Artisan Partners Asset Management Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless otherwise stated. Artisan is an active investment manager whose revenue is primarily management fees tied to assets under management (AUM).
Key financial and operating metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $203.6 million | $201.8 million; up 1% |
| Operating income | $67.8 million | $67.2 million |
| Net income before noncontrolling interests | $53.4 million | $52.2 million |
| Net income attributable to APAM | $19.5 million | $8.6 million; up 127% |
| GAAP diluted EPS | $0.43 | $(2.29); prior-year EPS was affected by deemed dividends on preferred securities |
| Adjusted operating margin (non-GAAP) | 38.4% | 45.1% |
| Adjusted net income per adjusted share (non-GAAP) | $0.65 | $0.78 |
| Net cash from operating activities | $128.7 million | $147.2 million |
Average AUM was $108.4 billion, up 2.1%; period-end AUM was $108.7 billion, up 1.2% year over year. Market appreciation added $3.0 billion in the quarter, offset by $2.2 billion of net client outflows. The weighted average fee was 76 basis points versus 77 basis points.
At March 31, cash and cash equivalents were $215.1 million, accounts receivable $66.4 million, and total assets $1.005 billion. Total liabilities were $895.9 million, including $200.0 million of borrowings and $596.4 million payable under tax receivable agreements (TRAs). Debt was unchanged from year-end; the $100 million revolving facility was undrawn, and the company reported compliance with debt covenants. Operating, investing and financing cash flows were $128.7 million, $(1.4) million and $(94.5) million, respectively.
Material changes and management commentary
- APAM’s economic ownership of Artisan Partners Holdings rose from approximately 47% to 53%, following a March follow-on offering, unit exchanges and other equity changes. This increased APAM’s share of Holdings’ earnings and affects comparisons of income attributable to APAM.
- The $176.6 million follow-on offering proceeds were used to purchase Holdings units. The transactions increased deferred tax assets by approximately $118.6 million and TRA liabilities by approximately $100.8 million.
- Revenue growth primarily reflected higher average AUM. Net outflows were concentrated in U.S. Value ($2.1 billion) and Emerging Markets ($182 million); management cited performance challenges and client allocation decisions. Non-U.S. Growth, Global Opportunities and High Income recorded net inflows.
- Operating expenses included $7.6 million related to formation of the Developing World team, including $6.5 million of start-up costs. Management also cited higher equity compensation and other operating costs. The adjusted operating margin declined to 38.4% from 45.1%.
- A $6.4 million non-operating expense resulted from a revised estimate of TRA obligations, partly reflecting changes in expected state tax rates. The effective tax rate was 8.7%, versus 17.7% in Q1 2014; management said it may rise as APAM’s ownership share of Holdings increases.
Outlook, risks and contingencies
Management expected to launch the Developing World strategy in the following months. It expected a $0.60 quarterly Class A dividend during 2015, subject to board approval; any special dividend would be considered after year-end based on adjusted earnings, business conditions and desired cash retention. The board subsequently declared a $0.60 quarterly dividend and a $32.8 million Holdings distribution, both announced April 22, 2015.
Management noted that AUM and results are sensitive to market performance, investment results, client flows, fee rates, competition and employee retention. It expected continued outflows in underperforming strategies if performance and client trends persisted. The $596.4 million TRA liability is an estimate; payments depend on future taxable income, tax rates, exchanges and other factors. In some cases payments may be accelerated or exceed realized tax benefits, potentially requiring cash on hand or borrowing. The filing reported no material legal proceedings, no off-balance-sheet arrangements, and no material changes in market-risk disclosures.
Most important facts for investors to verify
- Whether U.S. Value and Emerging Markets performance and client outflow trends improve or persist, and how those trends affect AUM and fee revenue.
- How much of the increase in APAM-attributable earnings reflects its higher Holdings ownership, and how non-GAAP adjustments affect comparisons with GAAP results.
- The assumptions, timing and cash-funding implications of the $596.4 million TRA liability, including the possibility of accelerated payments.
- Whether Developing World launch costs, equity compensation and other expenses continue to pressure margins, and whether expected intermediary-fee savings materialize.
- The sustainability of dividends and distributions given operating cash flows, Holdings’ distributions, debt obligations and future TRA payments.