The following executive overview, which summarizes the significant trends affecting our results of operations and financial condition, as well as the remainder of this Management's Discussion and Analysis of Financial Condition and Results of Operations ofAffiliated Managers Group, Inc. and its subsidiaries, should be read in conjunction with the "Forward-Looking Statements" section set forth in Part I and the "Risk Factors" section set forth in Item 1A of Part I of this Annual Report on Form 10-K and in any more recent filings with theSEC , and with our Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. Our discussion and analysis of the key operating performance measures and financial results for fiscal year 2020 compared to fiscal year 2019 is included herein. For discussion and analysis of fiscal year 2019 compared to fiscal year 2018, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , which was filed with theSEC onFebruary 28, 2020 . Executive Overview We are a leading partner to independent active investment management firms globally. Our strategy is to generate long-term value by investing in a diverse array of excellent partner-owned investment firms, which we call our "Affiliates," through a proven partnership approach, and allocating resources across our unique opportunity set to the areas of highest growth and return. Our innovative partnership approach enables each Affiliate's management team to own significant equity in their firm while maintaining operational and investment autonomy. In addition, we offer our Affiliates growth capital, global distribution, and other strategic value-added capabilities, which enhance the long-term growth of these independent businesses and enable them to align equity incentives across generations of principals to build enduring franchises. As ofDecember 31, 2020 , our aggregate assets under management were approximately$716 billion across a broad range of active, return-oriented strategies. For the year endedDecember 31, 2020 , the ongoing pandemic caused by the novel coronavirus ("COVID-19") had a significant impact on the global economy. The overall extent and duration of COVID-19, including the timing and effectiveness of vaccines, and its impact on businesses and economic activity going forward, remains difficult to predict. We and our Affiliates remain focused on the health and well-being of the individuals and families at AMG, our Affiliates, and the community at large. Given the nature of our decentralized operations and our entrepreneurial culture, we and our Affiliates remain fully operational and have experienced minimal disruption in our ability to serve our key stakeholders, most importantly our clients. We continue to monitor the economic uncertainty related to COVID-19, and the extent of the impact on our business operations and financial results will depend on a number of factors and future developments, which are uncertain and cannot be predicted. New Investments In 2020, we completed minority investments inComvest Partners , a leading middle-market private equity and credit investment firm,Inclusive Capital Partners LP , a newly founded investment firm focused on responsible capitalism and the advancement of economic and social inclusion and environmental stewardship, andJackson Square Partners LLC , an investment manager specializing in long-only, growth-oriented equity strategies. OnFebruary 1, 2021 , we completed a minority investment inBoston Common Asset Management LLC , a women-owned leader in sustainable and impact investing. We account for these investments under the equity method of accounting. Following the close of each transaction, Affiliate management continues to hold a significant portion of the equity in their business and directs the day-to-day-operations. Operating Performance Measures Under accounting principles generally accepted in theU.S. ("GAAP"), we are required to consolidate certain of our Affiliates and use the equity method of accounting for others. Whether we consolidate an Affiliate or use the equity method of accounting, we maintain the same innovative partnership approach and provide support and assistance in substantially the same manner for all of our Affiliates. Furthermore, all of our Affiliates are boutique investment managers and are impacted by similar marketplace factors and industry trends. Therefore, our key aggregate operating performance measures are important in providing management with a more comprehensive view of the operating performance and material trends across our entire business. 20
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Table of Contents The following table presents our key aggregate operating performance measures:
For the Years Ended December 31, (in billions, except as noted) 2018 2019 % Change 2020 % Change Assets under management$ 736.0 $ 722.5 (2) %$ 716.2 (1) % Average assets under management 819.9 758.1 (8) % 664.4 (12) % Aggregate fees (in millions) 5,442.4 4,962.7 (9) % 4,626.4 (7) % Assets under management and, therefore average assets under management, include the assets under management of our consolidated and equity method Affiliates, and as ofOctober 1, 2019 , exclude the assets under management of certain Affiliates in which we have repositioned our interests and that are not significant to our operating performance measures or our results of operations. Assets under management is presented on a current basis without regard to the timing of the inclusion of an Affiliate's financial results in our operating performance measures and Consolidated Financial Statements. Average assets under management reflects the timing of the inclusion of an Affiliate's financial results in our operating performance measures and Consolidated Financial Statements. Average assets under management for mutual funds and similar retail investment products represents an average of the daily net assets under management, while for institutional and high net worth clients, average assets under management generally represents an average of the assets at the beginning or end of each month during the applicable period. Aggregate fees consist of the total asset and performance based fees earned by all of our consolidated and equity method Affiliates, and include the aggregate fees of certain Affiliates in which we have repositioned our interests. These Affiliates are not significant to our operating performance measures or our results of operations. For certain of our Affiliates accounted for under the equity method, we report aggregate fees and the Affiliate's financial results in our Consolidated Financial Statements one quarter in arrears. Aggregate fees are provided in addition to, but not as a substitute for, Consolidated revenue or other GAAP performance measures. Assets Under Management Through our Affiliates, we provide a comprehensive and diverse range of active, return-oriented strategies designed to assist institutional, retail, and high net worth clients worldwide in achieving their investment objectives. We continue to see demand for active, return-oriented strategies, particularly in illiquid alternative and multi-asset and fixed income strategies, reflecting continued investor demand for returns that are less correlated to traditional equity markets, while we are experiencing outflows in quantitative strategies across liquid alternative strategies and equity strategies. In addition, investor demand for passively-managed products, including exchange traded funds has continued, and we have experienced outflows in certain equity strategies, consistent with this industry-wide trend. We believe the best-performing active equity managers (whether global-, regional-, or country-specific) will continue to have significant opportunities to grow as a result of net client cash inflows. We believe we are well-positioned to benefit from these trends. The following charts present information regarding the composition of our assets under management by active, return-oriented strategy as ofDecember 31, 2019 and 2020:
Assets Under Management by Strategy
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(1)Alternatives include illiquid alternative strategies, which accounted for 13%
and 14% of our assets under management as of
(2)Global equities include emerging markets strategies, which accounted for 9%
of our assets under management as of both
The following table presents changes in our assets under management by active, return-oriented strategy:
Global U.S. Multi-Asset & (in billions) Alternatives Equities Equities Fixed Income Total December 31, 2019$ 241.2 $ 274.9 $ 100.0 $ 106.4 $ 722.5 Client cash inflows and commitments 29.6 33.3 14.7 23.9 101.5 Client cash outflows (51.7) (61.2) (29.4) (21.0) (163.3) Net client cash flows (22.1) (27.9) (14.7) 2.9 (61.8) New investments 3.7 4.2 6.4 - 14.3 Market changes (3.4) 26.4 12.7 8.3 44.0 Foreign exchange(1) 0.9 1.3 0.3 0.2 2.7 Realizations and distributions (net) (2.6) (0.2) (0.2) (0.2) (3.2) Other(2) (1.2) (0.2) (1.0) 0.1 (2.3) December 31, 2020$ 216.5 $ 278.5 $ 103.5 $ 117.7 $ 716.2
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(1)Foreign exchange reflects the impact of translating intoU.S. dollars the assets under management of our Affiliates whose functional currency is not theU.S. dollar. (2)Other includes assets under management attributable to product transitions and reclassifications. The following charts present information regarding the composition of our assets under management by client type as ofDecember 31, 2019 and 2020:
Assets Under Management by Client Type
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-------------------------------------------------------------------------------- Table of Contents The following table presents changes in our assets under management by client type: High Net (in billions) Institutional Retail Worth Total December 31, 2019$ 407.2 $ 198.1 $ 117.2 $ 722.5 Client cash inflows and commitments 40.8 39.9 20.8 101.5 Client cash outflows (78.8) (63.3) (21.2) (163.3) Net client cash flows (38.0) (23.4) (0.4) (61.8) New investments 12.1 2.2 - 14.3 Market changes 22.0 12.7 9.3 44.0 Foreign exchange(1) 1.4 1.1 0.2 2.7 Realizations and distributions (net) (2.6) (0.5) (0.1) (3.2) Other(2) (1.1) (0.9) (0.3) (2.3) December 31, 2020$ 401.0 $ 189.3 $ 125.9 $ 716.2
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(1)Foreign exchange reflects the impact of translating intoU.S. dollars the assets under management of our Affiliates whose functional currency is not theU.S. dollar. (2)Other includes assets under management attributable to product transitions and reclassifications. Aggregate Fees Aggregate fees consist of asset and performance based fees of our consolidated and equity method Affiliates. Asset based fees include advisory and other fees earned by our Affiliates for services provided to their clients and are typically determined as a percentage of the value of a client's assets under management. Performance based fees are based on investment performance, typically on an absolute basis or relative to a benchmark, and are generally recognized when it is improbable that there will be a significant reversal in the amount of revenue recognized. Performance based fees are generally billed less frequently than asset based fees, and although performance based fees inherently depend on investment performance and will vary from period to period, we anticipate performance based fees will be a recurring component of our aggregate fees. Aggregate fees are generally determined by the level of our average assets under management and the composition of these assets across our strategies that realize different asset based fee ratios and performance based fees. Our asset based fee ratio is calculated as asset based fees divided by average assets under management. Aggregate fees were$4,626.4 million in 2020, a decrease of$336.3 million or 7% as compared to 2019. The decrease in our aggregate fees was due to a$525.0 million or 11% decrease in asset based fees, partially offset by a$188.7 million or 4% increase in performance based fees. The decrease in asset based fees was due to a decrease in our average assets under management, due to net client cash outflows principally in our quantitative strategies, and a change in the composition of our assets under management. Financial and Supplemental Financial Performance Measures The following table presents our key financial and supplemental financial performance measures: For the Years Ended December 31, (in millions) 2018 2019 % Change 2020 % Change Net income (controlling interest)$ 243.6 $ 15.7 (94) %$ 202.2 N.M.(1) Adjusted EBITDA (controlling interest)(2) 961.8 841.6 (12) % 798.8 (5) % Economic net income (controlling interest)(2) 780.7 720.2 (8) % 624.4 (13) %
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(1)Percentage change is not meaningful. (2)Adjusted EBITDA (controlling interest) and Economic net income (controlling interest) are non-GAAP performance measures and are discussed in "Supplemental Financial Performance Measures." 23 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA (controlling interest) is an important supplemental financial performance measure for management as it provides a comprehensive view of our share of the financial performance of our business. Adjusted EBITDA (controlling interest) decreased$42.8 million or 5% in 2020. The decrease in Adjusted EBITDA (controlling interest) was primarily due to a$336.3 million or 7% decrease in aggregate fees and a$17.5 million increase in share-based compensation principally due to an event that accelerated certain share-based compensation, partially offset by a$6.0 million decrease in travel-related expenses attributable to the controlling interest. While Adjusted EBITDA (controlling interest) decreased$42.8 million or 5% in 2020, our Net income (controlling interest) increased$186.5 million . The increase in Net income (controlling interest) was primarily due to a$300.0 million decrease in equity method intangible amortization and impairments, partially offset by a$78.6 million increase in Income tax expense attributable to the controlling interest. We believe Economic net income (controlling interest) is an important supplemental financial performance measure because it represents our performance before non-cash expenses relating to our acquisition of interests in Affiliates and improves comparability of performance between periods. Economic net income (controlling interest) decreased$95.8 million or 13% in 2020, primarily due to a$42.8 million decrease in Adjusted EBITDA (controlling interest), a$37.2 million increase in current and other deferred taxes primarily attributable to the controlling interest and a$16.1 million increase in Interest expense attributable to the controlling interest. Results of Operations The following discussion includes the key operating performance measures and financial results of our consolidated and equity method Affiliates. Our consolidated Affiliates' financial results are included in our Consolidated revenue, Consolidated expenses, and Investment and other income, and our share of our equity method Affiliates' financial results is reported, net of intangible amortization and impairments, in Equity method loss (net). Consolidated Revenue Our Consolidated revenue is derived from our consolidated Affiliates, primarily from asset based fees from investment management services. For these Affiliates, we typically use structured partnership interests in which we contractually share in the Affiliate's revenue without regard to expenses. Consolidated revenue is generally determined by the level of our consolidated Affiliate average assets under management and the composition of these assets across our strategies that realize different asset based fee ratios and performance based fees. The following table presents our consolidated Affiliate average assets under management and Consolidated revenue: For the Years Ended December 31, (in millions, except as noted) 2018 2019 % Change 2020 % Change Consolidated Affiliate average assets under management (in billions)$ 419.6 $ 395.1 (6) %$ 362.6 (8) % Consolidated revenue$ 2,378.4 $ 2,239.6 (6) %$ 2,027.5 (9) % Our Consolidated revenue decreased$212.1 million or 9% in 2020, due to a$191.2 million or 9% decrease in asset based fees and a$20.9 million or less than 1% decrease in performance based fees. The decrease in asset based fees was due to a decrease in consolidated Affiliate average assets under management, due to net client cash outflows principally in our equity strategies, and a change in the composition of our assets under management. Consolidated Expenses Our Consolidated expenses are primarily attributable to the non-controlling interests of our consolidated Affiliates in which we share in revenue without regard to expenses. For these Affiliates, the amount of expenses attributable to the non-controlling interests, including compensation, is generally determined by the percentage of revenue allocated to expenses as part of the structured partnership interests in place at the respective Affiliate. Accordingly, increases in revenue generally will increase a consolidated Affiliate's expenses attributable to the non-controlling interests and decreases in revenue will generally decrease a consolidated Affiliate's expenses attributable to the non-controlling interests. 24 -------------------------------------------------------------------------------- Table of Contents The following table presents our Consolidated expenses: For the Years Ended December 31, (in millions) 2018 2019 % Change 2020 % Change Compensation and related expenses$ 987.2 $ 943.0 (4) %$ 883.7 (6) % Selling, general and administrative 417.7 376.8 (10) % 321.4 (15) % Intangible amortization and impairments 114.8 144.5 26 % 140.5 (3) % Interest expense 80.6 76.2 (5) % 92.3 21 % Depreciation and other amortization 22.0 21.3 (3) % 19.1 (10) % Other expenses (net) 69.7 57.0 (18) % 52.8 (7) % Total consolidated expenses$ 1,692.0 $ 1,618.8 (4) %$ 1,509.8 (7) % Compensation and related expenses decreased$59.3 million or 6% in 2020, primarily due to an$88.1 million decrease in bonus and salary expenses, principally as a result of a decline in Consolidated revenue and headcount repositioning in 2019. This decrease was partially offset by a$17.5 million increase in share-based compensation, primarily due to an event that accelerated certain share-based compensation and an$11.3 million increase in Affiliate equity compensation expense. Selling, general and administrative expenses decreased$55.4 million or 15% in 2020, primarily due to a$21.7 million decrease in travel-related expenses, a$17.5 million decrease in sub-advisory and distribution expenses related to a decrease in certain assets under management, and a$12.1 million decrease in renewal commissions. Intangible amortization and impairments decreased$4.0 million or 3% in 2020, primarily due to a$33.8 million reduction in amortization expense related to certain definite-lived assets being fully amortized and a$4.3 million reduction in amortization expense related to a decrease in actual and expected client attrition. These decreases were partially offset by a$34.1 million increase in expenses to reduce the carrying value of acquired client relationships at certain of our Affiliates to fair value. See Note 9 of our Consolidated Financial Statements. Interest expense increased$16.1 million or 21% in 2020, primarily due to an$11.1 million increase from the termination of our pound sterling-denominated forward foreign currency contracts, a$10.3 million increase from our debt securities issued in 2020 and a$4.3 million increase from our debt securities issued in 2019. These increases were partially offset by a$9.5 million decrease from lower interest rates and lower borrowings on our senior unsecured term loan facility (the "term loan") and senior unsecured multicurrency revolving credit facility (the "revolver" and, together with the term loan, the "credit facilities"). Other expenses (net) decreased$4.2 million or 7% in 2020, primarily due to an$8.1 million expense recorded in 2019 to reduce certain right-of use assets to their fair value, related to the reduction in leased office space which did not reoccur and a$2.4 million gain recorded in 2020 related to changes in the value of Affiliate equity repurchase obligations. These decreases were partially offset by a$5.7 million expense recorded in 2020 related to the early termination of a lease. There were no significant changes in Depreciation and other amortization in 2020. Equity Method Loss (Net) When we do not own a controlling equity interest in an Affiliate, but have significant influence, we account for our interest in the Affiliate under the equity method. Our share of earnings or losses from Affiliates accounted for under the equity method, net of amortization and impairments, is included in Equity method loss (net) in our Consolidated Statements of Income. For a majority of these Affiliates, we use structured partnership interests in which we contractually share in the Affiliate's revenue less agreed-upon expenses. We also use structured partnership interests in which we contractually share in the Affiliate's revenue without regard to expenses. Our share of earnings or losses from Affiliates accounted for under the equity method, net of amortization and impairments, is included in Equity method loss (net). Our equity method revenue is derived primarily from asset and performance based fees from investment management services. Equity method revenue incorporates the total asset and performance based fees earned by all of our Affiliates accounted for under the equity method and is generally determined by the level of our equity method Affiliate average assets under management and the composition of these assets across our strategies that realize different asset based fee ratios and performance based fees. Our Affiliates accounted for under the equity method manage a greater proportion of assets subject to 25 -------------------------------------------------------------------------------- Table of Contents performance based fees than our consolidated Affiliates and, as a result, equity method revenue will generally have more performance based fees than Consolidated revenue. The following table presents equity method Affiliate average assets under management and equity method revenue, as well as equity method earnings and equity method intangible amortization and impairments, which in aggregate form Equity method loss (net): For the Years Ended December 31, (in millions, except as noted) 2018 2019 % Change 2020 % Change Operating Performance Measures Equity method Affiliate average assets under management (in billions)$ 400.3 $ 363.0 (9) %$ 301.8 (17) % Equity method revenue$ 3,064.0 $ 2,723.1 (11) %$ 2,598.9 (5) % Financial Performance Measures Equity method earnings$ 370.6 $ 289.4 (22) %$ 288.6 0 % Equity method intangible amortization and impairments (370.8) (627.4) 69 % (332.0) (47) % Equity method loss (net)$ (0.2) $ (338.0) N.M.(1)$ (43.4) (87) %
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(1)Percentage change is not meaningful. Our equity method revenue decreased$124.2 million or 5% in 2020, due to a$333.8 million or 13% decrease in asset based fees, partially offset by a$209.6 million or 8% increase in performance based fees. The decrease in asset based fees was primarily due to a decrease in equity method Affiliate average assets under management, due to net client cash outflows principally in our quantitative strategies, and a change in the composition of our assets under management. These decreases were partially offset by the impact of new investments, which had higher asset based fee ratios than our average asset based fee ratio. While equity method revenue decreased$124.2 million or 5% in 2020, equity method earnings decreased$0.8 million or less than 1%. Equity method earnings decreased less than equity method revenue on a percentage basis due to the recognition of performance based fees at Affiliates in which we hold more of an economic interest, partially offset by a decline in earnings at certain Affiliates in which we share in revenue less agreed-upon expenses. Equity method intangible amortization and impairments decreased$295.4 million or 47% in 2020, primarily due to a$300.0 million decrease in expenses to reduce the carrying value of certain Affiliates to fair value. See Note 10 of our Consolidated Financial Statements. This decrease was partially offset by a$6.4 million increase in amortization expense due to investments in new Affiliates. Investment and other income The following table presents our Investment and other income: For the Years Ended December 31, (in millions) 2018 2019 % Change 2020 % Change Investment and other income$ 27.4 $ 25.2 (8) %$ 34.1 35 % Investment and other income increased$8.9 million or 35% in 2020, primarily due to a$10.8 million increase in foreign currency gains, partially offset by a$1.4 million decrease in interest income. Income Tax Expense The following table presents our Income tax expense: For the Years Ended December 31, (in millions) 2018 2019 % Change 2020 % Change Income tax expense$ 181.3 $ 2.9 (98) %$ 81.4 N.M.(1) __________________________ 26 -------------------------------------------------------------------------------- Table of Contents (1)Percentage change is not meaningful. Income tax expense increased$78.5 million in 2020, primarily due to a$265.1 million increase in income before income taxes attributable to the controlling interest and an$18.7 million increase in valuation allowances against certain state and foreign loss carryforwards. These increases were partially offset by a$3.4 million decrease in stock compensation tax shortfalls during 2020. Net Income The following table presents Net income, Net income (controlling interest) and Net income (non-controlling interest): For the Years Ended December 31, (in millions) 2018 2019 % Change 2020 % Change Net income$ 532.3 $ 305.1 (43) %$ 427.0 40 % Net income (non-controlling interests) 288.7 289.4 0 % 224.8 (22) % Net income (controlling interest) 243.6 15.7 (94) % 202.2 N.M.(1)
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(1)Percentage change is not meaningful. Net income (controlling interest) increased$186.5 million in 2020, primarily due to a decrease in Equity method loss (net). This increase was partially offset by an increase in Income tax expense attributable to the controlling interest, an increase in share-based compensation attributable to the controlling interest and a decrease in Consolidated revenue. Supplemental Financial Performance Measures Adjusted EBITDA (controlling interest) As supplemental information, we provide a non-GAAP measure that we refer to as Adjusted EBITDA (controlling interest). Adjusted EBITDA (controlling interest) is an important supplemental financial performance measure for management as it provides a comprehensive view of our share of the financial performance of our business before interest, taxes, depreciation, amortization, impairments, certain Affiliate equity expenses, gains and losses on general partner and seed capital investments, and adjustments to contingent payment arrangements. We believe that many investors use this measure when assessing the financial performance of companies in the investment management industry. This non-GAAP performance measure is provided in addition to, but not as a substitute for, Net income (controlling interest) or other GAAP performance measures. The following table presents a reconciliation of Net income (controlling interest) to Adjusted EBITDA (controlling interest): For the Years Ended December 31, (in millions) 2018 2019 2020 Net income (controlling interest)$ 243.6 $ 15.7 $ 202.2 Interest expense 80.6 76.2 92.3 Income taxes 169.4 (9.1) 69.5 Intangible amortization and impairments(1) 454.9 745.8 427.7 Other items(2) 13.3 13.0 7.1 Adjusted EBITDA (controlling interest)$ 961.8
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(1)Intangible amortization and impairments in our Consolidated Statements of Income include amortization attributable to the non-controlling interests of our consolidated Affiliates. For our Affiliates accounted for under the equity method, we do not separately report intangible amortization and impairments in our Consolidated Statements of Income. Our share of these Affiliates' amortization is reported in Equity method loss (net). The following table presents the Intangible 27 -------------------------------------------------------------------------------- Table of Contents amortization and impairments shown above: For the Years Ended December 31, (in millions) 2018 2019 2020 Consolidated intangible amortization and impairments $
114.8
(30.7) (26.1) (44.8) Equity method intangible amortization and impairments 370.8 627.4 332.0 Total$ 454.9 $ 745.8 $ 427.7 (2)Other items include depreciation and adjustments to contingent payment arrangements. Beginning with the first quarter of 2020, other items also include certain Affiliate equity expenses and gains and losses on general partner and seed capital investments. These changes were made to improve the comparability of performance between periods. Prior periods have not been revised as the amounts were not significant. Economic Net Income (controlling interest) and Economic Earnings Per Share As supplemental information, we also provide non-GAAP performance measures that we refer to as Economic net income (controlling interest) and Economic earnings per share. We believe Economic net income (controlling interest) and Economic earnings per share are important measures because they represent our performance before non-cash expenses relating to the acquisition of interests in Affiliates and improve comparability of performance between periods. Economic net income (controlling interest) and Economic earnings per share are used by our management and Board of Directors as our principal performance benchmarks, including as one of the measures for aligning executive compensation with stockholder value. These non-GAAP performance measures are provided in addition to, but not as substitutes for, Net income (controlling interest) and Earnings per share (diluted) or other GAAP performance measures. We adjust Net income (controlling interest) to calculate Economic net income (controlling interest) by adding back our share of pre-tax intangible amortization and impairments attributable to intangible assets (including the portion attributable to equity method investments in Affiliates) because these expenses do not correspond to the changes in the value of these assets, which do not diminish predictably over time. We also add back the deferred taxes attributable to intangible assets because we believe it is unlikely these accruals will be used to settle material tax obligations. Further, we add back other economic items to improve comparability of performance between periods. Economic earnings per share represents Economic net income (controlling interest) divided by the Average shares outstanding (adjusted diluted). In this calculation, the potential share issuance in connection with our junior convertible securities is measured using a "treasury stock" method. Under this method, only the net number of shares of common stock equal to the value of these junior convertible securities in excess of par, if any, is deemed to be outstanding. We believe the inclusion of net shares under a treasury stock method best reflects the benefit of the increase in available capital resources (which could be used to repurchase shares of common stock) that occurs when these securities are converted and we are relieved of our debt obligation. This method does not take into account any increase or decrease in our cost of capital in an assumed conversion. The following table presents a reconciliation of Net income (controlling interest) to Economic net income (controlling interest) and Economic earnings per share: For the Years Ended December 31, (in millions, except per share data) 2018 2019 2020 Net income (controlling interest)$ 243.6 $ 15.7 $ 202.2 Intangible amortization and impairments(1) 454.9 745.8 427.7 Intangible-related deferred taxes 79.7 (51.3) (9.9) Other economic items(2) 2.5 10.0 4.4 Economic net income (controlling interest)$ 780.7 $ 720.2 $ 624.4 Average shares outstanding (diluted) 53.8 50.6 46.7 Stock options and restricted stock units - - - Assumed issuance of junior convertible securities shares - - - Average shares outstanding (adjusted diluted) 53.8 50.6 46.7 Economic earnings per share$ 14.50 $ 14.22 $ 13.36 __________________________ (1)See note (1) to the table in "Adjusted EBITDA (controlling interest)." (2)Other economic items include non-cash imputed interest (principally related to the accounting for convertible securities and contingent payment arrangements) and certain Affiliate equity expenses. Beginning with the first quarter of 2019, other economic items also include tax windfalls and shortfalls from share-based compensation. Beginning with the first quarter of 2020, other economic items also include gains and losses on general partner and seed capital investments. These changes were made to improve the comparability of performance between periods. Prior periods have not been revised as the amounts were not significant. For the years endedDecember 31, 2018 , 2019 and 2020, other economic items were net of income tax expense of$0.8 million ,$0.7 million and$2.6 million , respectively. Liquidity and Capital Resources We generate long-term value by investing in new Affiliate partnerships, investing in existing Affiliates, and investing in centralized capabilities through which we can leverage our scale and resources to benefit our Affiliates and enhance their long-term growth prospects. Given our annual cash generation from operations, in addition to investing for growth in our business, we are also able to return excess capital to shareholders primarily through share repurchases. We continue to manage our capital structure consistent with an investment grade company and are currently rated A3 by Moody's Investors Service and BBB+ byS&P Global Ratings . Cash and cash equivalents were$1,039.7 million as ofDecember 31, 2020 , and were attributable to both the controlling and non-controlling interests. In 2020, we met our cash requirements primarily through cash generated by operating activities. Our principal uses of cash in 2020 were for share repurchases, investments in existing Affiliates through repurchases of Affiliate equity interests, and investments in new Affiliates. Additionally, in 2020, we issued debt securities to enhance our balance sheet through extending duration and lower interest rates. The net cash proceeds from debt securities issued in 2020 were used to pay down outstanding indebtedness on our revolver and term loan, with a majority of the remainder retained for general corporate purposes and included in our Cash and cash equivalents balance in the Consolidated Balance Sheets as ofDecember 31, 2020 . We expect investments in new Affiliates, investments in existing Affiliates, primarily through repurchases of Affiliate equity interests and general partner and seed capital investments, the return of capital through share repurchases, the payment of cash dividends on our common stock, repayment of debt, distributions to Affiliate equity holders, and general working capital to be the primary uses of cash for the foreseeable future. We anticipate that our current cash balance, cash flows from operations, and borrowings under our revolver, will be sufficient to support our uses of cash for the foreseeable future. In addition, we may draw funding from the debt and equity capital markets, and our credit ratings, among other factors, allow us to access these sources of funding on favorable terms. 28
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Table of Contents The following table presents operating, investing and financing cash flow activities: For the Years Ended December 31, (in millions) 2018 2019 2020 Operating cash flow$ 1,140.6 $ 929.1 $ 1,009.3 Investing cash flow (18.2) (24.4) (53.7) Financing cash flow (983.1) (934.7) (455.4) Operating Cash Flow Operating cash flows are calculated by adjusting Net income for other significant sources and uses of cash, significant non-cash items and timing differences in the cash settlement of assets and liabilities. For the year endedDecember 31, 2020 , Cash flows from operating activities were$1,009.3 million , primarily from Net income of$427.0 million adjusted for non-cash items of$346.0 million and$236.8 million of distributions of earnings received from equity method investments. In 2020, operating cash flows were primarily attributable to the controlling interest. Investing Cash Flow For the year endedDecember 31, 2020 , Cash flows used in investing activities were$53.7 million , primarily due to investments in new Affiliates of$44.5 million and purchases of fixed assets of$8.5 million . Financing Cash Flow For the year endedDecember 31, 2020 , Cash flows used in financing activities were$455.4 million , primarily due to the return of$351.9 million of capital to shareholders through share repurchases and dividends on our common stock,$306.3 million of distributions to non-controlling interests,$294.9 million of Affiliate equity repurchases, net of issuances, and a$100.0 million paydown of our term loan. Cash flows used in financing activities were partially offset by the receipt of$624.8 million of proceeds from the issuance of debt securities in 2020. Affiliate Equity We periodically repurchase Affiliate equity from and issue Affiliate equity to our consolidated Affiliate partners and our officers, under agreements that provide us with a conditional right to call and Affiliate equity holders with a conditional right to put their Affiliate equity interests to us at certain intervals. For Affiliates accounted for under the equity method, we do not typically have such put and call arrangements. The purchase price of these conditional purchases is generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. Affiliate equity holders are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions. As ofDecember 31, 2020 , the current redemption value of$671.5 million for these interests (including$35.4 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors) has been presented as Redeemable non-controlling interests. Although the timing and amounts of these purchases are difficult to predict, we paid$294.9 million for Affiliate equity repurchases, net of issuances during 2020, and we expect net repurchases of approximately$125 million of Affiliate equity in 2021. In the event of a repurchase, we become the owner of the cash flow associated with the repurchased equity. See Notes 17 and 18 of our Consolidated Financial Statements. Share Repurchases Our Board of Directors authorized share repurchase programs inJanuary 2021 ,October 2019 , andJanuary 2019 to repurchase up to 5.0 million, 6.0 million, and 3.3 million shares of our common stock, respectively, and these authorizations have no expiry. Purchases may be made from time to time, at management's discretion, in the open market or in privately negotiated transactions, including through the use of trading plans as well as pursuant to accelerated share repurchase programs or other share repurchase strategies that may include derivative financial instruments. For the year endedDecember 31, 2020 , we repurchased 5.0 million shares of our common stock, at an average price per share of$86.35 . As ofDecember 31, 2020 , we had repurchased all of the shares of theJanuary 2019 program. As of theJanuary 2021 authorization, there were a total of 6.9 million shares available for repurchase under ourJanuary 2021 andOctober 2019 share repurchase programs. Debt 29 -------------------------------------------------------------------------------- Table of Contents The following table presents the carrying value of our outstanding indebtedness. See Note 6 of our Consolidated Financial Statements. December 31, (in millions) 2018 2019 2020 Senior bank debt$ 780.0 $ 450.0 $ 350.0 Senior notes 746.2 746.8 1,097.3
Junior convertible securities 312.5 315.4 318.4 Junior subordinated notes
- 290.7 565.7 The carrying value of our debt differs from the amount reported in the notes to our Consolidated Financial Statements, as the carrying value of our debt in the table above is not reduced for debt issuance costs. SeniorBank Debt We have a$1.25 billion revolver and a$350.0 million term loan. The revolver matures onJanuary 18, 2024 , and the term loan, as amended, matures onJanuary 18, 2026 . Subject to certain conditions, we may increase the commitments under the revolver by up to an additional$500.0 million and may borrow up to an additional$75.0 million under the term loan. Under the terms of the credit facilities we are required to meet two financial ratio covenants. The first of these covenants is a maximum ratio of debt to EBITDA (the "bank leverage ratio") of 3.25x. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.00x (the "bank interest coverage ratio"). For purposes of calculating these ratios, share-based compensation and certain Affiliate equity expenses are added back to Adjusted EBITDA. As ofDecember 31, 2020 , our bank leverage and bank interest coverage ratios were 1.6x and 10.1x, respectively, and we were in compliance with all of the terms of our credit facilities. As ofDecember 31, 2020 , we had no outstanding borrowings under the revolver, and could borrow all capacity and remain in compliance with our credit facilities. OnJanuary 8, 2021 , we amended and refinanced the term loan to adjust the marginal rate by 0.075% to 0.950% and to extend the maturity by three years fromJanuary 18, 2023 toJanuary 18, 2026 . The commercial terms of the term loan otherwise remained the same. Senior Notes and Junior Subordinated Notes As ofDecember 31, 2020 , we had the following senior notes and junior subordinated notes outstanding, the respective principal terms of which are presented below. 2059 2060 2024 2025 2030 Junior Subordinated Junior Subordinated Senior Notes Senior Notes Senior Notes Notes Notes Issue date February 2014 February 2015 June 2020 March 2019 September 2020 Maturity date February 2024 August 2025 June 2030 March 2059 September 2060 Par value (in millions)$ 400.0 $ 350.0 $ 350.0 $ 300.0 $ 275.0 Stated coupon 4.25 % 3.50 % 3.30 % 5.875 % 4.750 % Coupon frequency Semi-annually Semi-annually Semi-annually Quarterly Quarterly Potential call date Any time Any
time Any time March 2024 September 2025 Listing N.A. N.A. N.A. NYSE NYSE In the second quarter of 2020, we used$250.0 million of the net proceeds from the 2030 senior notes to repay all of the outstanding indebtedness under our revolver, and the remaining net proceeds of$100.0 million to repay a portion of the outstanding indebtedness under the term loan. The majority of the net proceeds from the 2060 junior subordinated notes were retained for general corporate purposes, which may include the repayment of indebtedness, share repurchases, investments in new independent investment management firms, and investments in our existing Affiliates, and were included in our Cash and cash equivalents balance as ofDecember 31, 2020 . 30 -------------------------------------------------------------------------------- Table of ContentsJunior Convertible Securities As ofDecember 31, 2020 , we had 5.15% junior convertible trust preferred securities outstanding (the "junior convertible securities") with a carrying value of$318.4 million . The carrying value is accreted to the principal amount at maturity ($430.8 million ) over a remaining life of approximately 17 years. Holders of the junior convertible securities have no rights to put these securities to us. Upon conversion, holders will receive cash or shares of our common stock, or a combination thereof, at our election. We may redeem the junior convertible securities, subject to our stock trading at or above certain specified levels over specified times periods, and may also repurchase junior subordinated notes in the open market or in privately negotiated transactions from time to time at management's discretion. The junior convertible securities are considered contingent payment debt instruments under federal income tax regulations, which require us to deduct interest in an amount greater than our reported interest expense. We estimate that these deductions will generate annual deferred tax liabilities of approximately$9 million . Assuming no redemptions or repurchases, these deferred tax liabilities will be reclassified directly to stockholders' equity if our common stock is trading above certain thresholds at the time of the conversion of the securities. If we redeem the securities or repurchase the notes at a price below such thresholds, all or a portion of these deferred tax liabilities may be reclassified to income taxes payable which is presented within Other liabilities on our Consolidated Balance Sheets. InAugust 2019 , in accordance with the convertible securities indenture, we adjusted the conversion rate of the junior convertible securities as a result of the cumulative declared dividends on our common stock. Equity Distribution Program We have equity distribution and forward equity agreements with several major securities firms under which we may, from time to time, issue and sell shares of our common stock (immediately or on a forward basis) having an aggregate sales price of up to$500.0 million (the "equity distribution program"). As ofDecember 31, 2020 , no sales had occurred under the equity distribution program. Derivatives In 2020, we entered into an interest rate swap contract (the "interest rate swap") with a financial institution, which will expire inMarch 2023 . The interest rate swap, which is designated as a cash flow hedge, is used to exchange a portion of our LIBOR-based interest payments for fixed rate interest payments. Under the contract, we receive payments based on one month LIBOR and make payments based on an annual fixed rate of 0.5135% on a notional amount of$250.0 million . In 2020, we terminated our forward contracts and corresponding collar contracts entered into in 2018, and we received net proceeds of$24.9 million upon settlement. See Note 7 of our Consolidated Financial Statements. Commitments See Note 8 of our Consolidated Financial Statements. Leases As ofDecember 31, 2020 , our lease obligations were$40.7 million through 2021,$69.1 million in 2022-2023,$47.4 million in 2024-2025 and$59.6 million thereafter. The portion of these lease obligations attributable to the controlling interest were$11.9 million through 2021,$19.8 million in 2022-2023,$13.5 million in 2024-2025 and$2.3 million thereafter. See Note 11 of our Consolidated Financial Statements. Recent Accounting Developments See Note 1 of our Consolidated Financial Statements. Critical Accounting Estimates and Judgments The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. See Note 1 of our Consolidated Financial Statements for a discussion of our significant accounting policies. The following are our critical accounting estimates and judgments used in the preparation of our Consolidated Financial Statements, and due to their subjectivity, actual results could differ materially from the amounts reported. Fair Value Measurements 31 -------------------------------------------------------------------------------- Table of Contents Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. These standards establish a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. We make judgments to determine the fair value of certain assets, liabilities, and equity interests when allocating the purchase price of our new investments, when revaluing our contingent payment arrangements, when we issue or repurchase Affiliate equity interests and when we test our goodwill, indefinite and definite-lived acquired client relationships, or equity method investments for impairment. In determining fair values that reflect our own assumptions concerning unobservable inputs, we typically use valuation techniques, including probability-weighted discounted cash flow analyses, where we make assumptions about growth rates of assets under management, client attrition, asset and performance based fee rates, and expenses. In these analyses, we also consider historical and current market multiples, tax benefits, credit risk, interest rates, tax rates, discount rates, and discounts for lack of marketability. We consider the reasonableness of our assumptions by comparing our valuation conclusions to observed market transactions and, in certain instances, by consulting with third-party valuation firms. Changes in the assumptions used could significantly impact fair values.Goodwill Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not separately recognized. We perform a qualitative impairment assessment at least annually to determine if the carrying value of our single reporting unit is in excess of its fair value. In this qualitative assessment, we typically measure the excess of the fair value of our reporting unit over its carrying value using various qualitative and quantitative factors (including our market capitalization and market multiples for asset management businesses). If there is an indication that the carrying value of the reporting unit is in excess of the fair value under this test, then we must determine if a potential impairment is more-likely-than-not. To determine if a potential impairment is more-likely-than-not, we perform a single step quantitative test with any excess of carrying value over fair value recorded as an expense in Intangible amortization and impairments. We completed our annual goodwill impairment assessment as ofSeptember 30, 2020 and no impairment was indicated. Based on our assessment, the fair value of our reporting unit was substantially greater than its respective carrying amount, including goodwill. Indefinite-Lived Acquired Client Relationships Indefinite-lived acquired client relationships include investment advisory contracts between our Affiliates and their mutual funds and other retail-oriented investment products. Because these contracts are with the investment products themselves, and not with the underlying investors, and the contracts between our Affiliates and the investment products are typically renewed on an annual basis, industry practice under GAAP is to consider the contract life to be indefinite and, as a result, not amortizable. We perform indefinite-lived acquired client relationship impairment assessments annually, or more frequently should circumstances indicate fair value has declined below the related carrying value. For purposes of our assessments, we consider various qualitative and quantitative factors (including market multiples) and determine if it is more-likely-than-not that the fair value of each asset group is greater than its carrying amount. If we determine that it is likely that the fair value has declined below our related carrying value, we perform discounted cash flow analyses to determine the fair value of the asset group and record an expense in Intangible amortization and impairments to reduce the carrying value to its fair value. For the year endedDecember 31, 2020 , we recorded$45.3 million of expense attributable to the controlling interest ($70.7 million in aggregate) to reduce the carrying values of the assets to fair value. See Note 9 of our Consolidated Financial Statements. For the year endedDecember 31, 2020 , we completed our annual assessment of our other indefinite-lived acquired client relationships and only a significant decline in the fair values of these assets would result in an impairment. Definite-Lived Acquired Client Relationships Definite-lived acquired client relationships include investment advisory contracts between our Affiliates and their underlying investors, and are amortized over their expected period of economic benefit. Significant judgment is required to estimate the period that these assets will contribute to our cash flows and the pattern over which these assets will provide an economic benefit. Formally, on an annual basis, or more frequently should client attrition trends warrant a potential revision, 32 -------------------------------------------------------------------------------- Table of Contents we review historical and projected attrition rates and other events that may influence our projections of the future period of economic benefit that we will derive from these relationships. Changes in the expected period of economic benefit of these assets may warrant changes in the period over which the assets are amortized. We perform definite-lived acquired client relationship impairment assessments annually, or more frequently should client attrition trends indicate fair value has declined below the related carrying value. If we determine that the fair value has declined below our related carrying value, an expense is recorded in Intangible amortization and impairments to reduce the carrying value to its fair value. We assess each of our definite-lived acquired client relationships for impairment by comparing their carrying value to the projected undiscounted cash flows of the acquired client relationships. For the year endedDecember 31, 2020 , we completed our annual assessment and noted that projected undiscounted cash flows over the remaining life of each of these assets exceed their carrying value and, accordingly, no impairments were identified. Equity Method Investments in Affiliates We periodically perform assessments to determine if the fair value of an investment may have declined below its related carrying value for our Affiliates accounted for under the equity method for a period that we consider to be other-than-temporary. Where we believe that such declines may have occurred, we determine the amount of impairment using valuation methods, such as discounted cash flow analyses. Impairments are recorded as an expense in Equity method loss (net) to reduce the carrying value of the Affiliate to its fair value. When we test our equity method investments for impairment, we make assumptions about growth rates of projected assets under management, client attrition, asset and performance based fees, and expenses. In these analyses, we also make judgments about tax benefits, tax rates and discount rates. We consider the reasonableness of our assumptions by comparing our valuation conclusions to observed market transactions and, in certain instances, by consulting with third-party valuation firms. Changes in these assumptions could significantly impact the respective fair value of an Affiliate. For the year endedDecember 31, 2020 , we recorded$185.0 million of expenses to reduce the carrying value of an Affiliate to fair value. See Note 10 of our Consolidated Financial Statements. For the year endedDecember 31, 2020 , we completed our annual assessment of our other investments in Affiliates accounted for under the equity method and no other impairments were identified. Income Taxes We and our Affiliates are subject to income taxes in theU.S. and certain foreign jurisdictions. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best estimate of current and future taxes to be paid. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. We measure our deferred taxes based on enacted tax rates and projected state apportionment percentages for the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in Income tax expense in the Consolidated Statement of Income in the period in which the change in tax rates is enacted. Our principal deferred tax assets relate to deferred compensation, state and foreign loss carryforwards, and the indirect benefits of uncertain foreign tax positions. We regularly assess the recoverability of our deferred tax assets, considering all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. A valuation allowance is utilized to adjust the carrying values of deferred tax assets to the amount that is more-likely-than-not to be realized. We record unrecognized tax benefits based on whether it is more-likely-than-not that uncertain tax positions will be sustained on the basis of the technical merits of the position. If it is determined an uncertain tax position is more-likely-than-not to be sustained, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. See Note 20 of our Consolidated Financial Statements. Share-Based Compensation and Affiliate Equity 33 -------------------------------------------------------------------------------- Table of Contents We have share-based compensation arrangements covering directors, senior management, and employees. Our share-based compensation arrangements typically vest and become fully exercisable over three to five years of continued employment and, in some cases, may require the satisfaction of certain performance conditions. We determine the fair value of our share-based compensation arrangements on their grant date and record compensation expense based on the number of awards expected to vest. For restricted stock units, we determine the fair value of the units using our share price on the date of grant and the number of shares expected to vest. For stock options, we estimate the fair value using the Black-Scholes option pricing model, which requires us to make assumptions about the volatility and dividend yield of our common stock and the expected life of our stock options. In measuring expected volatility, we consider both the historical volatility of our common stock, as well as the current implied volatility from traded options. For certain of our awards with performance conditions, the number of restricted stock units or stock options expected to vest may change over time depending upon the performance level achieved. For share-based compensation arrangements without performance conditions, we recognize expense based on the number of awards expected to vest on a straight-line basis over the requisite service period, including grants that are subject to graded vesting. For all other arrangements, we recognize expense based on the number of awards expected to vest on a straight-line basis for each separately vesting portion of the award. From time to time, we grant equity interests in our Affiliates to consolidated Affiliate partners and our officers, with vesting, forfeiture, and repurchase terms established at the date of grant. The fair value of the equity interests is determined as of the date of grant using a discounted cash flow analysis. Key valuation assumptions include projected assets under management, asset and performance based fees, tax rates, discount rates and discounts for lack of marketability. The use of different assumptions could change the value of these interests, including the amount of compensation expense, if any, that we may report upon their transfer or repurchase. Redeemable non-controlling interests represent the currently redeemable value of Affiliate equity interests. We may pay for these Affiliate equity purchases in cash, shares of our common stock or other forms of consideration, at our election. See Notes 16, 17 and 18 of our Consolidated Financial Statements. Item 7A.Quantitative and Qualitative Disclosures About Market Risk Assets Under Management Market Price Risk Our Consolidated revenue and equity method revenue are derived primarily from asset based fees that are typically determined as a percentage of the value of a client's assets under management. Such values are affected by changes in financial markets (including declines in the capital markets, fluctuations in foreign currency exchange rates, inflation rates or the yield curve, and other market factors) and, accordingly, declines in the financial markets may negatively impact our Consolidated revenue and equity method revenue. As ofDecember 31, 2020 , we estimate a proportional 1% change in the value of our assets under management would have resulted in a$19.6 million annualized change in asset based fees in Consolidated revenue for our consolidated Affiliates and a$13.2 million annualized change in asset based fees in equity method revenue for our Affiliates accounted for under the equity method. This proportional increase or decrease excludes assets under management on which asset based fees are charged on committed capital. Interest Rate Risk We have fixed rates of interest on our senior notes, junior subordinated notes, and junior convertible securities. While a change in market interest rates would not affect the interest expense incurred on our fixed rate securities, such a change may affect the fair value of these securities. We estimate that a 1% change in interest rates would have resulted in a$107.3 million net change in the fair value of our fixed rate securities as ofDecember 31, 2020 . We pay a variable rate of interest on our credit facilities at specified rates, based either on an applicable LIBOR or prime rate, plus a marginal rate determined based on our credit rating. As ofDecember 31, 2020 , the interest rate for our outstanding borrowings under the credit facilities was LIBOR plus 0.875%. In the first quarter of 2020, we entered into an interest rate swap to exchange a portion of our LIBOR-based interest payments for fixed rate interest payments, reducing our variable interest rate exposure. We estimate that a 1% change in interest rates would have changed our annual interest expense on the outstanding balances under our credit facilities not participating in the interest rate swap by$1.0 million , as ofDecember 31, 2020 . 34 -------------------------------------------------------------------------------- Table of Contents Currently, LIBOR is expected to be discontinued, however, there remains uncertainty as to the timing of the transition to, as well to as the nature of, any replacement rate. See "Item 1A. Risk Factors". We and our Affiliates have been monitoring these developments, and we currently do not expect to be significantly impacted by this transition. Our term loan and our revolver both include "fallback" language allowing for the substitution of a comparable or successor rate, as further described in the respective agreements. We will continue to monitor and evaluate our agreements and the developments with respect to LIBOR as the potential end-date for LIBOR approaches. Foreign Currency Exchange Risk The functional currency of most of our Affiliates is theU.S. dollar. Certain of our Affiliates have the pound sterling or the Canadian dollar as their functional currency, and are, therefore, impacted by movements in pound sterling and Canadian dollar toU.S. dollar foreign currency exchange rates. In addition, the valuations of our foreign Affiliates with a non-U.S. dollar functional currency change based on fluctuations in foreign currency exchange rates, among other factors. Changes due to fluctuations in foreign currency exchange rates are recorded as a component of stockholders' equity. To illustrate the effect of possible changes in foreign currency exchange rates, we estimate a 1% change in the pound sterling and Canadian dollar toU.S. dollar exchange rates would have resulted in a$10.8 million and$2.1 million change to stockholders' equity, respectively, based on theDecember 31, 2020 carrying value of Affiliates whose functional currency is the pound sterling or the Canadian dollar, and of our and our Affiliates' pound sterling-denominated derivative financial instruments. For the year endedDecember 31, 2020 , we estimate a 1% change in the pound sterling and the Canadian dollar toU.S. dollar exchange rates would have resulted in$1.1 million and$0.1 million in annual changes to Income before income taxes (controlling interest), respectively. Derivative Risk From time to time, we and our Affiliates seek to offset exposure to changes in interest rates, foreign currency exchange rates, and markets by entering into derivative financial instruments. There can be no assurance that our or our Affiliates' derivative financial instruments will meet their overall objective or that we or our Affiliates will be successful in entering into such instruments in the future. 35
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