Artisan Partners Asset Management Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited. Artisan is an active investment manager whose revenues are primarily management fees linked to assets under management (AUM). It reported six investment teams and launched its 14th strategy, High Income, during the quarter.
Key financial and operating metrics
| Metric | Q1 2014 | Comparable period |
|---|---|---|
| Revenue | $201.8 million | $148.2 million |
| Operating income (loss) | $67.2 million | $(421.3) million |
| Net income (loss) before noncontrolling interests | $52.2 million | $(399.4) million |
| Net income attributable to APAM | $8.6 million | $3.0 million |
| GAAP earnings per Class A share | $(2.29) | $0.19 |
| Adjusted net income and adjusted earnings per share (non-GAAP) | $56.0 million; $0.78 | $33.2 million; $0.47 |
| Operating cash flow | $147.2 million | $(29.0) million |
| Cash and cash equivalents, excluding Launch Equity | $208.4 million | $211.8 million at year-end 2013 |
| Debt | $200.0 million | $200.0 million at year-end 2013 |
- Ending AUM was $107.4 billion, up 29.1% year over year; average AUM rose 34.1% to $106.2 billion. Net client inflows were $1.4 billion, versus $2.2 billion in the prior-year quarter, and market appreciation added $648 million. The weighted average fee was 77 basis points, compared with 76.
- GAAP operating margin was approximately 33.3%; management’s adjusted operating margin was 45.1%, versus 37.0% in the prior-year period. Adjusted measures are non-GAAP and exclude specified items, including pre-offering compensation.
- Operating cash flow benefited from higher operating income and working-capital timing. Investing activities used $11.9 million, including $10.0 million to seed the High Income Fund. Financing activities used $138.8 million, principally for partnership distributions and dividends.
- Debt comprises $200.0 million of senior notes, with maturities of $60.0 million in 2017 and $140.0 million thereafter. The $100.0 million revolving facility was undrawn; the company reported compliance with debt covenants.
Changes versus the prior comparable period
- Revenue increased 36%, principally as average AUM grew. Net inflows were lower year over year, and market appreciation was substantially less than in Q1 2013.
- Operating results improved sharply from the prior-year loss, but comparison is distorted by $476.3 million of pre-offering compensation in Q1 2013, including a $287.3 million one-time Class B award modification charge and other IPO-related compensation. Q1 2014 included $23.6 million of amortization on pre-offering awards.
- GAAP net income attributable to APAM rose to $8.6 million, but GAAP EPS was a loss because $47.8 million of deemed dividends tied to the follow-on offering and preferred equity reduced income available to common stockholders. The filing’s 2013 EPS comparison covers APAM only from March 12, 2013, following its IPO; consolidated operating results reflect the historical predecessor structure.
- APAM completed a follow-on offering on March 12, 2014, issuing 9.3 million Class A shares and using the net proceeds to purchase Holdings units and convertible preferred stock. APAM’s economic ownership of Holdings increased from 29% to approximately 41%.
Liquidity, outlook, risks and unusual items
- Deferred tax assets were $474.8 million and amounts payable under tax receivable agreements (TRAs) were $405.2 million at quarter-end. The follow-on offering increased these balances by approximately $287.4 million and $244.3 million, respectively. TRAs generally entitle counterparties to 85% of specified realized or deemed tax savings; payments can be accelerated and, in some circumstances, exceed realized benefits.
- The company paid a $2.18 per-share Class A dividend in the quarter, comprising the regular quarterly dividend and a special annual dividend. Management stated its policy targets distributing a majority of annual adjusted earnings, subject to profitability and business conditions; future dividends are not assured. A $0.55 quarterly Class A dividend and $0.81 preferred dividend were declared for payment in May 2014.
- Management provided no specific earnings or AUM guidance. It noted that AUM and results depend on market performance, client flows, strategy mix and fee rates; client activity can be lumpy. One $722 million separate-account termination reflected the client’s decision to consolidate managers and reduce costs. Seven strategies were closed to most new investors, including Global Value, which closed in February 2014.
- Key risks include adverse markets and investment performance, client outflows, competition, and the ability to attract and retain investment professionals. Other considerations include TRA obligations, restrictive debt covenants, and indemnification exposure whose maximum amount is unknown. Management reported no legal or administrative proceedings believed material, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP EPS of $(2.29) with positive APAM net income and the $47.8 million of deemed dividends; distinguish this from non-GAAP adjusted EPS of $0.78.
- Assess the quality and durability of AUM growth: inflows slowed, and the quarter included a significant client termination and strategy capacity closures.
- Review TRA payment assumptions, timing, and potential acceleration against the $405.2 million recorded liability and $474.8 million deferred tax asset.
- Evaluate dividend capacity after partnership distributions, debt service, taxes, and possible TRA payments; the distribution policy does not guarantee future dividends.
- Account for APAM’s approximately 41% economic interest in Holdings and the resulting noncontrolling interests when evaluating consolidated results and cash available to APAM shareholders.