Artisan Partners Asset Management Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparative periods ended September 30, 2014. Unaudited. Artisan is an active investment manager with seven investment teams and 15 strategies. APAM owned approximately 54% of Artisan Partners Holdings at quarter-end and consolidates Holdings’ results.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $198.3 million | $212.4 million | $613.5 million | $622.7 million |
| Operating income | $70.6 million | $81.0 million | $216.7 million | $229.0 million |
| Net income attributable to APAM | $18.5 million | $20.4 million | $61.7 million | $48.3 million |
| Basic and diluted EPS | $0.44 | $0.57 | $1.38 | $(1.02) |
| Adjusted operating margin (non-GAAP) | 40.9% | 44.0% | 40.5% | 45.2% |
| Adjusted net income per adjusted share (non-GAAP) | $0.67 | $0.79 | $2.06 | $2.41 |
Operating income margin on a GAAP basis was approximately 35.6% in Q3 2015 versus 38.1% in Q3 2014. For the first nine months, it was approximately 35.3% versus 36.8%. Non-GAAP measures exclude specified items and assume full exchange of Holdings units; they are not substitutes for GAAP results.
- AUM and revenue drivers: Period-end AUM was $97.0 billion, down 8.7% year over year. Average AUM was $104.7 billion in Q3, down 5.0%; the nine-month average was nearly unchanged at $108.2 billion. The weighted average fee was 75 bps in Q3 versus 76 bps, and 76 bps for nine months versus 77 bps.
- Client flows and markets: Net outflows were $1.3 billion in Q3 and $3.8 billion for nine months, compared with $0.6 billion and $1.3 billion, respectively, in net outflows/inflows in 2014. Market depreciation was $10.9 billion in Q3 and $7.1 billion for nine months. U.S. Value strategies had $4.9 billion of nine-month outflows; Global Equity had $2.2 billion of inflows.
- Cash flow: Nine-month operating cash flow was $298.6 million, investing cash outflow $7.6 million, and financing cash outflow $255.6 million. Cash and equivalents increased $35.4 million from year-end to $217.7 million.
- Balance sheet and liquidity: At September 30, cash was $217.7 million, debt was $200.0 million, and the $100.0 million revolving facility was undrawn. Deferred tax assets were $687.1 million and tax receivable agreement (TRA) liabilities were $588.7 million. The company reported compliance with debt covenants.
- Distributions: APAM paid $0.60 per Class A share in Q3. It declared a further $0.60 quarterly dividend after quarter-end. Management expected to consider a special dividend after year-end, subject to board judgment and business conditions.
Material changes and management commentary
- Q3 revenue declined 7%, primarily reflecting lower average AUM. Nine-month revenue fell 1%, with lower fee yield partly offset by higher separate-account and Global Funds fees.
- Q3 operating expenses declined 3%, mainly from lower incentive compensation and distribution costs. Nine-month expenses rose slightly: Developing World launch costs, higher restricted-share compensation, and other expenses offset lower pre-offering compensation.
- Q3 APAM-attributable net income fell 10%. Nine-month APAM-attributable net income rose 28%, but the comparison benefited from 2014 preferred-equity deemed dividends that depressed prior-year EPS.
- A $5.8 million Q3 and $12.2 million nine-month non-operating expense arose from changes in estimated TRA obligations. Nine-month TRA payments, including interest, were $20.2 million. The liability increased from $489.2 million at year-end, including effects of the 2015 share offering, unit exchanges, and revised estimates.
- Management said more than 85% of AUM was in strategies outperforming broad-based benchmarks over the cited trailing periods and since inception. It cited capacity and demand in Global Opportunities, Global Equity, High Income, and Developing World, while warning that continued U.S. Value underperformance could sustain outflows.
- The Global Value strategy reopened to pooled vehicles on October 1, 2015, while remaining restricted for most new separate-account clients. Non-U.S. Growth was scheduled to close to most new retail/intermediary investors in February 2016 and most institutional investors in October 2016. Management expected November 2015 fund distributions to produce aggregate net outflows similar to approximately $650 million in November 2014.
Outlook, risks, and contingencies
Management expected a $0.60 quarterly Class A dividend during 2015, subject to board approval; it did not provide earnings or revenue guidance. Results remain sensitive to equity markets, investment performance, client flows, strategy mix, fee rates, and employee retention. Management noted potential industry fee pressure. TRA payments depend on future taxable income, tax law, unit exchanges, and other assumptions; in some circumstances payments may accelerate or exceed realized tax benefits, potentially requiring cash on hand or borrowing. Indemnification exposure is not quantifiable. The filing reported no material legal proceedings, no off-balance-sheet arrangements, effective disclosure controls, and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether AUM outflows—particularly in U.S. Value—and market losses continue, and how benchmark performance translates into client demand.
- Whether average AUM, strategy mix, and fee yield stabilize or further pressure management-fee revenue and margins.
- How TRA estimates, payments, and potential acceleration compare with actual tax savings and available liquidity.
- The full economic impact of share-based compensation and the assumptions behind non-GAAP adjusted earnings and margins.
- Whether operating cash generation can support debt service, TRA payments, distributions, and dividends under weaker markets or client flows.