Artisan Partners Asset Management Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Comparisons are with the corresponding 2014 periods. Dollar amounts are in millions unless stated otherwise.
Business context
Artisan is an active investment manager whose revenue is primarily asset-based management fees. At quarter-end it managed $109.2 billion across seven autonomous teams and 15 strategies. The Developing World strategy launched in late June. APAM owned approximately 53% of Artisan Partners Holdings at June 30, up from 47% at December 31, 2014; the remaining economic interest is reflected as noncontrolling interest.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $211.6 | $208.5 | $415.1 | $410.3 |
| Operating income | $78.3 | $80.8 | $146.1 | $148.0 |
| GAAP operating margin | 37.0% | 38.8% | 35.2% | 36.1% |
| Adjusted operating margin (non-GAAP) | 42.1% | 46.5% | 40.3% | 45.8% |
| Net income attributable to APAM | $23.7 | $19.3 | $43.3 | $27.9 |
| Basic and diluted EPS | $0.50 | $0.42 | $0.95 | $(1.64) |
| Adjusted net income per adjusted share (non-GAAP) | $0.74 | $0.84 | $1.39 | $1.62 |
Six-month operating cash flow was $214.3, versus $235.1 in 2014. Investing activities used $8.6 and financing activities used $172.6; cash rose to $215.5 from $182.3 at year-end 2014. The cash-flow decline reflected lower operating income excluding share-based compensation and working-capital timing, including incentive compensation payments.
At June 30, cash was $215.5, accounts receivable $76.7, and investment securities $13.1. Borrowings were $200.0, consisting of $60.0 senior notes maturing in 2017, $50.0 in 2019, and $90.0 in 2022. The $100.0 revolving facility was undrawn, and the company reported compliance with debt covenants. Deferred tax assets were $683.4 and tax receivable agreement (TRA) liabilities were $599.5.
Material changes versus prior periods
- Six-month revenue increased 1%, principally as average AUM rose 3%; the weighted average fee declined to 76 basis points from 77.
- Despite higher revenue, six-month operating income fell 1% and adjusted operating margin declined 5.5 percentage points. Compensation and benefits increased $2.2 overall, including higher restricted-share compensation, partly offset by lower amortization of pre-IPO awards; other operating expenses rose $4.5.
- Six-month net client cash flows were negative $2.5 billion, compared with positive $2.0 billion in 2014. Market appreciation added $3.8 billion. Quarter-end AUM was down 2.6% year over year, while average AUM was up 2.6%.
- APAM-attributable net income increased, but the comparison reflects its larger share of Holdings’ earnings after the 2015 follow-on offering and unit exchanges. Six-month 2014 EPS was also reduced by $47.3 million of deemed preferred-equity dividends; it should not be read as a GAAP net loss for the consolidated business.
- Cash dividends declared per Class A share were $0.60 for Q2 2015, versus $0.55 in Q2 2014. Six-month dividends were $2.15, including a $0.95 special dividend, versus $2.73 in 2014.
Outlook, commentary, risks and unusual items
- Management expected a $0.60 quarterly Class A dividend during 2015, subject to board approval, and said the board would consider a possible special dividend after year-end. On July 23, 2015, it declared a $0.60 quarterly dividend and a $44.1 Holdings distribution.
- Management cited realizable capacity particularly in Non-U.S. Growth, Global Equity and Global Opportunities, and reported strong initial interest in the new Developing World strategy. It also cautioned that future flows depend on investment results, client demand and capacity.
- U.S. Mid-Cap Value and U.S. Small-Cap Value had substantial outflows and underperformed benchmarks over trailing one-, three- and five-year periods; management said continued underperformance and client trends could mean further outflows. Multiple strategies were closed to most new investors.
- Six-month expenses included $6.5 million of Developing World team start-up costs. Restricted share-based compensation rose to $17.6 million from $8.5 million; management expected this expense to continue increasing as awards are granted.
- The six-month results included $6.4 million of expense from revising TRA liability estimates, partly reflecting changed state tax-rate estimates. TRA payments generally represent 85% of applicable tax savings; the $599.5 million liability could increase with future exchanges, and payments may in some cases accelerate or exceed realized tax benefits.
- Key risks include market and investment-performance volatility, client outflows, fee pressure, competition, and the ability to retain investment and distribution professionals. Management reported no material legal proceedings, no off-balance-sheet arrangements, and no material change in market-risk disclosures.
Most important facts for investors to verify
- Whether negative net flows persist, especially in underperforming U.S. strategies, and whether inflows in other strategies offset them.
- How market returns, AUM mix and fee rates affect revenue, and whether operating-cost growth continues to compress margins.
- The expected timing and funding of TRA payments, and whether the recorded deferred tax assets are realized as projected.
- The full economic impact of share-based compensation, Holdings’ noncontrolling interest, and the difference between GAAP and management’s non-GAAP measures.
- Whether dividend and distribution levels remain supportable given operating cash generation, debt obligations and future tax-related payments.