Artisan Partners Asset Management Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are primarily with FY 2015. The filing also reports unaudited fourth-quarter results. Artisan is an active investment manager whose revenue is derived almost entirely from fees based on assets under management (AUM). All amounts are in U.S. dollars.
Financial and operating results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $720.9 million | $805.5 million |
| Operating income / margin | $234.2 million / 32.5% | $282.4 million / 35.1% |
| Adjusted operating income / margin (non-GAAP) | $262.3 million / 36.4% | $324.5 million / 40.3% |
| Net income attributable to APAM | $73.0 million | $81.8 million |
| GAAP diluted EPS | $1.57 | $1.86 |
| Adjusted net income per adjusted share (non-GAAP) | $2.13 | $2.69 |
| Net cash provided by operating activities | $270.4 million | $321.2 million |
| Year-end AUM | $96.8 billion | $99.8 billion |
| Average AUM | $96.3 billion | $106.5 billion |
| Weighted average fee rate | 75 bps | 76 bps |
Net client cash outflows were $4.8 billion in 2016, partly offset by $1.8 billion of market appreciation. Cash and cash equivalents were $156.8 million at year-end; total assets were $936.2 million and total liabilities were $818.5 million. Operating cash flow remained positive, while investing activities used $2.1 million and financing activities used $277.7 million.
Borrowings were $200 million: $60 million of Series A notes due August 2017, $50 million due 2019 and $90 million due 2022. The $100 million revolving facility was undrawn. The company reported a 0.6x leverage ratio and 28.6x interest coverage at year-end and stated it was in covenant compliance. A $586.2 million liability was recorded for tax receivable agreements (TRAs).
Material changes and business developments
- Revenue declined 11%, principally reflecting a 10% reduction in average AUM and a modest decrease in the weighted average fee rate. Operating expenses fell 7%, but not enough to offset lower revenue; GAAP operating margin decreased 2.6 percentage points.
- Net outflows improved from $5.8 billion in 2015 to $4.8 billion in 2016, but remained substantial. The Non-U.S. Growth strategy had $3.8 billion in outflows; the U.S. Value team’s strategies had $3.6 billion in outflows. Global Value, Global Opportunities, High Income and Developing World attracted inflows.
- Management attributed lower expenses partly to reduced incentive compensation and distribution costs. Communication and technology expense increased. Artisan added its Thematic investment team in late 2016 and incurred about $3.5 million of related and executive hiring costs in the fourth quarter.
- GAAP net income attributable to APAM declined 11%; adjusted net income per adjusted share fell from $2.69 to $2.13. Results include a $0.7 million gain from changes in the estimated TRA obligation in 2016, compared with a $12.2 million loss in 2015.
- FY 2016 dividends declared were $2.80 per Class A share, versus $3.35 in 2015. In January 2017, the board declared a $0.60 quarterly dividend and a $0.36 special dividend, payable in February.
Fourth-quarter 2016 revenue was $181.5 million, operating income $58.6 million, net income attributable to APAM $19.3 million and diluted EPS $0.42.
Outlook, risks and unusual items
- Management gave no specific revenue, earnings or AUM forecast. It expected to continue a $0.60 quarterly dividend during 2017 subject to board approval; a future special dividend would depend on adjusted earnings, business conditions and desired cash retention.
- Management expected about $2.0 million per quarter of 2017 operating costs associated with the Thematic team and the new investment-operations executive. It expected approximately $30 million of TRA payments in 2017.
- The $60 million notes and $100 million revolving facility mature in August 2017. Management intended to refinance the notes and extend the facility, subject to board approval, lender negotiations and market conditions; it said existing excess cash could repay the notes if refinancing did not occur.
- Management expected continued outflows in Non-U.S. Growth and U.S. Mid-Cap Value, though at a lower level for the latter, and anticipated continued demand for Global Opportunities, High Income and Developing World. These are expectations, not guarantees.
- Key risks include market declines and client withdrawals, investment underperformance, loss of key portfolio managers, fee and passive-product competition, regulatory and operational/cybersecurity risks, foreign-currency exposure, and dependence on intermediaries. The largest strategy, Non-U.S. Growth, represented about 24% of year-end AUM and depended principally on one lead portfolio manager.
- The TRA liability is material and uncertain in amount and timing. The agreements generally require payment of 85% of specified tax savings; payments may accelerate in certain circumstances and could exceed realized tax benefits. The company estimated that early termination at year-end would require about $0.9 billion.
- Adoption of revised consolidation guidance resulted in retrospective deconsolidation of a private investment partnership that had been liquidated in 2014; the filing states this did not affect net income attributable to APAM. Management and the auditor concluded internal control over financial reporting was effective. No material legal proceedings were reported.
Investor verification priorities
- Track AUM and flows by strategy, especially continuing outflows in Non-U.S. Growth and U.S. Value, and inflows in newer strategies.
- Reconcile GAAP results with adjusted non-GAAP measures and assess the sensitivity of revenue and margins to AUM, fee mix and market performance.
- Verify refinancing or repayment of the $60 million notes and renewal or replacement of the revolving facility before August 2017.
- Monitor TRA payments, liability estimates, tax-benefit realization and potential acceleration provisions.
- Assess dividend sustainability alongside cash needs, debt service, partnership distributions and future investment in new teams.
- Review key-person succession and strategy capacity, including the post-year-end closure of Global Small-Cap Growth.