of the liability to reflect the impact of the 2013 income tax return and will also reduce the liability as of the Offering date to reflect a revised estimate of the future realizable benefits as of the Offering date.  The liability will again be adjusted in the fourth quarter of 2015 to reflect the impact of the 2014 income tax return through October 8, 2014.

 

Between October 1, 2014 and October 15, 2014 the Company completed the following restructuring steps:

 

i.                     payment of the $175.0 million pre-Offering dividend to OMGUK, funded by a new third party credit facility entered into at the closing of the Offering; and

ii.                    the purchase of additional ownership of an Affiliate for $60.0 million in cash, resulting in a reduction of liabilities for the same amount.

 

Additionally, the Company has recast the components of Parent equity (deficit) to reflect the issuance of 120,000,000 ordinary shares, nominal value $0.001.

 

Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies

 

 

2)  Basis of Presentation and Significant Accounting Policies

 

The Company’s significant accounting policies are as follows:

 

Basis of presentation

 

These Condensed Consolidated Financial Statements reflect the historical balance sheets; statements of operations and of comprehensive income; statements of changes in stockholders’ equity; and statements of cash flows of the Company.  On October 15, 2014, the Company completed the Offering by its Parent of 22,000,000 ordinary shares of the Company pursuant to the Securities Act of 1933, as amended.  Additionally, the underwriters in the Offering exercised a portion of their overallotment option and purchased an additional 2,231,375 shares of the Company from the Parent.  Within these Condensed Consolidated Financial Statements, entities that are part of the Parent’s consolidated results, but are not part of OMAM, as defined above, are referred to as “related parties.” These historical Condensed Consolidated Financial Statements have been prepared using the Parent’s historical basis in determining the assets and liabilities and the results of the Company. The financial information included herein may not reflect the consolidated financial position, operating results, changes in the Parent’s equity investment and cash flows of the Company in the future, and does not reflect what they would have been had the Company been a separate, stand-alone entity during the periods presented.

 

The Company historically has utilized the services of the Parent for certain functions. These services include providing working capital, as well as certain finance, internal audit, insurance, human resources, investor relations, risk, governance and other corporate functions and projects. The cost of these services has been allocated to the Company and included in the Condensed Consolidated Financial Statements. The allocations have been determined on the basis which the Parent and the Company considered to be reasonable reflections of the utilization of services provided by the Parent. The Condensed 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 the Parent are included in the Condensed Consolidated Financial Statements, however material intercompany balances and transactions among the Company, its consolidated Affiliates and consolidated Funds are eliminated in consolidation.

 

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Condensed Consolidated Financial Statements and notes thereto for the year ended December 31, 2013 included in the prospectus which forms a part of the Registration Statement on Form S-1 for the Offering as filed with the Securities and Exchange Commission (“SEC”) on October 9, 2014. The Company’s significant accounting policies, which have been consistently applied, are summarized in those Financial Statements.

 

Consolidation

 

Affiliates

 

The Company evaluates each of its Affiliate 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 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 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 relating to the consolidation of VIEs. Substantially all of the Funds that are managed by the Company qualify for the deferral granted under Accounting Standards Updates (“ASU”) 2010-10, “Amendments for Certain Investment Funds” (“ASU 2010-10”). As such, the Company evaluates these Funds for consolidation pursuant to guidance formerly in Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities. These Funds are typically owned entirely by third-party investors, however certain Funds are capitalized with seed capital investments from the Company or its related parties and may be owned partially by Affiliate key employees and/or individuals that own minority interests in an Affiliate.

 

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. For VIEs that are investment companies subject to ASU 2010-10, the primary beneficiary of the VIE is generally the variable interest holder that absorbs a majority of the expected losses of the VIE, receives a majority of the expected residual returns of the VIE, or both. 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.

 

For VIEs that do not fall within the scope of ASU 2010-10, the primary beneficiary of a 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 consolidates VOEs when it has control over significant operating, financial and investing decisions of the entity. 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.

 

Other than Funds holding investments in timber assets (the “Timber Funds”), the Company’s consolidated Funds are investment companies (the “Investment Funds”) and the Company has therefore retained their specialized investment company accounting in consolidation, pursuant to ASC 946, “Financial Services—Investment Companies.”

 

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.

 

Timber Funds

 

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. Timber 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.

 

The Company estimates its timber inventory using statistical information and data obtained from physical measurements, site maps, photo-types and other information gathering techniques. These estimates are updated annually and may result in adjustments of timber volumes, including timber growth rates and depletion rates.

 

Depletion consists of costs attributed to harvesting timber and is recorded as an expense as timber is harvested. The depletion rate applied to the volume of timber sold is adjusted annually and is based on the relationship of incurred costs in the merchantable timber classification to estimated current merchantable volume.

 

Use of estimates

 

The preparation of these Condensed 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.

 

Fair Value Measurements
Fair Value Measurements

 

 

3)  Fair Value Measurements

 

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2014 (in millions):

 

 

 

Quoted prices
in active
markets
(Level I)

 

Significant
other
observable
inputs
(Level II)

 

Significant
unobservable
inputs
(Level III)

 

Total value,
September 30,
2014

 

Assets of consolidated Funds(1)

 

 

 

 

 

 

 

 

 

Investments owned, at fair value

 

 

 

 

 

 

 

 

 

Common and preferred stock

 

$

24.8

 

$

 

$

 

$

24.8

 

Short-term investment funds

 

0.1

 

 

 

0.1

 

Fixed income securities

 

1.1

 

 

 

1.1

 

Collective investment Funds

 

 

24.0

 

 

24.0

 

Corporate debt

 

 

8.5

 

 

8.5

 

Other investments

 

0.3

 

1.8

 

 

2.1

 

Total investments at fair value

 

26.3

 

34.3

 

 

60.6

 

Restricted cash held at fair value

 

104.5

 

 

 

104.5

 

Consolidated Funds Total

 

130.8

 

34.3

 

 

165.1

 

Investment securities(2)

 

61.0

 

 

 

61.0

 

Investments in unconsolidated Funds(3)

 

 

 

39.4

 

39.4

 

OMAM Total

 

61.0

 

 

39.4

 

100.4

 

Total fair value assets

 

$

191.8

 

$

34.3

 

$

39.4

 

$

265.5

 

 

 

 

 

 

 

 

 

 

 

Liabilities of consolidated Funds(1)

 

 

 

 

 

 

 

 

 

Common stock

 

$

(16.4

)

$

 

$

 

$

(16.4

)

Total fair value liabilities

 

$

(16.4

)

$

 

$

 

$

(16.4

)

 

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2013 (in millions):

 

 

 

Quoted prices
in active
markets
(Level I)

 

Significant
other
observable
inputs
(Level II)

 

Significant
unobservable
inputs
(Level III)

 

Total value,
December 31,
2013

 

Assets of consolidated Funds(1)

 

 

 

 

 

 

 

 

 

Investments owned, at fair value

 

 

 

 

 

 

 

 

 

Common and preferred stock

 

$

52.0

 

$

 

$

 

$

52.0

 

Short-term investment funds

 

8.8

 

 

 

8.8

 

Fixed income securities

 

 

207.0

 

 

207.0

 

Collective investment Funds

 

 

9.1

 

 

9.1

 

Corporate debt

 

 

54.1

 

 

54.1

 

Other investments

 

0.9

 

70.2

 

 

71.1

 

Derivatives

 

2.8

 

1.3

 

 

4.1

 

Total investments at fair value

 

64.5

 

341.7

 

 

406.2

 

Restricted cash held at fair value

 

80.5

 

93.6

 

 

174.1

 

Consolidated Funds Total

 

145.0

 

435.3

 

 

580.3

 

Investment securities(2)

 

52.1

 

 

 

52.1

 

Investments in unconsolidated Funds(3)

 

 

 

43.1

 

43.1

 

OMAM Total

 

52.1

 

 

43.1

 

95.2

 

Total fair value assets

 

$

197.1

 

$

435.3

 

$

43.1

 

$

675.5

 

Liabilities of consolidated Funds(1)

 

 

 

 

 

 

 

 

 

Common stock

 

$

(24.6

)

$

 

$

 

$

(24.6

)

Forward Exchange Contracts

 

(3.4

)

(0.1

)

 

(3.5

)

Interest Rate Swaps

 

 

(0.1

)

 

(0.1

)

Other derivatives

 

(0.2

)

(0.4

)

 

(0.6

)

Total fair value liabilities

 

$

(28.2

)

$

(0.6

)

$

 

$

(28.8

)

 

(1)     Assets and liabilities measured at fair value are comprised of financial investments managed by the Company’s Affiliates. $60.6 million in assets and $16.4 million in liabilities at September 30, 2014 and $406.2 million in assets and $28.8 million in liabilities at December 31, 2013 are the result of the consolidation of Funds sponsored by the Company’s Affiliates.  Of the balances at December 31, 2013, $323.0 million of assets and $4.0 million of liabilities relate to discontinued operations.

 

Of these, collective investment funds are multi-strategy products categorized as Level II because they are redeemable monthly and valued at NAV per share of the fund without adjustment which the Company believes represents the fair value of the investments. The fair value of fixed income securities, corporate debt, and other investments is estimated based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs and therefore 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.

 

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)     $61.0 million and $52.1 million at September 30, 2014 and December 31, 2013, respectively, of investment securities 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.

 

(3)     The $39.4 million and $43.1 million at September 30, 2014 and December 31, 2013, 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. The NAVs that have been provided by investees have been derived from the fair values of the underlying investments as of the measurement dates. The Company has classified investments in unconsolidated Funds as Level III given the nature of redemption restrictions that are in place. These unconsolidated Funds consist primarily of real estate investments funds. 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 1-8 years from September 30, 2014. The valuation process for the underlying real estate investments held by the real estate investments 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.

 

The following table presents changes in Level III assets and liabilities, for the three and nine months ended September 30, comprised of significant unobservable inputs, 2014:

 

 

 

Investments in
unconsolidated
Funds

 

Balance, June 30, 2014

 

$

42.3

 

Realized gain (loss)

 

0.5

 

Net change in unrealized appreciation (depreciation)

 

(2.4

)

Dispositions

 

(1.0

)

Balance, September 30, 2014

 

$

39.4

 

 

 

 

Investments in
unconsolidated
Funds

 

Balance, December 31, 2013

 

$

43.1

 

Realized gain (loss)

 

1.5

 

Net change in unrealized appreciation (depreciation)

 

(2.1

)

Dispositions

 

(3.1

)

Balance, September 30, 2014

 

$

39.4

 

 

Unrealized losses recorded on the Company’s Condensed Consolidated Statements of Income related to the above Level III changes were $2.4 million and $2.1 million for the three and nine months ended September 30, 2014, respectively. There were no significant transfers of financial assets or liabilities among Levels I, II or III during the nine months ended September 30, 2014.

Variable Interest Entities
Variable Interest Entities

 

 

4)  Variable Interest Entities

 

The Company sponsors the formation of various entities considered to be VIEs. The Company consolidates these entities pursuant to ASC Topic 810 relating to the consolidation of VIEs. These VIEs are primarily Funds managed by Affiliates that qualify for the deferral granted under ASU 2010-10. As such, the Company evaluates these Funds for consolidation pursuant to FASB Interpretation No. 46(R). These investment vehicles are typically owned entirely by third-party investors; however, certain Funds are capitalized with seed capital investments from the Company 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 (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Investments, at fair value

 

$

5.9

 

$

90.9

 

Restricted cash

 

2,487.7

 

2,557.0

 

Timber assets

 

4,089.5

 

4,172.5

 

Other assets of consolidated Funds

 

164.7

 

145.0

 

Total Assets

 

$

6,747.8

 

$

6,965.4

 

Liabilities

 

 

 

 

 

Borrowings

 

$

4,123.6

 

$

4,146.0

 

Other liabilities of consolidated Funds

 

110.5

 

77.2

 

Total Liabilities

 

$

4,234.1

 

$

4,223.2

 

 

“Investments at fair value” consist of investments in securities and investments in related parties.

 

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. Any debt or liabilities held by consolidated Funds have no recourse to the Company’s general credit. The Company also consolidates Funds that are not VIEs, and therefore the assets and liabilities of those Funds are not included in the table above.

 

The Company’s involvement with Funds that are VIEs and unconsolidated 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 significant variable interest (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Unconsolidated VIE assets

 

$

9,391.0

 

$

12,156.8

 

Unconsolidated VIE liabilities

 

$

1,419.4

 

$

1,720.4

 

Equity interests on the Consolidated Balance Sheet

 

$

74.3

 

$

78.4

 

Maximum risk of loss (1)

 

$

74.5

 

$

81.1

 

 

(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 assets and liabilities of Heitman LLC include the management company itself as well as certain funds that Heitman LLC consolidates. 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.

 

Equity Accounted Investees
Equity Accounted Investees

 

 

5)  Equity Accounted Investees

 

The following tables present summarized financial information for Affiliates and Funds accounted for under the equity method (in millions):

 

 

 

For the Nine Months

 

For the Nine Months

 

 

 

Ended September 30, 2014

 

Ended September 30, 2013

 

Statements of Income

 

Heitman LLC

 

Other

 

Total

 

Heitman LLC

 

Other

 

Total

 

Net revenues (1)

 

$

176.1

 

$

64.2

 

$

240.3

 

$

173.9

 

$

61.9

 

$

235.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

42.0

 

22.4

 

64.4

 

48.8

 

17.5

 

66.3

 

Other income (expense), net

 

41.2

 

(35.4

)

5.8

 

139.5

 

5.3

 

144.8

 

Income (loss) before income taxes

 

83.2

 

(13.0

)

70.2

 

188.3

 

22.8

 

211.1

 

Income tax (expense)

 

(1.5

)

(0.1

)

(1.6

)

(1.8

)

(0.2

)

(2.0

)

Noncontrolling interests (expense) benefit

 

(73.3

)

14.3

 

(59.0

)

(162.9

)

(23.0

)

(185.9

)

Net income (loss) attributable to controlling interests

 

$

8.4

 

$

1.2

 

$

9.6

 

$

23.6

 

$

(0.4

)

$

23.2

 

OMAM Equity in net income (loss) of equity method investees

 

$

5.2

 

$

1.2

 

$

6.4

 

$

6.3

 

$

(0.4

)

$

5.9

 

 

 

 

As of September 30, 2014

 

As of December 31, 2013

 

Balance Sheet

 

Heitman LLC

 

Other

 

Total

 

Heitman LLC

 

Other

 

Total

 

Current assets

 

$

85.9

 

$

558.3

 

$

644.2

 

$

125.7

 

$

58.7

 

$

184.4

 

Noncurrent assets

 

1,616.2

 

573.9

 

2,190.1

 

1,785.4

 

1,027.4

 

2,812.8

 

Total Assets

 

1,702.1

 

1,132.2

 

2,834.3

 

1,911.1

 

1,086.1

 

2,997.2

 

Current liabilities

 

54.3

 

237.4

 

291.7

 

65.9

 

378.9

 

444.8

 

Long-term liabilities

 

539.2

 

300.1

 

839.3

 

645.4

 

48.8

 

694.2

 

Non-controlling interests in subsidiaries

 

1,062.1

 

581.5

 

1,643.6

 

1,140.2

 

643.7

 

1,783.9

 

Members’ equity

 

$

46.5

 

$

13.2

 

$

59.7

 

$

59.6

 

$

14.7

 

$

74.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OMUSH Equity investment and undistributed earnings of affiliated companies, before consolidating and reconciling adjustments

 

$

44.4

 

$

13.2

 

$

57.6

 

$

47.1

 

$

14.7

 

$

61.8

 

Consolidating and reconciling adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill attributable to equity method investment

 

29.9

 

 

29.9

 

29.8

 

 

29.8

 

OMAM Investment in equity method investees at cost plus equity in undistributable earnings since acquisition

 

$

74.3

 

$

13.2

 

$

87.5

 

$

76.9

 

$

14.7

 

$

91.6

 

 

(1)     Net revenue includes advisory fees for asset management services and investment income, including interest and dividends from consolidated investment partnerships.

Timber and Timberlands
Timber and Timberlands

 

 

6)  Timber and Timberlands

 

Timber and timberlands consist of the following (in millions):

 

 

 

September 30,

 

December 31,

 

USD, in millions

 

2014

 

2013

 

Total timber and timberlands, at cost

 

$

4,957.3

 

$

5,214.8

 

Accumulated depletion on timber

 

(768.6

)

(791.9

)

Accumulated amortization

 

(99.2

)

(0.8

)

Timber and timberlands, net

 

$

4,089.5

 

$

4,422.1

 

 

In the three month period ending September 30, 2014, the Company deconsolidated a Timber Fund.

 

Related Party Transactions
Related Party Transactions

 

 

7)  Related Party Transactions

 

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 OMAM “feeder” Funds.

 

The Company’s Parent provides 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 and tax services. The Company has also been allocated the costs associated with projects specific to or involving the Company. The costs associated with these services generally include employee related costs, including payroll and benefit as well as overhead related to support functions. Costs associated with these services were generally allocated based on the Company’s proportion of the total Parent’s consolidated, normalized revenues. In the nine months ended September 30, 2014 and 2013, $3.4 million and $2.2 million, respectively, of these costs incurred have been allocated to the Company through a non-cash contribution to Parent equity, with the balance of the charges settled in cash.

 

Pursuant to the Reorganization described more fully in Note 1, on October 8, 2014, the Company entered into a seed capital management agreement, a co-investment deed, a deferred tax asset deed and a shareholder agreement with its Parent and/or its Parent’s subsidiaries.

 

Borrowings and Debt
Borrowings and Debt

 

 

8)  Borrowings and Debt

 

The Company’s long term debt at September 30, 2014 and December 31, 2013 excluding the long term debt of the Company’s consolidated Funds was comprised of the following (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

 

 

(in millions)

 

2014

 

2013

 

Interest rate

 

Maturity

 

Related party obligations:

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

 

$

140.7

 

LIBOR + 5.58% + 0.50% fee on undrawn amounts

 

March 31, 2018

 

Term loan one

 

 

900.0

 

6.34%

 

September 30, 2015

 

Loan note one

 

175.0

 

 

3.00%

 

September 29, 2015

 

Loan note two

 

37.0

 

 

0.00%

 

September 29, 2024

 

Total related party obligations

 

212.0

 

1,040.7

 

 

 

 

 

Third party obligations:

 

 

 

 

 

 

 

 

 

Term loan two

 

 

2.5

 

5.23%

 

August 15, 2014

 

Total long term debt of the Company

 

$

212.0

 

$

1,043.2

 

 

 

 

 

 

The fair value of borrowings approximated net cost basis as of September 30, 2014 and December 31, 2013. Fair value was determined based on future cash flows, discounted to present value using current market rates. The inputs are categorized as Level III in the fair value hierarchy. Interest expense incurred amounted to a total of $49.8 million and $55.2 million for the nine months ended September 30, 2014 and 2013, respectively.

 

On September 29, 2014, the Company entered into loan note one and loan note two with its Parent. Loan note one was issued in the amount of $175.0 million, accrues interest at 3% per annum and is payable in full on its maturity date, September 29, 2015. Loan note two was issued in the amount of $37.0 million and does not bear interest. Loan note two has a ten year term and calls for quarterly repayments amounting to the greater of the Company’s excess cash, as defined in loan note two, or $1.0 million, whichever is greater.

 

On October 15, 2014, the Company entered into a revolving credit facility with Citibank, as administrative agent and issuing bank, Citigroup Global Markets Inc. and Merrill Lynch, Piece, Fenner & Smith Incorporated as joint lead arrangers and joint book runners (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 will 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 being 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 has assigned an initial rating to the Company’s senior, unsecured long-term indebtedness for borrowed money that is not subject to credit enhancement, or its credit rating, at which time such additional amount will be 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 being based from time to time on the Company’s Leverage Ratio until it has been assigned a credit rating, at which time such additional amount will be based on its credit rating. In addition, the Company will be 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 its Leverage Ratio until it has been assigned a credit rating, at which time such amount will be based on the Company’s credit rating. Under the Credit Facility, the ratio of third-party borrowings to trailing twelve months Adjusted EBITDA cannot exceed 3.0x, and the interest coverage ratio must not be less than 4.0x. On October 15, 2014, the Company drew $177.0 million on this facility of which $175.0 million was paid to the Parent to satisfy loan note one pursuant to the Reorganization described more fully in Note 1.  As the Company is yet to receive a credit rating and in accordance with the terms of the Credit Facility an interest rate of LIBOR plus a margin of 1.50% and commitment fee rate of 0.25% is being charged.  At September 30, 2014, the Company’s pro forma ratio of third-party borrowings to trailing twelve months Adjusted EBITDA was 1.0x.

 

On October 15, 2014, we repaid loan note one upon the closing of our new revolving credit facility.

 

The long term debt of the Company’s consolidated Funds was comprised of the following at September 30, 2014 and December 31, 2013 (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

 

 

(in millions)

 

2014

 

2013

 

Interest rate

 

Maturity

 

Related party obligations:

 

 

 

 

 

 

 

 

 

Promissory note

 

$

 

$

265.0

 

4.00%

 

August 2019

 

Shareholder loans and note interest

 

338.7

 

339.7

 

BBSW* + 5.5%

 

October 2022

 

Total related party obligations:

 

338.7

 

604.7

 

 

 

 

 

Third party obligations:

 

 

 

 

 

 

 

 

 

Term loan A

 

163.0

 

163.0

 

6% - 6.26%

 

May 2016

 

Term loan B

 

261.3

 

261.5

 

5.93% - LIBOR + 1.61%

 

October 2016

 

Senior secured notes

 

860.0

 

860.0

 

6.19% - 6.38%

 

December 2019

 

Secured bank loan

 

117.4

 

115.4

 

variable

 

October 2017

 

Notes payable

 

2,383.2

 

2,383.2

 

LIBOR + margin

 

October 2027

 

Total third party obligations:

 

3,784.9

 

3,783.1

 

 

 

 

 

Total long term debt of consolidated Funds

 

$

4,123.6

 

$

4,387.8

 

 

 

 

 

 

* BBSW refers to the Australian Bank-Bill Reference Rate

 

The fair value of borrowings was approximately $4,280.6 million and $4,600.3 million as of September 30, 2014 and December 31, 2013, respectively. Fair value was determined based on future cash flows, discounted to present value using current market rates. The inputs are categorized as Level III in the fair value hierarchy.

 

Total interest expense recognized in relation to the above obligations of consolidated Funds during the nine months ended September 30, 2014 and 2013 was $99.3 million and $107.6 million, respectively.

 

The Company and its consolidated Funds were in compliance with the required covenants related to borrowings and debt facilities as of September 30, 2014.

Commitments and Contingencies
Commitments and Contingencies

 

 

9)  Commitments and Contingencies

 

Operational commitments

 

As of December 31, 2013, the Company had maximum potential contingent acquisition payment obligations of $11 million related to the acquisition of an Affiliate in a prior period. As a result of specific hurdles being met during 2014 and following a restructuring this amount has now been settled in full.

 

As of September 30, 2014, the Company had an obligation to purchase additional ownership interests in an Affiliate for $60.0 million contingent upon the pricing of the Offering.  Subsequent to September 30, 2014, the Company completed the Offering and purchased the additional ownership interest of the Affiliate for $60.0 million in cash, resulting in a reduction of liabilities for the same amount.

 

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. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the Combined and Consolidated financial condition or results of operations of the Company. As of September 30, 2014, there were no 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.

 

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.

 

Earnings Per Share
Earnings Per Share

 

 

10)  Earnings Per Share

 

The calculation of pro forma basic and diluted earnings per ordinary share is as follows (in millions, except per share data):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests

 

$

(1.7

)

$

6.9

 

$

17.4

 

$

18.6

 

Denominator:

 

 

 

 

 

 

 

 

 

Pro forma weighted-average ordinary shares outstanding—basic

 

120,000,000

 

120,000,000

 

120,000,000

 

120,000,000

 

Pro forma weighted-average ordinary shares outstanding—diluted

 

120,000,000

 

120,000,000

 

120,000,000

 

120,000,000

 

Pro forma earnings per ordinary share attributable to controlling interests:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

$

0.06

 

$

0.15

 

$

0.15

 

Diluted

 

$

(0.01

)

$

0.06

 

$

0.15

 

$

0.15

 

 

Included in pro forma basic ordinary shares outstanding are 1,212,766 restricted ordinary shares converted from restricted shares of the Company’s Parent prior to the Offering. The holders of these restricted ordinary shares are entitled to the same rights and privileges, including the participation in earnings at the conversion and during the vesting period of the shares, as outstanding ordinary shares and as such these shares are considered participating securities. The restricted ordinary shares are subject to the same rights as the other pro forma basic ordinary shares resulting in equivalent earnings per ordinary share.

 

Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income

 

 

11)  Accumulated Other Comprehensive Income

 

The components of accumulated other comprehensive income at September 30, 2014 and December 31, 2013 were as follows (in millions), including proportions attributable to non-controlling interests:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Foreign currency translation

 

$

(16.7

)

$

(17.9

)

Discontinued Operations and Restructuring
Discontinued Operations and Restructuring

 

 

12)  Discontinued Operations and Restructuring

 

Discontinued operations

 

The Company’s gain (loss) from discontinued operations was comprised of the following at September 30 (in millions):

 

 

 

For the Three

 

For the Nine

 

 

 

Months Ended

 

Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

 

$

20.5

 

$

38.0

 

$

63.4

 

Compensation expense

 

 

15.2

 

31.0

 

39.0

 

Depreciation

 

 

(0.5

)

0.2

 

0.4

 

Other operating expenses

 

 

4.0

 

9.8

 

12.2

 

Amortization and impairment of goodwill & intangibles

 

 

 

 

0.1

 

Operating loss

 

 

1.8

 

(3.0

)

11.7

 

Investment gain (loss) of consolidated OMAM Funds

 

 

1.5

 

2.8

 

(11.6

)

Net interest income (expense)

 

 

(0.1

)

0.2

 

 

Loss before taxes

 

 

3.2

 

 

0.1

 

Income taxes

 

 

1.2

 

2.0

 

4.7

 

Discontinued net loss

 

 

2.0

 

(2.0

)

(4.6

)

Gain (loss) on disposal, net of tax of $0.6, $(0.7), $0.6, and $(0.7)

 

1.3

 

 

3.7

 

(1.0

)

Total Discontinued Operations

 

1.3

 

2.0

 

1.7

 

(5.6

)

Attributable to non-controlling interests

 

 

2.8

 

4.7

 

(9.4

)

Attributable to controlling interests

 

$

1.3

 

$

(0.8

)

$

(3.0

)

$

3.8

 

Pro forma earnings (loss) per share (basic and diluted) attributable to controlling interests

 

$

0.01