Artisan Partners Asset Management Inc. — FY2013 Form 10-K
Business and reporting period. Artisan Partners is an active investment manager offering equity strategies through mutual funds and separate accounts. This annual report covers the fiscal year ended December 31, 2013; the company completed its IPO and reorganization on March 12, 2013, so reported results and per-share data reflect a major change in structure during the year.
Key financial and operating metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $685.8 million | $505.6 million |
| GAAP operating income (loss) | $(261.2) million | $47.1 million |
| GAAP operating margin | (38.1)% | 9.3% |
| Adjusted operating income (non-GAAP) | $288.9 million | $202.9 million |
| Adjusted operating margin (non-GAAP) | 42.1% | 40.1% |
| Adjusted net income (non-GAAP) | $180.3 million | $122.4 million |
| Adjusted net income per adjusted share (non-GAAP) | $2.54 | Not provided |
| Cash flow from operations | $112.2 million | $130.1 million |
| Cash and cash equivalents | $211.8 million | $141.2 million |
| Borrowings | $200.0 million | $290.0 million |
| Ending AUM | $105.5 billion | $74.3 billion |
| Average AUM | $89.5 billion | $66.2 billion |
Revenue rose 36%, primarily on 35.3% growth in average AUM; the weighted average fee was 77 basis points versus 76 basis points. Net client inflows were $7.2 billion and market appreciation added $24.0 billion. Eleven of 13 strategies had positive net flows. The company reported $24.8 million of net income attributable to APAM, but a GAAP loss of $234.1 million before noncontrolling interests and a loss of $2.04 per basic and diluted common share. The company’s $200 million of notes carry fixed annual rates of 4.98%–5.82%, with maturities in 2017, 2019 and 2022. Its $100 million revolving facility was undrawn at year-end.
Material changes and unusual items
- FY2013 GAAP operating results included $547.2 million of pre-offering compensation, including a $287.3 million charge from modifying employee Class B awards, $74.9 million of amortization, and $56.8 million in IPO-related cash incentives. The filing says these charges were excluded from management’s non-GAAP adjusted measures.
- A $49.6 million gain from revaluing contingent value rights (CVRs) increased non-operating income; the CVRs were terminated in November 2013 without payment. This gain was not recurring operating revenue.
- APAM’s ownership of Artisan Partners Holdings rose from 24% to 29% following the November offering. The 71% held by other limited partners produces substantial noncontrolling-interest accounting.
- Tax receivable agreement liabilities were $160.7 million at year-end. The agreements generally provide counterparties 85% of specified realized or deemed tax savings; actual payment timing and amounts depend on future taxable income and other factors.
- The filing states preliminary FY2013 per-share losses were revised from $0.63 to $2.04 in the audited results; preliminary GAAP results for the quarter were revised from a $1.42 loss to a $3.04 loss per share. The reported fourth-quarter table shows revenue of $197.6 million, operating income of $58.4 million and APAM-attributable net income of $10.1 million alongside loss per share of $3.04.
Outlook, management commentary and risks
Management expected to launch Artisan High Income, the firm’s first fixed-income strategy, in the first half of 2014 and estimated incremental net costs of $6 million–$8 million in 2014. The filing gives no formal revenue or earnings guidance. Management’s dividend policy targets distribution of the majority of annual adjusted earnings through quarterly dividends and, subject to profitability and business conditions, a special annual dividend. Subsequent to year-end, the board declared a $0.55 quarterly and $1.63 special dividend per Class A share.
Key risks include dependence on investment performance and retention of key portfolio managers; concentration in a few large strategies, some closed to most new investors; market-driven AUM and fee volatility; client withdrawals and short-notice termination rights; fee pressure and reliance on distribution intermediaries; extensive regulatory obligations; and the cost and execution risks of entering fixed income. The filing also highlights leverage and covenant constraints, potential liquidity demands under the tax receivable agreements, foreign-market and currency exposure, and concentrated voting control. Management reported no material legal proceedings and concluded disclosure controls and internal control over financial reporting were effective; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Reconcile the reported GAAP loss and negative EPS with positive APAM-attributable net income, noncontrolling interests, preferred-stock deemed dividends and the IPO-related compensation adjustments; assess the recurring nature of the non-GAAP measures.
- Check the audited per-share revisions and fourth-quarter EPS calculation against the detailed financial statements and subsequent disclosures.
- Review the assumptions, timing, acceleration provisions and liquidity implications of the $160.7 million TRA liability; the filing’s hypothetical long-term TRA amounts are not guaranteed payments.
- Assess AUM and fee concentration, investment-team succession—including the announced retirement notice of a senior U.S. Value portfolio manager—and strategy closures.
- Monitor fixed-income launch costs and execution, debt covenant headroom, future dividends, and potential share sales or exchanges by pre-IPO holders.