Artisan Partners Asset Management Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report. Artisan is an active investment manager with 14 strategies and six investment teams; substantially all revenue comes from management fees tied to assets under management (AUM).
Financial and operating performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $828.7 million | $685.8 million | +21% |
| Operating income (loss), GAAP | $306.9 million | $(261.2) million | Improved $568.1 million |
| Operating margin, GAAP | 37.0% | (38.1)% | Improved |
| Adjusted operating income, non-GAAP | $371.7 million | $288.9 million | +29% |
| Adjusted operating margin, non-GAAP | 44.9% | 42.1% | +2.8 percentage points |
| Net income attributable to APAM | $69.6 million | $24.8 million | +181% |
| Adjusted net income, non-GAAP | $228.9 million | $180.3 million | +27% |
| Operating cash flow | $398.1 million | $112.2 million | Increased |
| Year-end AUM | $107.9 billion | $105.5 billion | +2.3% |
| Average AUM | $107.9 billion | $89.5 billion | +20.5% |
| Net client cash flows | $788 million inflow | $7.2 billion inflow | Substantially lower |
| Cash and cash equivalents | $182.3 million | $211.8 million | Down $29.6 million |
| Borrowings | $200.0 million | $200.0 million | Unchanged |
Management fees were $827.7 million; performance fees were $1.1 million. The weighted average fee remained 77 basis points. GAAP net income attributable to APAM is not the same as earnings available to Class A shareholders: deemed dividends and participating-security allocations resulted in reported basic and diluted EPS of $(0.37) for 2014. Non-GAAP adjusted net income per adjusted share was $3.17; the filing cautions that adjusted measures are not substitutes for GAAP results.
Fourth-quarter 2014 revenue was $206.0 million, operating income was $77.9 million, net income attributable to APAM was $21.3 million and basic and diluted EPS was $0.58.
Artisan generated $398.1 million of operating cash flow. Financing activities used $419.9 million, primarily for $266.8 million of distributions to noncontrolling partners and $99.8 million of APAM dividends. The $100 million revolving facility was undrawn; reported liquidity also included $69.4 million of accounts receivable. The $200 million unsecured notes bear fixed rates of 4.98%–5.82%, with maturities in 2017, 2019 and 2022. Year-end leverage and interest coverage ratios were 0.5x and 36.41x, respectively; the company reported covenant compliance.
Material changes and notable items
- Revenue growth reflected average AUM increasing 20.5%, while year-end AUM rose only 2.3%. Market appreciation was $1.7 billion in 2014, versus $24.0 billion in 2013; net inflows fell to $788 million from $7.2 billion.
- Gross client outflows rose to $22.2 billion from $15.1 billion. Management cited rebalancing and performance challenges in U.S. Value and Emerging Markets strategies. U.S. Mid-Cap Value, U.S. Small-Cap Value, Value Equity and Emerging Markets had outflows of $2.2 billion, $1.7 billion, $1.0 billion and $897 million, respectively; management expected continued outflows from these strategies in 2015.
- Non-U.S. Growth and Global Opportunities attracted net inflows of $4.1 billion and $2.3 billion, respectively. Artisan launched its first fixed-income strategy, High Income, which ended the year with $565 million in AUM.
- The 2014 GAAP operating result improved sharply from 2013, which included substantial IPO-related and pre-offering compensation charges. In 2014, pre-offering compensation was $64.7 million, compared with $547.2 million in 2013. The 2013 result also included a $49.6 million gain on contingent value rights that were terminated without payment.
- APAM’s ownership of Artisan Partners Holdings increased from 29% to 47% through the 2014 follow-on offering and unit exchanges. Consequently, noncontrolling interests remain material to consolidated results.
- Tax receivable agreement (TRA) liability was $489.2 million at year-end, and deferred tax assets were $562.4 million. The company estimates approximately $1.5 billion of TRA payments over 15 years under stated assumptions; actual amounts and timing depend on future taxable income, tax law, stock price and unit exchanges. It expected approximately $20 million of TRA payments in 2015.
Outlook, risks and contingencies
- No numerical revenue, earnings or AUM guidance is provided. Subject to quarterly board approval, management expected a $0.60 quarterly Class A dividend during 2015 and to consider a year-end special dividend. In February 2015, the board declared a $0.60 quarterly dividend and a $0.95 special dividend.
- Management expected $12 million–$14 million of incremental 2015 costs to establish its seventh investment team and launch a developing-world strategy, expected in mid-2015. Approximately $7 million–$8 million was expected in Q1, including about $6.5 million of nonrecurring costs.
- Key risks include investment underperformance and client redemptions, dependence on key portfolio managers, concentration in five large strategies, equity-market and foreign-exchange exposure, fee pressure, and reliance on third-party distribution. Several strategies were closed to most new investors to manage capacity.
- Management highlighted operational, cybersecurity, regulatory and litigation risks, as well as potential liquidity demands from the TRAs. No material legal or administrative proceedings were reported. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. A new general-ledger and reporting system was implemented in Q4 2014.
Most important facts for investors to verify
- Reconcile GAAP net income attributable to APAM with the negative GAAP EPS, including deemed dividends, participating securities and the effects of the holding-company structure.
- Assess the sustainability of the sharp decline in net inflows and the expected continued outflows from underperforming strategies.
- Review the $489.2 million recorded TRA liability and the assumptions behind the much larger estimated long-term payments and potential acceleration provisions.
- Monitor manager succession and retention, particularly given the concentration of AUM in large strategies and reported portfolio-manager transitions.
- Evaluate the 2015 strategy-launch costs, dividend policy, and available cash after partner distributions, dividends, debt service and TRA payments.