Artisan Partners Asset Management Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Artisan is an active investment manager whose revenue is primarily investment management fees, generally linked to client assets under management (AUM). Results consolidate Artisan Partners Holdings; APAM owned approximately 56% of Holdings at quarter-end, with the balance reported as noncontrolling interest.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $180.8M | $211.6M | $355.3M | $415.1M |
| Operating income | $59.0M | $78.3M | $113.7M | $146.1M |
| Operating margin | 32.6% | 37.0% | 32.0% | 35.2% |
| Net income attributable to APAM | $18.4M | $23.7M | $34.6M | $43.3M |
| GAAP diluted EPS | $0.38 | $0.50 | $0.74 | $0.95 |
| Adjusted operating margin (non-GAAP) | 36.6% | 42.1% | 36.2% | 40.3% |
| Adjusted net income per adjusted share (non-GAAP) | $0.53 | $0.74 | $1.04 | $1.39 |
For the six months, net income before noncontrolling interests was $83.8M versus $112.7M. Interest expense was $5.8M; the effective tax rate was 22.4%, compared with 16.1% in 2015. The prior-year period included a $6.4M TRA valuation loss and $7.7M of discrete tax benefits.
At June 30, AUM was $95.0B, down 13.0% from $109.2B a year earlier. Average AUM for the first half fell 13.8% year over year to $94.7B. First-half net client outflows were $3.7B and market depreciation was $1.2B. Q2 outflows were $2.3B, partly offset by $0.2B of market appreciation and net transfers. Weighted average fee was 75 basis points for the first half, versus 76 basis points in 2015.
Cash and cash equivalents were $197.8M, up from $166.2M at year-end 2015. First-half operating cash flow was $184.1M, compared with $214.3M; investing activities used $3.9M and financing activities used $148.6M. Borrowings were $200.0M face value (about $199.4M carrying value); the $100.0M revolving facility was undrawn. Debt maturities are $60.0M in 2017, $50.0M in 2019 and $90.0M in 2022. The company reported covenant compliance. Total liabilities were $880.6M, including a $591.7M TRA liability.
Changes versus comparable periods
- First-half revenue declined 14%, primarily due to lower average AUM; Q2 revenue declined 15%. First-half GAAP operating income fell 22% and APAM-attributable net income fell 20%.
- Operating expenses declined 10% in the first half, mainly from lower incentive compensation and distribution expenses, partly offset by higher technology and communication costs and share-based compensation.
- First-half AUM declined 4.9% from the start of the year, including net outflows and market depreciation. U.S. Value strategies drove $3.0B of first-half outflows; the team’s Q2 outflows were $1.8B.
- APAM’s ownership of Holdings increased from 54% to 56%, including exchanges of 1.53M Holdings units for Class A shares. Class A shares outstanding rose to 42.0M from 39.4M at year-end.
Outlook, commentary, risks and unusual items
- Management said it expects U.S. Value strategies to continue experiencing outflows if client trends persist. Artisan ceased managing its U.S. Small-Cap Value strategy and reorganized its small-cap fund into its Mid-Cap Value fund; the reorganization involved about $518M of net outflows and a $180M asset transfer.
- Non-U.S. Growth was closed to most new retail and intermediary investors and was scheduled for further closure to most new institutional investors and employee benefit plans in October 2016. Management cited continuing capacity in Global Opportunities and Global Equity, but future asset gathering is conditional on performance and demand.
- Management expected annual communication and technology expense of approximately $30M. It expected to pay quarterly dividends during 2016 subject to board approval; the board declared a $0.60-per-share dividend payable August 31, 2016. A possible special dividend after year-end would depend on adjusted earnings, business conditions and desired cash retention.
- Management expected approximately $28M of TRA payments in 2016, of which approximately $21M had been paid by April 15. TRA payments can vary and may, in certain circumstances, be accelerated or exceed realized tax benefits; the company may need to use cash on hand or borrow to fund them.
- Compensation includes substantial share-based expense: first-half share-based compensation was $37.0M, and unrecognized restricted-award expense was $134.3M. The filing says normal-course indemnification exposure is not quantifiable. Management reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
- Key risks include adverse markets, poor investment performance, continued client outflows, loss of key investment professionals, regulatory changes and operational or reputational harm. The filing provides no specific earnings or AUM guidance.
Important facts for investors to verify
- Whether net outflows—particularly from U.S. Value, Non-U.S. Growth and U.S. Mid-Cap Growth—continue, and how they affect AUM, fee revenue and margins.
- Subsequent strategy performance and flows, including management’s stated capacity and demand assumptions for strategies open to new clients.
- Actual TRA payments, realizable tax benefits, and the potential effect of accelerated or larger-than-expected payments on liquidity and dividends.
- Debt maturity and refinancing plans, covenant compliance, and cash available after operating needs, distributions and dividends.
- The impact of ongoing share-based compensation and any special dividend decision on reported earnings, adjusted measures and per-share returns.