Artisan Partners Asset Management Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; compared primarily with FY 2014. Artisan is an active investment manager whose fees are primarily based on clients’ average assets under management (AUM).
Key financial and operating metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $805.5 million | $828.7 million |
| GAAP operating income / margin | $282.4 million / 35.1% | $306.9 million / 37.0% |
| Net income attributable to APAM | $81.8 million | $69.6 million |
| GAAP diluted EPS | $1.86 | $(0.37) |
| Adjusted operating income / margin (non-GAAP) | $324.5 million / 40.3% | $371.7 million / 44.9% |
| Adjusted net income / adjusted EPS (non-GAAP) | $197.3 million / $2.69 | $228.9 million / $3.17 |
| Cash from operating activities | $321.2 million | $398.1 million |
| Ending cash and cash equivalents | $166.2 million | $182.3 million |
| Borrowings | $200.0 million | $200.0 million |
- Ending AUM was $99.8 billion, down 7.5% year over year; average AUM was $106.5 billion, down 1.3%. Net client outflows were $5.8 billion and market depreciation was $2.2 billion.
- Weighted-average fee rate declined to 76 basis points from 77 basis points, partly because a smaller share of AUM was in Artisan Funds, which carry higher average fees than separate accounts.
- Total assets were $946.5 million and total liabilities $830.0 million. The balance sheet included $678.5 million of deferred tax assets and a $589.1 million liability under tax receivable agreements (TRAs).
- The $100 million revolving credit facility was undrawn. Debt comprises $60 million of notes due 2017, $50 million due 2019 and $90 million due 2022, with fixed rates of 4.98%, 5.32% and 5.82%, respectively. Management reported covenant compliance; leverage ratio was 0.5x and interest coverage was 33.54x.
- Class A dividends declared were $3.35 per share in 2015. The company paid $123.9 million in dividends and Holdings distributed $368.9 million to partners, including $186.7 million to APAM.
Changes versus prior period
- Revenue fell 3%, primarily reflecting lower average AUM and the lower weighted-average fee rate. Operating income declined 8%; GAAP operating expenses were nearly flat at $523.1 million.
- APAM-attributable net income rose 18% despite lower operating income, in part because the prior-year per-share result was affected by deemed dividends from purchases of preferred securities. Adjusted net income fell 14% and adjusted EPS declined from $3.17 to $2.69.
- Operating cash flow decreased by $76.8 million. The filing attributes part of the 2014 comparison to $46.5 million of net operating cash from the liquidation of Launch Equity.
- Global Equity had $2.1 billion of net inflows, while U.S. Value had $6.5 billion of net outflows. Global Value and Emerging Markets also recorded outflows.
Outlook, risks and unusual items
- Management cited realizable capacity and demand in Global Opportunities and Global Equity, and inflows to High Income and the newly launched Developing World strategy. No quantified company-wide earnings or revenue guidance is provided.
- Management expected quarterly dividends during 2016 subject to board approval. In January 2016, the board declared $0.60 per share quarterly and $0.40 per share special dividends; future distributions remain discretionary and depend on cash, business conditions, debt service and legal and covenant limits.
- After year-end, Artisan announced plans to cease managing U.S. Small-Cap Value assets and reorganize its mutual fund into Artisan Mid Cap Value Fund, expected in Q2 2016. It also reported that a client representing about half of Emerging Markets strategy AUM intended to terminate in Q2 2016. Non-U.S. Growth was closed to most new retail and intermediary investors, with a further institutional closure planned for October 2016.
- TRAs require payment of 85% of specified realized or deemed tax savings. The recorded liability was $589.1 million; the filing estimated approximately $1.2 billion of payments under a hypothetical scenario over generally at least 15 years, and about $28 million of payments in 2016. Early termination or a change of control could accelerate payments; estimated termination payments as of year-end were approximately $1.0 billion.
- Other notable items include $12.2 million of 2015 non-operating expense from changes in the TRA liability estimate and $42.1 million of pre-offering share-based compensation expense. Adjusted figures are non-GAAP and exclude specified items; they should not be treated as substitutes for GAAP results.
- Principal risks include market declines and client withdrawals, investment underperformance, dependence on key portfolio managers, concentration in long-only equity strategies, fee pressure, foreign currency exposure, regulation, operational and cybersecurity risks, and reliance on third-party distribution channels. No material legal proceeding was reported. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the reported net outflows, strategy performance and post-filing client termination affect AUM, fee revenue and earnings in 2016.
- The sustainability of adjusted margins and adjusted earnings, including the effect of compensation, new-team costs and fee-rate or product-mix changes.
- The assumptions, timing, funding requirements and potential acceleration scenarios for the $589.1 million recorded TRA liability and the larger hypothetical exposure disclosed.
- Debt maturities, covenant headroom, cash available for dividends and the company’s ability to maintain distributions while meeting TRA and other obligations.
- Reported GAAP EPS versus adjusted EPS, and the effects of noncontrolling interests, equity awards and the company’s ownership structure on common-stockholder returns.