APAM-2014-3-31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| |
(Mark One) | |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014 |
OR |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE TRANSITION PERIOD FROM TO |
Commission file number: 001-35826
Artisan Partners Asset Management Inc.
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 45-0969585 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
875 E. Wisconsin Avenue, Suite 800 Milwaukee, WI | 53202 |
(Address of principal executive offices) | (Zip Code) |
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(414) 390-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | |
Large accelerated filer o | | | Accelerated filer o |
Non-accelerated filer þ | (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of outstanding shares of the registrant’s Class A common stock, par value $0.01 per share, Class B common stock, par value $0.01 per share, and Class C common stock, par value $0.01 per share, as of May 5, 2014 were 29,133,585, 21,566,436 and 20,370,787, respectively.
TABLE OF CONTENTS
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Part I | Financial Information | |
Item 1. | Unaudited Consolidated Financial Statements | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
Part II | Other Information | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
Except where the context requires otherwise, in this report, references to the “Company”, “Artisan”, “we”, “us” or “our” refer to Artisan Partners Asset Management Inc. (“APAM”) and its consolidated subsidiaries, including Artisan Partners Holdings LP (“Artisan Partners Holdings” or “Holdings”). On March 12, 2013, APAM closed its initial public offering and related corporate reorganization. Prior to that date, APAM was a subsidiary of Artisan Partners Holdings. The reorganization and initial public offering are described in the notes to our consolidated financial statements included in Part I of this Form 10-Q.
Forward-Looking Statements
This report contains, and from time to time our management may make, forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue”, the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions, may include projections of our future financial performance, future expenses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in our business or financial results. These statements are only predictions based on our current expectations and projections about future events. Among the important factors that could cause actual results, level of activity, performance or achievements to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, adverse economic or market conditions, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Artisan Partners brand and other factors disclosed under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 26, 2014, which is accessible on the SEC’s website at www.sec.gov. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Forward-looking statements include, but are not limited to, statements about:
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• | our anticipated future results of operations; |
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• | our potential operating performance and efficiency; |
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• | our expectations with respect to future levels of assets under management, inflows and outflows; |
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• | our financing plans, cash needs and liquidity position; |
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• | our intention to pay dividends and our expectations about the amount of those dividends; |
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• | our expected levels of compensation of our employees; |
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• | our expectations with respect to future expenses and the level of future expenses; |
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• | our expected tax rate, and our expectations with respect to deferred tax assets; and |
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• | our estimates of future amounts payable pursuant to our tax receivable agreements. |
Part I — Financial Information
Item 1. Financial Statements
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Condensed Consolidated Statements of Financial Condition (U.S. dollars in thousands, except per share amounts) |
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
ASSETS |
Cash and cash equivalents | $ | 208,371 |
| | $ | 211,839 |
|
Cash and cash equivalents of Launch Equity | 30,263 |
| | 19,156 |
|
Accounts receivable | 62,219 |
| | 64,110 |
|
Accounts receivable of Launch Equity | — |
| | 7,428 |
|
Investment securities | 17,911 |
| | 7,804 |
|
Investment securities of Launch Equity | 60,528 |
| | 63,364 |
|
Property and equipment, net | 9,998 |
| | 8,760 |
|
Deferred tax assets | 474,789 |
| | 187,907 |
|
Prepaid expenses and other assets | 13,049 |
| | 11,030 |
|
Total assets | $ | 877,128 |
| | $ | 581,398 |
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| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Accounts payable, accrued expenses, and other | $ | 48,672 |
| | $ | 45,369 |
|
Accrued incentive compensation | 64,580 |
| | 3,580 |
|
Borrowings | 200,000 |
| | 200,000 |
|
Amounts payable under tax receivable agreements | 405,207 |
| | 160,663 |
|
Accounts payable of Launch Equity | 869 |
| | 7,485 |
|
Securities sold, not yet purchased of Launch Equity | 38,222 |
| | 31,990 |
|
Total liabilities | $ | 757,550 |
| | $ | 449,087 |
|
Commitments and contingencies |
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Common stock | | | |
Class A common stock ($0.01 par value per share, 500,000,000 shares authorized, 29,133,585 and 19,807,436 shares outstanding at March 31, 2014 and December 31, 2013, respectively) | 291 |
| | 198 |
|
Class B common stock ($0.01 par value per share, 200,000,000 shares authorized, 21,566,436 and 25,271,889 shares outstanding at March 31, 2014 and December 31, 2013, respectively) | 216 |
| | 253 |
|
Class C common stock ($0.01 par value per share, 400,000,000 shares authorized, 20,370,787 and 25,206,554 shares outstanding at March 31, 2014 and December 31, 2013, respectively) | 204 |
| | 252 |
|
Convertible preferred stock ($0.01 par value per share, 15,000,000 shares authorized, 455,011 and 1,198,128 shares outstanding at March 31, 2014 and December 31, 2013, respectively) | 13,257 |
| | 34,909 |
|
Additional paid-in capital | 65,485 |
| | 6,388 |
|
Retained earnings (deficit) | (24,419 | ) | | 1,401 |
|
Accumulated other comprehensive income (loss) | 582 |
| | 378 |
|
Total stockholders’ equity | 55,616 |
| | 43,779 |
|
Noncontrolling interest - Artisan Partners Holdings | 12,263 |
| | 38,060 |
|
Noncontrolling interest - Launch Equity | 51,699 |
| | 50,472 |
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Total equity | 119,578 |
| | 132,311 |
|
Total liabilities and equity | $ | 877,128 |
| | $ | 581,398 |
|
The accompanying notes are an integral part of the consolidated financial statements.
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Consolidated Statements of Operations (U.S. dollars in thousands, except per share amounts) |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
Revenues | | | |
Management fees | $ | 201,792 |
| | $ | 148,214 |
|
Performance fees | — |
| | 9 |
|
Total revenues | $ | 201,792 |
| | $ | 148,223 |
|
Operating Expenses | | | |
Compensation and benefits | | | |
Salaries, incentive compensation and benefits | 85,855 |
| | 72,680 |
|
Pre-offering related compensation - share-based awards | 23,637 |
| | 333,231 |
|
Pre-offering related compensation - other | — |
| | 143,035 |
|
Total compensation and benefits | 109,492 |
| | 548,946 |
|
Distribution and marketing | 11,174 |
| | 8,176 |
|
Occupancy | 2,686 |
| | 2,616 |
|
Communication and technology | 4,476 |
| | 3,330 |
|
General and administrative | 6,812 |
| | 6,469 |
|
Total operating expenses | 134,640 |
| | 569,537 |
|
Total operating income (loss) | 67,152 |
| | (421,314 | ) |
Non-operating income (loss) | | | |
Interest expense | (2,883 | ) | | (3,210 | ) |
Net gain (loss) of Launch Equity | (598 | ) | | 4,779 |
|
Net gain on the valuation of contingent value rights | — |
| | 24,800 |
|
Other non-operating expense | (276 | ) | | — |
|
Total non-operating income (loss) | (3,757 | ) | | 26,369 |
|
Income (loss) before income taxes | 63,395 |
| | (394,945 | ) |
Provision for income taxes | 11,208 |
| | 4,449 |
|
Net income (loss) before noncontrolling interests | 52,187 |
| | (399,394 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 44,149 |
| | (407,123 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Launch Equity | (598 | ) | | 4,779 |
|
Net income attributable to Artisan Partners Asset Management Inc. | $ | 8,636 |
| | $ | 2,950 |
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| | | |
| January 1, 2014 to March 31, 2014 | | March 12, 2013 to March 31, 2013 |
Earnings (loss) per share | | | |
Basic | $ | (2.29 | ) | | $ | 0.19 |
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Diluted | $ | (2.29 | ) | | $ | 0.19 |
|
Weighted average number of common shares outstanding | | | |
Basic | 20,214,242 |
| | 12,728,949 |
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Diluted | 20,214,242 |
| | 15,294,412 |
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| | | |
Dividends declared per Class A common share | $ | 2.18 |
| | $ | — |
|
The accompanying notes are an integral part of the consolidated financial statements.
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Consolidated Statements of Comprehensive Income (Loss) (U.S. dollars in thousands) |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
Net income (loss) before noncontrolling interests | $ | 52,187 |
| | $ | (399,394 | ) |
Other comprehensive income (loss), net of tax | | | |
Unrealized gains on investment securities: | | | |
Unrealized holding gains on investment securities, net of tax of $86 and $39, respectively | 21 |
| | 1,854 |
|
Less: reclassification adjustment for gains (losses) included in net income | — |
| | — |
|
Net unrealized gains on investment securities | 21 |
| | 1,854 |
|
Foreign currency translation gain (loss) | 53 |
| | (322 | ) |
Total other comprehensive income | 74 |
| | 1,532 |
|
Comprehensive income (loss) | 52,261 |
| | (397,862 | ) |
Comprehensive income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 44,019 |
| | (405,662 | ) |
Comprehensive income (loss) attributable to noncontrolling interests - Launch Equity | (598 | ) | | 4,779 |
|
Comprehensive income attributable to Artisan Partners Asset Management Inc. | $ | 8,840 |
| | $ | 3,021 |
|
The accompanying notes are an integral part of the consolidated financial statements.
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Consolidated Statements of Changes in Stockholders' Equity (U.S. dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Convertible preferred stock | Additional paid-in capital | Retained earnings (deficit) | Accumulated other comprehensive income | Non-controlling interest - Artisan Partners Holdings | Non-controlling interest - Launch Equity | Total equity |
Balance at December 31, 2013 | $ | 703 |
| $ | 34,909 |
| $ | 6,388 |
| $ | 1,401 |
| $ | 378 |
| $ | 38,060 |
| $ | 50,472 |
| $ | 132,311 |
|
Net income (loss) | — |
| — |
| — |
| 8,636 |
| — |
| 44,149 |
| (598 | ) | 52,187 |
|
Other comprehensive income - foreign currency translation | — |
| — |
| — |
| — |
| 13 |
| 40 |
| — |
| 53 |
|
Other comprehensive income - available for sale investments, net of tax | — |
| — |
| — |
| — |
| 14 |
| 85 |
| — |
| 99 |
|
Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax | — |
| — |
| (3,456 | ) | — |
| 177 |
| 3,201 |
| — |
| (78 | ) |
Capital contribution | — |
| — |
| — |
| — |
| — |
| — |
| 1,825 |
| 1,825 |
|
Amortization of equity-based compensation | — |
| — |
| 9,357 |
| — |
| — |
| 18,921 |
| — |
| 28,278 |
|
Deferred tax assets, net of amounts payable under tax receivable agreements | — |
| — |
| 45,825 |
| — |
| — |
| — |
| — |
| 45,825 |
|
Issuance of Class A common stock, net of issuance costs | 93 |
| — |
| 552,897 |
| — |
| — |
| — |
| — |
| 552,990 |
|
Purchase of convertible preferred stock and subsidiary equity | (85 | ) | (21,652 | ) | (533,204 | ) | — |
| — |
| 812 |
| — |
| (554,129 | ) |
Distributions | — |
| — |
| — |
| — |
| — |
| (93,005 | ) | — |
| (93,005 | ) |
Dividends | — |
| — |
| (12,322 | ) | (34,456 | ) | — |
| — |
| — |
| (46,778 | ) |
Balance at March 31, 2014 | $ | 711 |
| $ | 13,257 |
| $ | 65,485 |
| $ | (24,419 | ) | $ | 582 |
| $ | 12,263 |
| $ | 51,699 |
| $ | 119,578 |
|
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Consolidated Statements of Changes in Stockholders' Equity, continued (U.S. dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Convertible preferred stock | Additional paid-in capital | Retained earnings (deficit) | Accumulated other comprehensive income | Non-controlling interest - Artisan Partners Holdings | Non-controlling interest - Launch Equity | Total equity | Redeemable Preferred Units |
Balance at December 31, 2012 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (709,414 | ) | $ | 36,699 |
| $ | (672,715 | ) | $ | 357,194 |
|
Net income (loss) | — |
| — |
| — |
| — |
| — |
| (434,342 | ) | — |
| (434,342 | ) | — |
|
Other comprehensive income | — |
| — |
| — |
|
| — |
| 1,065 |
| — |
| 1,065 |
| — |
|
Partnership distributions | — |
| — |
| — |
| — |
| — |
| (100,514 | ) | — |
| (100,514 | ) | — |
|
Modification of equity award and other pre-offering related compensation | — |
| — |
| — |
| — |
| — |
| 572,471 |
| — |
| 572,471 |
| — |
|
Modification of redeemable preferred units | — |
| — |
| — |
| — |
| — |
| 357,194 |
| — |
| 357,194 |
| (357,194 | ) |
Initial establishment of contingent value right liability | — |
| — |
| — |
| — |
| — |
| (55,440 | ) | — |
| (55,440 | ) | — |
|
Capital redemption | — |
| — |
| — |
| — |
| — |
| (16 | ) | — |
| (16 | ) | — |
|
Balance at March 12, 2013 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (368,996 | ) | $ | 36,699 |
| $ | (332,297 | ) | $ | — |
|
| | | | | | | |
| |
IPO proceeds | — |
| — |
| — |
| — |
| — |
| 353,414 |
| — |
| 353,414 |
| — |
|
Attribution of noncontrolling interest | 674 |
| 74,748 |
| (58,365 | ) | — |
| 3,029 |
| (20,086 | ) | — |
| — |
| — |
|
Redemption of partnership units | — |
| — |
| — |
| — |
| — |
| (76,319 | ) | — |
| (76,319 | ) | — |
|
Net income (loss) | — |
| — |
| — |
| 2,950 |
| — |
| 27,219 |
| 4,779 |
| 34,948 |
| — |
|
Other comprehensive income, net of tax | — |
| — |
| — |
| — |
| 467 |
| — |
| — |
| 467 |
| — |
|
Capital contribution | — |
| — |
| — |
| — |
| — |
| — |
| 3,050 |
| 3,050 |
| — |
|
Amortization of equity-based compensation | — |
| — |
| 1,374 |
| — |
| — |
| 3,124 |
| — |
| 4,498 |
| — |
|
Establishment of deferred tax assets, net of amounts payable under tax receivable agreements | — |
| — |
| 17,989 |
| — |
| — |
| — |
| — |
| 17,989 |
| — |
|
Balance at March 31, 2013 | $ | 674 |
| $ | 74,748 |
| $ | (39,002 | ) | $ | 2,950 |
| $ | 3,496 |
| $ | (81,644 | ) | $ | 44,528 |
| $ | 5,750 |
| $ | — |
|
The accompanying notes are an integral part of the consolidated financial statements.
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Consolidated Statements of Cash Flows (U.S. dollars in thousands) |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
Cash flows from operating activities | | | |
Net income (loss) before noncontrolling interests | $ | 52,187 |
| | $ | (399,394 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 693 |
| | 698 |
|
Deferred income taxes | 2,540 |
| | 2,646 |
|
Net gain on the valuation of contingent value rights | — |
| | (24,800 | ) |
(Gains) losses of Launch Equity, net | 598 |
| | (4,779 | ) |
Proceeds from sale of investments by Launch Equity | 56,880 |
| | 22,204 |
|
Purchase of investments by Launch Equity | (48,094 | ) | | (22,109 | ) |
Loss on disposal of property and equipment | 5 |
| | 1 |
|
Amortization of debt issuance costs | 112 |
| | 112 |
|
Share-based compensation | 28,278 |
| | 576,969 |
|
Change in assets and liabilities resulting in an increase (decrease) in cash: | | | |
Net change in operating assets and liabilities of Launch Equity | (10,611 | ) | | (3,013 | ) |
Accounts receivable | 1,891 |
| | (5,459 | ) |
Prepaid expenses and other assets | (1,442 | ) | | (263 | ) |
Accounts payable and accrued expenses | 67,634 |
| | 54,434 |
|
Class B liability awards | (3,459 | ) | | (226,177 | ) |
Deferred lease obligations | 10 |
| | (71 | ) |
Net cash provided by (used in) operating activities | 147,222 |
| | (29,001 | ) |
Cash flows from investing activities | | | |
Acquisition of property and equipment | (990 | ) | | (455 | ) |
Leasehold improvements | (949 | ) | | (199 | ) |
Proceeds from sale of property and equipment | 4 |
| | — |
|
Purchase of investment securities | (10,000 | ) | | (2,000 | ) |
Net cash used in investing activities | (11,935 | ) | | (2,654 | ) |
Cash flows from financing activities | | | |
Partnership distributions | (93,005 | ) | | (100,530 | ) |
Dividends paid | (46,778 | ) | | — |
|
Change in other liabilities | (16 | ) | | (16 | ) |
Repayment under revolving credit facility | — |
| | (90,000 | ) |
Net proceeds from issuance of common stock | 554,129 |
| | 356,579 |
|
Payment of costs directly associated with the issuance of Class A common stock | (781 | ) | | (3,165 | ) |
Purchase of preferred stock and subsidiary equity | (554,129 | ) | | — |
|
Purchase of Class A common units | — |
| | (76,319 | ) |
Capital invested into Launch Equity | 1,825 |
| | 3,050 |
|
Net cash provided by (used in) financing activities | (138,755 | ) | | 89,599 |
|
Net increase (decrease) in cash and cash equivalents | (3,468 | ) | | 57,944 |
|
Cash and cash equivalents | | | |
Beginning of period | 211,839 |
| | 141,159 |
|
End of period | $ | 208,371 |
| | $ | 199,103 |
|
| | | |
Supplementary information | | | |
Noncash activity: | | | |
Issuance of preferred stock | $ | — |
| | $ | 74,748 |
|
Establishment of deferred tax assets | 287,367 |
| | 70,862 |
|
Establishment of amounts payable under tax receivable agreements | 244,262 |
| | 53,449 |
|
Establishment of contingent value rights | — |
| | 55,440 |
|
The accompanying notes are an integral part of the consolidated financial statements.
ARTISAN PARTNERS ASSET MANAGEMENT INC.
Notes to Unaudited Consolidated Financial Statements
(U.S. currencies in thousands, except per share or per unit amounts and as otherwise indicated)
Note 1. Organization and nature of business
Organization
On March 12, 2013, Artisan Partners Asset Management Inc. (“APAM”) completed its initial public offering (the “IPO”). APAM was formed in 2011 as a subsidiary of Artisan Partners Holdings LP (“Artisan Partners Holdings” or “Holdings”). APAM was formed for the purpose of becoming the general partner of Holdings in connection with the IPO. The reorganization (“IPO Reorganization”) established the necessary corporate structure to complete the IPO while at the same time preserving the ability of the firm to conduct operations through Holdings and its subsidiaries.
As part of the IPO Reorganization, APAM became the sole general partner of Holdings. As the sole general partner, APAM controls the business and affairs of Holdings. As a result, APAM consolidates Holdings’ financial statements and records a noncontrolling interest for the economic interests in Holdings held by the limited partners of Holdings. At March 31, 2014, APAM’s total economic interest in Holdings approximated 41% of Holdings’ economics.
Artisan Partners Asset Management has been allocated a part of Artisan Partners Holdings’ net income since March 12, 2013, when it became Artisan Partners Holdings’ general partner. APAM and its subsidiaries are hereafter referred to collectively as “Artisan” or the “Company”.
Nature of Business
Artisan is an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. Artisan’s operations are conducted through Artisan Partners Holdings and its subsidiaries.
Artisan has six autonomous investment teams that oversee fourteen distinct U.S., non-U.S. and global investment strategies. During the March quarter of 2014 Artisan launched its fourteenth investment strategy, the Artisan Partners High Income strategy, which is managed by the firm’s Credit team.
Each strategy is offered through multiple investment vehicles to accommodate a broad range of client mandates. Artisan offers its investment management services primarily to institutions and through intermediaries that operate with institutional-like decision-making processes and have long-term investment horizons.
2014 Follow-On Offering
On March 12, 2014, APAM completed a registered public offering of 9,284,337 shares of Class A common stock (the “2014 Follow-on Offering”) and utilized all of the net proceeds to purchase an aggregate of 6,284,337 common units and 2,256,883 preferred units of Artisan Partners Holdings and 743,117 shares of APAM’s convertible preferred stock, at a price per unit or share, as applicable, equal to $62.00 less the underwriting discount per share. The offering and subsequent purchase of shares and units had the following impact on the consolidated financial statements:
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• | APAM received 9,284,337 general partnership (“GP”) units of Holdings, and APAM’s ownership interest in Holdings increased from 29% to 41%. See Note 7, “Noncontrolling interest - Holdings” for the impact of the change in ownership. |
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• | APAM’s purchase of common and preferred units of Holdings with a portion of the net proceeds resulted in an increase to deferred tax assets of approximately $287.4 million and an increase in amounts payable under tax receivable agreements of approximately $244.3 million. |
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• | The purchase price of the convertible preferred stock exceeded its carrying value on APAM’s consolidated balance sheet by $22.7 million, which is considered a deemed dividend and is subtracted from net income to calculate income available to common stockholders in the calculation of earnings per share. The purchase of the preferred units of Holdings resulted in a similar deemed dividend, which reduced net income available to common stockholders by an additional $25.2 million in the calculation of earnings per share. |
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such consolidated financial statements have been included. Such interim results are not necessarily indicative of full year results.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and accordingly they do not include all of the information and footnotes required in the annual consolidated financial statements and accompanying footnotes. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. As a result, the interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in APAM’s latest annual report on Form 10-K.
The accompanying financial statements were prepared in accordance with U.S. GAAP and related rules and regulations of the SEC. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates or assumptions.
Because APAM and Holdings were under common control at the time of the IPO Reorganization, APAM’s acquisition of control of Holdings was accounted for as a transaction among entities under common control. The consolidated financial statements of APAM reflect the following:
| |
• | Statements of Financial Condition - The assets, liabilities and equity of Holdings and of APAM have been carried forward at their historical carrying values. The historical partners’ equity or deficit of Holdings is reflected as a noncontrolling interest. |
| |
• | Statements of Operations, Comprehensive Income and Cash Flows - The historical consolidated statements of Holdings have been consolidated with the statements of operations, comprehensive income and cash flows of APAM. |
Principles of consolidation
Artisan’s policy is to consolidate all subsidiaries or other entities in which it has a controlling financial interest and variable interest entities (“VIEs”) of which Artisan is deemed to be the primary beneficiary. The primary beneficiary is deemed to be the entity that has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. The consolidated financial statements include the accounts of APAM, all subsidiaries or other entities in which APAM has a direct or indirect controlling financial interest and VIEs of which Artisan is deemed to be the primary beneficiary. All material intercompany balances have been eliminated in consolidation.
Artisan’s wholly-owned subsidiary, Artisan Partners Alternative Investments GP LLC, is the general partner of Artisan Partners Launch Equity LP (“Launch Equity”), a private investment partnership that is considered a VIE. Launch Equity is considered an investment company and therefore is accounted for under ASC Topic 946, Financial Services – Investment Companies. Artisan has retained the specialized industry accounting principles of this investment company in its Consolidated Financial Statements. See Note 8, “Variable and Voting Interest Entities” for additional details.
The Company makes initial seed investments in sponsored investment portfolios at the portfolio’s formation. If the seed investment results in a controlling financial interest, APAM consolidates the investment, and the underlying individual securities are accounted for as trading securities. Seed investments in which the Company does not have a controlling financial interest are classified as available-for-sale investments. As of March 31, 2014, APAM does not have a controlling financial interest in any of its seed investments.
Recent accounting pronouncements
In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The ASU clarifies the interaction between ASC 810-10, Consolidation-Overall, and ASC 830-30, Foreign Currency Matters-Translation of Financial Statements, when releasing the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The ASU was adopted prospectively on January 1, 2014 and did not have an impact on the Company’s consolidated financial statements.
In June 2013, the FASB issued ASU 2013-08, Investment Companies (Topic 946). The ASU changes the approach to the investment company assessment in Topic 946, clarifying the characteristics of an investment company and provides comprehensive guidance for assessing whether an entity is an investment company. This update would also require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting and to include additional disclosures. The ASU was adopted prospectively on January 1, 2014 and did not have an impact on the Company’s consolidated financial statements.
Note 3. Investment Securities
The disclosures below include details of Artisan’s investments. Investments held by Launch Equity are described in Note 8, “Variable and Voting Interest Entities”.
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
At March 31, 2014 | | | | | | | |
Mutual funds | $ | 16,190 |
| | $ | 1,721 |
| | $ | — |
| | $ | 17,911 |
|
At December 31, 2013 | | | | | | | |
Mutual funds | $ | 6,190 |
| | $ | 1,614 |
| | $ | — |
| | $ | 7,804 |
|
Artisan’s investments in mutual funds consist of investments in shares of Artisan Partners Funds, Inc. and Artisan Partners Global Funds plc and are considered to be available-for-sale securities. As a result, unrealized gains (losses) are recorded to other comprehensive income (loss). During the three months ended March 31, 2014, Artisan made an investment of $10.0 million in Artisan Partners High Income Fund.
As of March 31, 2014 and December 31, 2013, Artisan held no available-for-sale securities in an unrealized loss position.
Note 4. Fair Value Measurements
The table below presents information about Artisan’s assets and liabilities that are measured at fair value and the valuation techniques Artisan utilized to determine such fair value. The fair value of financial instruments held by Launch Equity is presented in Note 8, “Variable and Voting Interest Entities”. In accordance with ASC 820, fair value is defined as the price that Artisan would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
| |
• | Level 1 – Observable inputs such as quoted (unadjusted) market prices in active markets for identical securities. |
| |
• | Level 2 – Other significant observable inputs (including but not limited to quoted prices for similar instruments, interest rates, prepayment speeds, credit risk, etc.). |
| |
• | Level 3—Significant unobservable inputs (including Artisan’s own assumptions in determining fair value). |
The following provides the hierarchy of inputs used to derive fair value of Artisan’s assets and liabilities that are financial instruments as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value |
| Total | | Level 1 | | Level 2 | | Level 3 |
March 31, 2014 | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 60,002 |
| | $ | 60,002 |
| | $ | — |
| | $ | — |
|
Mutual funds | 17,911 |
| | 17,911 |
| | — |
| | — |
|
| | | | | | | |
December 31, 2013 | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 105,001 |
| | $ | 105,001 |
| | $ | — |
| | $ | — |
|
Equity mutual funds | 7,804 |
| | 7,804 |
| | — |
| | — |
|
Fair values determined based on Level 1 inputs utilize quoted market prices for identical assets. Level 1 assets generally consist of money market accounts, marketable open-end mutual funds or UCITS. There were no Level 2 or Level 3 assets or liabilities recorded at fair value as of March 31, 2014 and December 31, 2013.
Artisan’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1, Level 2 or Level 3 securities during the three months ended March 31, 2014 and 2013.
Note 5. Borrowings
Artisan’s borrowings consist of the following as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | |
| Maturity | | Outstanding Balance | | Interest Rate Per Annum |
Revolving credit agreement | August 2017 | | — |
| | NA |
|
Senior notes | | | | | |
Series A | August 2017 | | 60,000 |
| | 4.98 | % |
Series B | August 2019 | | 50,000 |
| | 5.32 | % |
Series C | August 2022 | | 90,000 |
| | 5.82 | % |
Total borrowings | | | $ | 200,000 |
| | |
The fair value of borrowings was approximately $201.6 million as of March 31, 2014. Fair value was determined based on future cash flows, discounted to present value using current market interest rates. The inputs are categorized as Level 2 in the fair value hierarchy, as defined in Note 4, “Fair Value Measurements”.
Interest expense incurred on the unsecured notes and revolving credit agreement was $2.8 million and $3.1 million for the three months ended March 31, 2014 and 2013, respectively.
As of March 31, 2014, the aggregate maturities of debt obligations, based on their contractual terms, are as follows: |
| | | |
2014 | $ | — |
|
2015 | — |
|
2016 | — |
|
2017 | 60,000 |
|
Thereafter | 140,000 |
|
| $ | 200,000 |
|
Note 6. Derivative Instruments
Contingent Value Rights (“CVRs”)
As part of the IPO Reorganization, Holdings issued Partnership CVRs and APAM issued APAM CVRs to the holders of Holdings’ preferred units and APAM’s convertible preferred stock, respectively. APAM held one Partnership CVR for each APAM CVR outstanding. On November 6, 2013, the CVRs were terminated with no amounts paid or payable by Artisan.
The CVRs were considered derivative instruments under ASC 815, Derivatives and Hedging, and accordingly were recorded as a liability at fair value on the balance sheet until they were terminated. Changes in the fair value of these derivative instruments have been recorded in earnings as a net gain (loss) on the valuation of contingent value rights in the period of change. The following table presents gains (losses) recognized on derivative instruments for the three months ended March 31, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | 2014 | | 2013 |
Income Statement Classification | | Gains | | Losses | | Gains | | Losses |
Contingent value rights | Net gain on the valuation of contingent value rights | | $ | — |
| | $ | — |
| | $ | 24,800 |
| | $ | — |
|
Total | | | $ | — |
| | $ | — |
| | $ | 24,800 |
| | $ | — |
|
Note 7. Noncontrolling interest - Holdings
Holdings is the predecessor of APAM for accounting purposes, and its consolidated financial statements are Artisan’s historical financial statements for periods prior to March 12, 2013, the date on which APAM became the general partner of Holdings.
As of March 31, 2014, APAM held approximately 41% of the economic interests in Holdings. Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings in the Unaudited Consolidated Statements of Operations represents the portion of earnings or loss attributable to the economic interests in Holdings held by the limited partners of Holdings. All income for the period prior to March 12, 2013, is entirely attributable to noncontrolling interests.
During the three months ended March 31, 2014, APAM’s ownership interest in Holdings increased due to (i) the issuance of 41,812 Holdings’ GP units corresponding to 41,812 restricted shares of Class A common stock issued by APAM during the period, (ii) the issuance of 9,284,337 Holdings’ GP units corresponding to the 9,284,337 shares of Class A common stock issued during the period and (iii) APAM’s purchase and cancellation of 6,284,337 common units and 3,000,000 preferred units of Holdings. Since APAM continues to have a controlling interest in Holdings, changes in ownership of Holdings are accounted for as equity transactions. Additional paid-in capital and Noncontrolling interest - Artisan Partners Holdings in the Unaudited Condensed Consolidated Statements of Financial Condition are adjusted to reallocate Holdings’ historical equity to reflect the change in APAM’s ownership of Holdings.
As a result of the change in ownership, a deficit of $3.5 million was transferred to Additional paid-in capital from Noncontrolling interests - Artisan Partners Holdings. Additionally, Accumulated other comprehensive income was adjusted to reflect the change in ownership interest through a $0.3 million reduction to Noncontrolling interest and a $0.2 million increase to accumulated other comprehensive income, net of tax. The increased ownership level also resulted in a $2.1 million increase in deferred tax assets and Additional paid-in-capital. The impact of the change in APAM’s ownership interests in Holdings is reflected in the Unaudited Consolidated Statement of Changes in Stockholders’ Equity.
Note 8. Variable and Voting Interest Entities
Artisan Funds and Artisan Global Funds
Artisan serves as the investment adviser for Artisan Partners Funds, Inc. (“Artisan Funds”), a family of mutual funds registered with the SEC under the Investment Company Act of 1940, and Artisan Partners Global Funds plc (“Artisan Global Funds”), a family of Ireland-based UCITS. Artisan Funds and Artisan Global Funds are corporate entities the business and affairs of which are managed by their respective boards of directors. The shareholders of the funds retain all voting rights, including the right to elect and reelect members of their respective boards of directors. As a result, each of these entities is a voting interest entity (“VOE”). While Artisan holds, in limited cases, direct investments in a fund (which are made on the same terms as are available to other investors and do not represent a majority voting interest in any fund), Artisan does not have a controlling financial interest or a majority voting interest and, as such, does not consolidate these entities.
Artisan Partners Launch Equity LP
Artisan serves as the investment adviser for Launch Equity, a private investment partnership which seeks to achieve returns primarily through capital appreciation, while also mitigating market risk through the use of hedging strategies. Artisan receives management fees as compensation for services provided as the investment adviser. Artisan also maintains, through Artisan Partners Alternative Investments GP LLC, a direct equity investment in the fund and receives an allocation of profits based upon Launch Equity’s net capital appreciation during a fiscal year. Each of these represents a variable interest in the fund.
The limited partners of Launch Equity are certain current or former Artisan employees and are considered related parties. Artisan has determined that Launch Equity is a VIE as (a) the voting rights of the limited partners are not proportional to their obligations to absorb expected losses and rights to receive expected residual returns and (b) substantially all of Launch Equity’s activities either involve or are conducted on behalf of the limited partners (the investors that have disproportionately few voting rights) and their related parties (including Artisan).
Launch Equity qualifies for deferral of the current consolidation guidance for VIEs; therefore the consolidation assessment is based on previous consolidation guidance. This guidance requires an analysis of which party, through holding interests directly or indirectly in the entity or contractually through other variable interests, such as management fees and incentive allocations, would absorb a majority of the expected variability of the entity. In determining whether Artisan is the primary beneficiary of Launch Equity, both qualitative and quantitative factors such as voting rights of the equity holders, economic participation of all parties, including how fees are earned, related party ownership and the level of involvement Artisan had in the design of the VIE, were considered. It was concluded that Artisan was the primary beneficiary as the related party group absorbs a majority of the variability associated with Launch Equity and Artisan is the member within the related party group that is most closely associated with the VIE. Although Artisan has only a minimal equity investment in Launch Equity, as the general partner, controls Launch Equity’s management and affairs.
In addition, the fund was designed to attract third party investors to provide an economic benefit to Artisan in the form of quarterly management fees and an annual incentive allocation based upon the net capital appreciation of the fund. Also, in the ordinary course of business, Artisan may choose to waive certain fees, its incentive allocation or assume operating expenses of the fund. As a result, it was concluded that Artisan is the primary beneficiary of Launch Equity and its results are included in Artisan’s consolidated financial statements.
Artisan’s maximum exposure to loss from its involvement with Launch Equity is limited to its equity investment of $1 thousand while the potential benefit is limited to the management and incentive fees received as investment adviser. Therefore, the gains or losses of Launch Equity have not had a significant impact on Artisan’s results of operations, liquidity or capital resources. Artisan has no right to the benefits from, nor does it bear the risks associated with, Launch Equity’s investments, beyond Artisan’s minimal direct investment in Launch Equity. If Artisan were to liquidate, the assets of Launch Equity would not be available to its general creditors and as a result, Artisan does not consider investments held by Launch Equity to be Artisan’s assets.
The following tables reflect the impact of consolidating Launch Equity’s assets and liabilities into the Consolidated Statement of Financial Condition as of March 31, 2014 and December 31, 2013 and results into the Consolidated Statement of Operations for the three months ended March 31, 2014 and 2013.
Condensed Consolidating Statements of Financial Condition |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2014 | | As of December 31, 2013 |
| Before Consolidation | | Launch Equity | | Eliminations | | As Reported | | Before Consolidation | | Launch Equity | | Eliminations | | As Reported |
Cash and cash equivalents | $ | 208,371 |
| | $ | — |
| | $ | — |
| | $ | 208,371 |
| | $ | 211,839 |
| | $ | — |
| | $ | — |
| | $ | 211,839 |
|
Cash and cash equivalents of Launch Equity | — |
| | 30,263 |
| | — |
| | 30,263 |
| | — |
| | 19,156 |
| | — |
| | 19,156 |
|
Accounts receivable | 62,219 |
| | — |
| | — |
| | 62,219 |
| | 64,110 |
| | — |
| | — |
| | 64,110 |
|
Accounts receivable of Launch Equity | — |
| | — |
| | — |
| | — |
| | — |
| | 7,428 |
| | — |
| | 7,428 |
|
Investment securities of Launch Equity | 1 |
| | 60,528 |
| | (1 | ) | | 60,528 |
| | 1 |
| | 63,364 |
| | (1 | ) | | 63,364 |
|
Other assets | 515,747 |
| | — |
| | — |
| | 515,747 |
| | 215,501 |
| | — |
| | — |
| | 215,501 |
|
Total assets | $ | 786,338 |
| | $ | 90,791 |
| | $ | (1 | ) | | $ | 877,128 |
| | $ | 491,451 |
| | $ | 89,948 |
| | $ | (1 | ) | | $ | 581,398 |
|
| | | | | | | | | | | | | | | |
Accounts payable of Launch Equity | $ | — |
| | $ | 869 |
| | $ | — |
| | $ | 869 |
| | $ | — |
| | $ | 7,485 |
| | $ | — |
| | $ | 7,485 |
|
Securities sold, not yet purchased of Launch Equity | — |
| | 38,222 |
| | — |
| | 38,222 |
| | — |
| | 31,990 |
| | — |
| | 31,990 |
|
Other liabilities | 718,459 |
| | — |
| | — |
| | 718,459 |
| | 409,612 |
| | — |
| | — |
| | 409,612 |
|
Total liabilities | 718,459 |
| | 39,091 |
| | — |
| | 757,550 |
| | 409,612 |
| | 39,475 |
| | — |
| | 449,087 |
|
Total stockholders’ equity | 55,616 |
| | — |
| | — |
| | 55,616 |
| | 43,779 |
| | — |
| | — |
| | 43,779 |
|
Noncontrolling interest - Artisan Partners Holdings | 12,263 |
| | 1 |
| | (1 | ) | | 12,263 |
| | 38,060 |
| | 1 |
| | (1 | ) | | 38,060 |
|
Noncontrolling interest - Launch Equity | — |
| | 51,699 |
| | — |
| | 51,699 |
| | — |
| | 50,472 |
| | — |
| | 50,472 |
|
Total equity | 67,879 |
| | 51,700 |
| | (1 | ) | | 119,578 |
| | 81,839 |
| | 50,473 |
| | (1 | ) | | 132,311 |
|
Total liabilities and equity | $ | 786,338 |
| | $ | 90,791 |
| | $ | (1 | ) | | $ | 877,128 |
| | $ | 491,451 |
| | $ | 89,948 |
| | $ | (1 | ) | | $ | 581,398 |
|
Condensed Consolidating Statements of Operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2014 | | March 31, 2013 |
| Before Consolidation | | Launch Equity | | Eliminations | | As Reported | | Before Consolidation | | Launch Equity | | Eliminations | | As Reported |
Total revenues | $ | 201,917 |
| | $ | — |
| | $ | (125 | ) | | $ | 201,792 |
| | $ | 148,327 |
| | $ | — |
| | $ | (104 | ) | | $ | 148,223 |
|
Total operating expenses | 134,765 |
| | — |
| | (125 | ) | | 134,640 |
| | 569,641 |
| | — |
| | (104 | ) | | 569,537 |
|
Operating income (loss) | 67,152 |
| | — |
| | — |
| | 67,152 |
| | (421,314 | ) | | — |
| | — |
| | (421,314 | ) |
Non-operating income (loss) | (3,159 | ) | | — |
| | — |
| | (3,159 | ) | | 21,590 |
| | — |
| | — |
| | 21,590 |
|
Net gain (loss) of Launch Equity | — |
| | (598 | ) | | — |
| | (598 | ) | | — |
| | 4,779 |
| | — |
| | 4,779 |
|
Total non-operating income (loss) | (3,159 | ) | | (598 | ) | | — |
| | (3,757 | ) | | 21,590 |
| | 4,779 |
| | — |
| | 26,369 |
|
Income (loss) before income taxes | 63,993 |
| | (598 | ) | | — |
| | 63,395 |
| | (399,724 | ) | | 4,779 |
| | — |
| | (394,945 | ) |
Provision for income taxes | 11,208 |
| | — |
| | — |
| | 11,208 |
| | 4,449 |
| | — |
| | — |
| | 4,449 |
|
Net income (loss) | 52,785 |
| | (598 | ) | | — |
| | 52,187 |
| | (404,173 | ) |
| 4,779 |
| | — |
| | (399,394 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 44,149 |
| | — |
| | — |
| | 44,149 |
| | (407,123 | ) | | — |
| | — |
| | (407,123 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Launch Equity | — |
| | (598 | ) | | — |
| | (598 | ) | | — |
| | 4,779 |
| | — |
| | 4,779 |
|
Net income attributable to Artisan Partners Asset Management Inc. | $ | 8,636 |
| | $ | — |
| | $ | — |
| | $ | 8,636 |
| | $ | 2,950 |
| | $ | — |
| | $ | — |
| | $ | 2,950 |
|
The carrying value of Launch Equity’s consolidated investments is also their fair value. Short and long positions on investment securities are valued based upon closing market prices of the security on the principal exchange on which they are traded. Investments in investment companies are valued at their respective net asset values on the valuation date. Short-term investments, other than repurchase agreements, maturing within sixty days from the valuation date are valued at amortized cost, which approximates market value. The following table presents the fair value hierarchy levels of investments and liabilities held by Launch Equity which are measured at fair value as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value: |
| Total | | Level 1 | | Level 2 | | Level 3 |
March 31, 2014 | | | | | | | |
Assets | | | | | | | |
Investment securities – long position | $ | 60,528 |
| | $ | 60,528 |
| | $ | — |
| | $ | — |
|
Liabilities | | | | | | | |
Investment securities – short position | $ | 38,222 |
| | $ | 38,222 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
December 31, 2013 | | | | | | | |
Assets | | | | | | | |
Investment securities – long position | $ | 63,364 |
| | $ | 63,364 |
| | $ | — |
| | $ | — |
|
Liabilities | | | | | | | |
Investment securities – short position | $ | 31,990 |
| | $ | 31,990 |
| | $ | — |
| | $ | — |
|
Note 9. Stockholders' Equity
APAM - Stockholders’ Equity
As of March 31, 2014 and December 31, 2013, APAM had the following authorized and outstanding equity:
|
| | | | | | | | | | | | |
| | | Outstanding | | | | |
| Authorized | | March 31, 2014 | | December 31, 2013 | | Voting Rights (1) | | Economic Rights (2) |
Common shares | | | | | | | | | |
Class A, par value $0.01 per share | 500,000,000 |
| | 29,133,585 |
| | 19,807,436 |
| | 1 vote per share | | Proportionate |
Class B, par value $0.01 per share | 200,000,000 |
| | 21,566,436 |
| | 25,271,889 |
| | 5 votes per share | | None |
Class C, par value $0.01 per share | 400,000,000 |
| | 20,370,787 |
| | 25,206,554 |
| | 1 vote per share | | None |
| | | | | | | | | |
Preferred shares | | | | | | | | | |
Convertible preferred, par value $0.01 per share | 15,000,000 |
| | 455,011 |
| | 1,198,128 |
| | 1 vote per share | | Proportionate |
(1) Each of the Company’s employees to whom Artisan has granted equity have entered into a stockholders agreement with respect to all shares of APAM common stock they have acquired from the Company and any shares they may acquire from the Company in the future, pursuant to which they granted an irrevocable voting proxy to a Stockholders Committee. As of March 31, 2014, Artisan’s employees held 1,616,969 shares of Class A common stock subject to the agreement and all 21,566,436 outstanding shares of Class B common stock. |
(2) The holders of preferred units of Holdings are entitled to preferential distributions in the case of a partial capital event or upon dissolution of Holdings. In the case of any distributions on the preferred units, prior to paying any dividends on the Class A common stock, APAM must pay the holders of convertible preferred stock a dividend equal to the distribution APAM received in respect of the preferred units it holds, net of taxes, if any. |
APAM is dependent on cash generated by Holdings to fund any dividends. Generally, Holdings will make distributions to all of its partners, including APAM, based on the proportionate ownership each holds in Holdings. APAM will fund dividends to its stockholders from its proportionate share of those distributions after provision for its taxes and other obligations. During the three months ended March 31, 2014, APAM paid a dividend of $2.18 per share of outstanding Class A common stock and $3.00 per share of outstanding convertible preferred stock.
Class A Common Stock
During the three months ended March 31, 2014, APAM issued 9,326,149 shares of Class A common stock, in connection with the 2014 Follow-on Offering and restricted share awards granted during the quarter. APAM also granted a total of 6,970 restricted stock units with respect to Class A common stock to non-employee directors.
Each Class A, Class B, Class D and Class E unit of Holdings (together with the corresponding share of Class B or Class C common stock) is exchangeable for one share of Class A common stock. The preferred units of Holdings (together with the corresponding shares of Class C common stock) are also exchangeable for Class A common stock generally on a one-for-one basis, though in certain circumstances on a less than a one-for-one basis. APAM’s convertible preferred stock is convertible into Class A common stock generally on a one-for-one basis, though in certain circumstances on a less than one-for-one basis. During the three months ended March 31, 2014, there were no exchanges of units or conversions of convertible preferred stock.
Class B Common Stock
In 2013, APAM issued shares of Class B common stock to employee-partners in amounts equal to the number of Class B common units those individuals held in Holdings. Upon termination of employment with Artisan, an employee-partner’s vested Class B common units are automatically exchanged for Class E common units; unvested Class B common units are forfeited. The employee-partner’s shares of Class B common stock are canceled and APAM issues the former employee-partner a number of shares of Class C common stock equal to the former employee-partner’s number of Class E common units. The former employee-partner’s Class E common units are exchangeable for Class A common stock subject to the same restrictions and limitations on exchange applicable to the other common units of Holdings. As part of the 2014 Follow-on Offering, APAM canceled 3,705,453 shares of Class B common stock corresponding to the Class B common units APAM purchased.
Class C Common Stock
In 2013, APAM issued shares of Class C common stock to certain investors in Holdings in amounts equal to the number of units the investors held in Holdings. As part of the 2014 Follow-on Offering, APAM canceled 4,835,767 shares of Class C common stock corresponding to the Class A, D, and E common units and the preferred units APAM purchased.
Convertible Preferred Stock
APAM issued shares of convertible preferred stock in 2013. When the holders of APAM convertible preferred stock are no longer entitled to preferential distributions, all shares of convertible preferred stock will automatically convert into shares of Class A common stock at the conversion rate plus cash in lieu of fractional shares. As part of the March 2014 Follow-on Offering, APAM purchased 743,117 shares of convertible preferred stock and immediately canceled the shares.
Artisan Partners Holdings - Partners’ Equity
Prior to the IPO Reorganization, Holdings was a private company. Holdings has several outstanding classes of partnership units held by investors.
Holdings makes distributions of its net income to the holders of its partnership units for income taxes as required under the terms of the partnership agreement and also makes additional distributions of its net income under the terms of the partnership agreement. The distributions are recorded in the financial statements on the declaration date, or on the payment date in lieu of a declaration date.
Holdings’ partnership distributions totaled $131.6 million and $166.2 million for the three months ended March 31, 2014 and 2013, respectively. The portion of these distributions made prior to the IPO to the holders of Class B common units (which were classified as liability awards prior to the IPO) are reflected as compensation and benefits expense within the Consolidated Statements of Operations and totaled $65.7 million for the three months ended March 31, 2013. The portion of these distributions made prior to the IPO to the other partners of Holdings and, after the IPO, to all partners are recorded to total stockholders’ equity, with the exception of the portion of distributions made to APAM, the general partner of Holdings. Holdings distributions to APAM totaled $38.6 million for the three months ended March 31, 2014.
Note 10. Compensation and Benefits |
| | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2014 | | 2013 |
Salaries, incentive compensation and benefits (1) | | $ | 81,597 |
|
| $ | 72,680 |
|
Restricted share compensation expense | | 4,258 |
|
| — |
|
Total salaries, incentive compensation and benefits | | 85,855 |
| | 72,680 |
|
Pre-offering related compensation - share-based awards | | 23,637 |
| | 333,231 |
|
Pre-offering related compensation - other | | — |
| | 143,035 |
|
Total compensation and benefits | | $ | 109,492 |
| | $ | 548,946 |
|
(1) Excluding restricted share compensation expense |
Incentive compensation
Cash incentive compensation paid to members of Artisan’s portfolio management teams and members of its marketing and client service teams is based on a formula that is tied directly to revenues. These payments are made in the quarter following the quarter in which the incentive was earned with the exception of fourth quarter payments which are paid in the fourth quarter of the year. Cash incentive compensation paid to most other employees is discretionary and subjectively determined based on individual performance and Artisan’s overall results during the applicable year and has historically been paid in the fourth quarter of the year.
Restricted shares
Pursuant to the 2013 Omnibus Incentive Compensation Plan, Artisan has issued restricted shares of Class A common stock to its employees and employees of its subsidiaries. The shares vest on a pro rata basis over five years. Unvested shares are subject to forfeiture upon termination of employment. Grantees receiving the awards are entitled to dividends on unvested and vested shares.
Compensation expense related to the restricted shares is recognized based on the estimated grant date fair value, for only those awards expected to vest, on a straight-line basis over the requisite service period of the award. The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover. Forfeitures are estimated at the time of grant and revised in subsequent periods, if necessary, based on actual forfeiture activity.
The following table summarizes the restricted share activity for the three months ended March 31, 2014:
|
| | | | | | | |
| | Weighted-Average Grant Date Fair Value | | Number of Awards |
Unvested at December 31, 2013 | | $ | 52.36 |
| | 1,575,157 |
|
Granted | | $ | 71.59 |
| | 41,812 |
|
Forfeited | | — |
| | — |
|
Vested | | — |
| | — |
|
Unvested at March 31, 2014 | | $ | 52.85 |
| | 1,616,969 |
|
Compensation expense recognized related to the restricted shares was $4.3 million for the three months ended March 31, 2014. The unrecognized compensation expense for the unvested restricted shares as of March 31, 2014 was $70.5 million with a weighted average recognition period of 4.4 years remaining.
Pre-offering related compensation consists of the following: |
| | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2014 | | 2013 |
Change in value of Class B liability awards | | $ | — |
| | $ | 41,942 |
|
Class B award modification expense | | — |
| | 287,292 |
|
Amortization expense on pre-offering Class B awards | | 23,637 |
| | 3,997 |
|
Pre-offering related compensation - share-based awards | | 23,637 |
| | 333,231 |
|
| | | | |
Pre-offering related cash incentive compensation | | — |
| | 56,788 |
|
Pre-offering related bonus make-whole compensation | | — |
| | 20,520 |
|
Distributions on Class B liability awards | | — |
| | 65,727 |
|
Pre-offering related compensation - other | | — |
| | 143,035 |
|
Total pre-offering related compensation | | $ | 23,637 |
| | $ | 476,266 |
|
Pre-offering related compensation - share-based awards
Historical Class B share-based awards
Holdings historically granted Class B share-based awards to certain employees. These awards vested over a period of five years. Prior to the IPO, all vested Class B awards were subject to mandatory redemption on termination of employment for any reason and were reflected as liabilities measured at fair value; unvested Class B awards were forfeited on termination of employment. The vested Class B liability awards of a terminated employee were historically redeemed in cash in annual installments, generally over the five years following termination of employment. The change in value of Class B liability awards and distributions to Class B limited partners were treated as compensation expense.
Historical redemption of Class B awards
Holdings historically redeemed the Class B awards of partners whose employment was terminated. The redemption value of the awards was determined in accordance with the terms of the grant agreement pursuant to which the award was granted. The Class B awards of partners whose services to Holdings terminated prior to the IPO will be redeemed for payments totaling $19.6 million and $23.0 million as of March 31, 2014 and December 31, 2013, respectively. Payments of $3.4 million were made for the three months ended March 31, 2014.
Modification of Class B share-based awards
As a part of the IPO Reorganization, the Class B grant agreements were amended to eliminate the cash redemption feature. The amendment is considered a modification under ASC 718 and the Class B awards have been classified as equity awards since such modification. As a result of the modification, Artisan recognized a non-recurring expense of $287.3 million based on the elimination of the redemption feature associated with the Class B awards recorded as the difference between the fair value and carrying value of the liability associated with the vested Class B common units immediately prior to the IPO. For any unvested Class B awards, Artisan will recognize recurring non-cash compensation charges over the remaining vesting period.
The following table summarizes the activity related to unvested Class B awards for the three months ended March 31, 2014:
|
| | | | | | |
| Weighted-Average Grant Date Fair Value | | Number of Class B Awards |
Unvested Class B awards at January 1, 2014 | $ | 30.00 |
| | 7,249,842 |
|
Granted | — |
| | — |
|
Forfeited | — |
| | — |
|
Vested | $ | 30.00 |
| | (666,878 | ) |
Unvested at March 31, 2014 | $ | 30.00 |
| | 6,582,964 |
|
The unrecognized compensation expense for the unvested Class B awards as of March 31, 2014 was $128.2 million with a weighted average recognition period of 2.8 years remaining.
Upon termination of employment with Artisan, an employee-partner’s vested Class B common units are automatically exchanged for Class E common units; unvested Class B common units are forfeited. The employee-partner’s shares of Class B common stock are canceled and APAM issues the former employee-partner a number of shares of Class C common stock equal to the former employee-partner’s number of Class E common units. The former employee-partner’s Class E common units are exchangeable for Class A common stock subject to the same restrictions and limitations on exchange applicable to the other common units of Holdings.
Pre-offering related compensation - other
During the three months ended March 31, 2013, Artisan also incurred pre-offering related compensation charges of $56.8 million to pay cash incentive compensation to certain portfolio managers and $20.5 million representing profits after the IPO otherwise allocable and distributable, in the aggregate, to Holdings’ pre-IPO non-employee partners that instead was allocated and distributed to certain employee-partners. For the period between January 1, 2013 and the IPO, profits distributions totaling $65.7 million were made to Class B partners.
Note 11. Income Taxes and Related Payments
APAM is subject to U.S. federal and state income taxation on APAM’s allocable portion of the income of Holdings. APAM’s effective income tax rate was lower than the U.S. Federal statutory rate of 35% primarily due to a rate benefit attributable to the fact that approximately 62% of Holdings’ earnings are not subject to corporate level taxes. This favorable impact is partially offset by the impact of certain permanent items, primarily attributable to certain compensation related expenses that are not deductible for tax purposes. Prior to the IPO Reorganization, none of Holdings’ earnings were subject to U.S. corporate-level taxes.
In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). Under the first TRA, APAM generally is required to pay to a private equity fund controlled by Hellman & Friedman LLC 85% of the applicable cash savings, if any, in U.S. federal and state income tax that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger of a wholly-owned subsidiary of the private equity fund into APAM in March 2013 (the “H&F Corp Merger”), (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.
Under the second TRA, APAM generally is required to pay to the holders of limited partnership units of Holdings 85% of the applicable cash savings, if any, in U.S. federal and state income tax that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their units sold to APAM or exchanged (for shares of Class A common stock or convertible preferred stock) and that are created as a result of the sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.
For purposes of the TRAs, cash savings in tax are calculated by comparing APAM’s actual income tax liability to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the TRAs, unless certain assumptions apply. The TRAs will continue in effect until all such tax benefits have been utilized or expired, unless APAM exercises its right to terminate the agreements or payments under the agreements are accelerated in the event that APAM materially breaches any of its material obligations under the agreements. The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of exchanges by the holders of limited partnership units, the price of the Class A common stock or the value of the convertible preferred stock, as the case may be, at the time of the exchange, whether such exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM’s payments under the TRAs constituting imputed interest.
Payments under the TRAs, if any, will be made pro rata among all TRA counterparties entitled to payments on an annual basis to the extent APAM has sufficient taxable income to utilize the increased depreciation and amortization charges. Artisan expects to make payments under the TRAs, to the extent they are required, within 125 days after APAM’s federal income tax return is filed for each fiscal year. Interest on such payments will begin to accrue at a rate equal to one-year LIBOR plus 100 basis points from the due date (without extension) of such tax return.
The 2014 Follow-on Offering resulted in an increase to deferred tax assets and amounts payable under the TRA of $287.4 million and $244.3 million, respectively. As of March 31, 2014, the deferred tax asset and amounts payable related to the TRA were $468.4 million and $405.2 million. respectively. No amounts were paid under the TRAs during the three months ended March 31, 2014.
Components of the provision for income taxes consist of the following: |
| | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2014 | | 2013 |
Current: | | | | |
Federal | | $ | 7,610 |
| | $ | 1,177 |
|
State and local | | 981 |
| | 544 |
|
Foreign | | 77 |
| | 82 |
|
Total | | 8,668 |
| | 1,803 |
|
Deferred: | | | | |
Federal | | 2,776 |
| | 2,588 |
|
State and local | | (236 | ) | | 58 |
|
Total | | 2,540 |
| | 2,646 |
|
Income tax expense | | $ | 11,208 |
| | $ | 4,449 |
|
Net deferred tax assets comprise the following:
|
| | | | | | | |
| As of March 31, 2014 | | As of December 31, 2013 |
Deferred tax assets: | | | |
Amortizable basis (1) | $ | 468,440 |
| | $ | 183,858 |
|
Other (2) | 6,349 |
| | 4,049 |
|
Total deferred tax assets | 474,789 |
| | 187,907 |
|
Less: valuation allowance (3) | — |
| | — |
|
Net deferred tax assets | $ | 474,789 |
| | $ | 187,907 |
|
(1) Represents the unamortized step-up of tax basis from the H&F Corp Merger and the purchase of common and preferred units by APAM. |
(2) Represents the net deferred tax assets associated with the H&F Corp Merger and other miscellaneous deferred tax assets. |
(3) Artisan assessed whether the deferred tax assets would be realizable and determined based on its history of taxable income that the benefits would more likely than not be realized. Accordingly, no valuation allowance is required. |
Accounting standards establish a minimum threshold for recognizing, and a system for measuring, the benefits of income tax return positions in financial statements. There were no uncertain tax positions recorded as of March 31, 2014 and December 31, 2013.
In the normal course of business, Artisan is subject to examination by federal and certain state, local and foreign tax regulators. As of March 31, 2014, U.S. federal income tax returns for the years 2010 through 2013 are open and therefore subject to examination. State and local tax returns are generally subject to audit from 2009 to 2013. Foreign tax returns are generally subject to audit from 2010 to 2013.
Note 12. Accumulated Other Comprehensive Income (loss)
Accumulated other comprehensive income (loss), net of tax, in the accompanying Condensed Consolidated Statements of Financial Condition represents the portion of accumulated other comprehensive income attributable to APAM, and consists of the
following:
|
| | | | | | | |
| As of March 31, 2014 | | As of December 31, 2013 |
Unrealized gain on investments | $ | 455 |
| | $ | 303 |
|
Foreign currency translation | 127 |
| | 75 |
|
Accumulated Other Comprehensive Income (Loss) | $ | 582 |
| | $ | 378 |
|
Comprehensive income (loss) attributable to noncontrolling interests - Artisan Partners Holdings in the Consolidated Statements of Comprehensive Income (Loss) represents the portion of comprehensive income (loss) attributable to the economic interests in Holdings held by the limited partners of Holdings. For periods prior to the IPO, all comprehensive income (loss) is entirely attributable to noncontrolling interests.
Note 13. Earnings Per Share
Basic earnings per share is computed by dividing income available to Class A common stockholders by the weighted average number of Class A common shares outstanding during the period. Unvested restricted shares are excluded from the number of Class A common shares outstanding for the basic earnings per share calculation because the shares have not yet been earned by the employees. Income available to Class A common stockholders is computed by reducing net income attributable to APAM by dividends declared or paid to convertible preferred stockholders during the period and earnings (distributed and undistributed) allocated to participating securities, according to their respective rights to participate in those earnings. All income for the period prior to the IPO was entirely allocable to noncontrolling interest. As a result, only net income allocable to APAM from the period subsequent to the IPO is included in net income (loss) available to Class A common stockholders for the period ended March 31, 2013.
As described in Note 1, “Organization and nature of business” the consideration Artisan paid to purchase shares of its convertible preferred stock in connection with the 2014 Follow-on Offering exceeded the carrying amount of the shares of convertible preferred stock on Artisan’s consolidated balance sheet by $22.7 million, which is subtracted from net income as a deemed dividend to arrive at income available to common stockholders in the earnings per share calculation. The purchase of subsidiary preferred equity in connection with the 2014 Follow-on Offering resulted in a similar deemed dividend, which reduced net income available to common stockholders by an additional $25.2 million in the calculation of earnings per share.
Diluted earnings per share is computed by increasing the denominator by the amount of additional Class A common shares that would have been outstanding if all potential Class A common shares had been issued. Potential dilutive Class A common shares consist of (1) the Class A common shares issuable upon exchange of Holdings’ limited partnership units (together with the corresponding shares of APAM Class B or C common stock) for APAM Class A common stock, (2) the Class A common shares issuable upon conversion of APAM convertible preferred stock into APAM Class A common stock and (3) unvested restricted shares of Class A common stock.
At March 31, 2014 and 2013, there were 41,937,223 and 54,713,763, respectively, limited partnership units of Holdings outstanding exchangeable, as of March 12, 2014, for up to 41,937,223 and 54,713,763 shares, respectively, of APAM’s Class A common stock. Such units/shares were not included in the calculation of diluted net income (loss) per common share because the effect would have been anti-dilutive. For the three months ended March 31, 2014, a net loss was allocable to common stockholders. As a result, 1,616,969 shares of unvested restricted stock and 455,011 shares of convertible preferred stock and the net income allocated to those shares were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
At March 31, 2013, 2,565,463 shares of APAM convertible preferred stock were determined to be dilutive and are included in the diluted earnings per share calculation. The dilutive effect of outstanding convertible preferred stock is reflected in diluted earnings per share by application of the if-converted method.
The computation of weighted average common shares outstanding considers the outstanding shares of Class A common stock from January 1, 2014 through March 31, 2014 and March 12, 2013 through March 31, 2013, for the respective periods. The Class B and Class C common shares do not share in profits of APAM and therefore are not reflected.
The computation of basic and diluted earnings per share for the periods ended March 31, 2014 and 2013 were as follows:
|
| | | | | | | |
Basic and Diluted Earnings Per Share | For the Three Months Ended March 31, 2014 | | For the Period from March 12, 2013 to March 31, 2013 |
Numerator: | | | |
Net income (loss) allocable to APAM | $ | 8,636 |
| | $ | 2,950 |
|
Less: Convertible preferred stock deemed dividends | (22,694 | ) | | — |
|
Less: Subsidiary preferred equity deemed dividends | (25,155 | ) | | — |
|
Less: Allocation to participating securities | (6,980 | ) | | (495 | ) |
Net income (loss) allocable to common stockholders | $ | (46,193 | ) | | $ | 2,455 |
|
Denominator: | | | |
Weighted average shares outstanding - basic | 20,214,242 |
| | 12,728,949 |
|
Effect of dilutive securities | — |
| | 2,565,463 |
|
Weighted average shares outstanding - diluted | 20,214,242 |
| | 15,294,412 |
|
Earnings (loss) per share - basic and diluted | $ | (2.29 | ) | | $ | 0.19 |
|
Note 14. Indemnifications
In the normal course of business, APAM enters into agreements that include indemnities in favor of third parties. Holdings has also agreed to indemnify APAM as its general partner, Artisan Investment Corporation (“AIC”) as its former general partner, the directors and officers of APAM, the directors and officers of AIC as its former general partner, the members of its former Advisory Committee, and its partners, directors, officers, employees and agents. Holdings’ subsidiaries may also have similar agreements to indemnify their respective general partner(s), directors, officers, directors and officers of their general partner(s), partners, members, employees, and agents. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against us that have not yet occurred. APAM maintains insurance policies that may provide coverage against certain claims under these indemnities.
Note 15. Related Party Transactions
Artisan engages in transactions with its affiliates in the ordinary course of business.
Affiliate transactions—Artisan Funds
Artisan has agreements to serve as the investment manager of Artisan Funds, with which certain of Artisan employees are affiliated. Under the terms of these agreements, which are generally reviewed and continued by the board of directors of Artisan Funds annually, a fee is paid to Artisan based on an annual percentage of the average daily net assets of each Artisan Fund ranging from 0.63% to 1.25%. Artisan generally collects revenues related to these services on the last business day of each month and records them in Management fees in the Consolidated Statement of Operations. Artisan has contractually agreed to waive its management fees or reimburse for expenses incurred to the extent necessary to limit annualized ordinary operating expenses incurred by certain of the Artisan Funds to not more than 1.50% of average daily net assets, and 1.25% of the fund’s average daily net assets for the Artisan Partners High Income Fund. In addition, Artisan may voluntarily waive fees or reimburse any of the Artisan Funds for other expenses. The officers and a director of Artisan Funds who are affiliated with Artisan receive no compensation from the funds. At March 31, 2014 and December 31, 2013, accounts receivable included $3 thousand and $9 thousand due from the Funds, respectively.
Fees for managing the Funds and amounts waived or reimbursed by Artisan for fees and expenses (including management fees) are as follows:
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
Investment management fees: | | | |
Artisan Funds | $ | 136,586 |
| | $ | 98,080 |
|
Fee waiver / expense reimbursement: | | | |
Artisan Funds | $ | 60 |
| | $ | 121 |
|
Affiliate transactions—Artisan Global Funds
Artisan has agreements to serve as the investment manager and promoter of Artisan Global Funds, with which certain of Artisan employees are affiliated. Under the terms of these agreements, a fee is paid based on an annual percentage of the average daily net assets of each fund ranging from 0.75% to 1.80%. Artisan reimburses each sub-fund of Artisan Global Funds to the extent that sub-fund’s expenses, not including Artisan’s fee, exceed certain levels, which range from 0.10% to 0.20%. At March 31, 2014 and December 31, 2013, respectively, accounts receivable included $1.2 million and $2.2 million due from Artisan Global Funds.
Fees for managing Artisan Global Funds and amounts reimbursed to Artisan Global Funds by Artisan are as follows:
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
Investment management fees: | | | |
Artisan Global Funds | $ | 3,239 |
| | $ | 1,439 |
|
Fee waiver / expense reimbursement: | | | |
Artisan Global Funds | $ | 82 |
| | $ | 126 |
|
Affiliate transactions—Launch Equity
Artisan has an agreement to serve as the investment manager of Launch Equity. Under the terms of Artisan’s agreement with Launch Equity, Artisan earns a quarterly fee based on the value of the closing capital account of each limited partner for the quarter, at the rate of 1.00% (annualized). At Artisan’s discretion, the fee may be waived and certain expenses reimbursed to the extent they exceed a certain level. Artisan expects to waive 100% of the quarterly fee and reimburse Launch Equity for all operating expenses, and Artisan may waive other expenses as well. Artisan is also entitled to receive an allocation of profits equal to 20% of Launch Equity’s net capital appreciation as determined at the conclusion of its fiscal year. That amount, which Artisan also expects to waive, is calculated at the end of the Launch Equity’s fiscal year. Artisan waived its incentive allocation for the year ended December 31, 2013. Expense reimbursements totaled $38 thousand and $40 thousand for the three months ended March 31, 2014 and 2013, respectively.
Affiliate transactions—AIC
Artisan had and has cost sharing arrangements with entities controlled by Andrew A. Ziegler (APAM’s Chairman of the Board and former Artisan employee) and Carlene M. Ziegler (also a former Artisan employee), pursuant to which the Ziegler entities currently reimburse Artisan for the costs associated with three employees using Artisan’s office space while they transition to new facilities, which is expected to occur by the end of June 2014. In addition, Artisan has obtained and paid for insurance policies covering potential liability AIC may incur as the prior general partner of Holdings. At March 31, 2014 and December 31, 2013, accounts receivable included $139 thousand and $243 thousand due from Ziegler entities, respectively.
Note 16. Subsequent Events
Distributions and dividends
On April 10, 2014, Artisan Partners Holdings paid an aggregate tax distribution of $48.9 million to partnership unit holders, including APAM. On April 22, 2014, the board of directors of APAM declared a distribution by Artisan Partners Holdings of $30.6 million to holders of Artisan Partners Holdings partnership units, including APAM. On the same date, the board declared a quarterly dividend of $0.55 per share of APAM’s Class A common stock and a dividend of $0.81 per share of APAM’s convertible preferred stock. The APAM dividends are payable on May 30, 2014, to shareholders of record as of May 16, 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. Our operations are conducted through Artisan Partners Holdings and its subsidiaries. We derive essentially all of our revenues from investment management fees. Nearly all our fees are based on a specified percentage of clients’ average assets under our management. We operate our business in a single segment.
We have six autonomous investment teams that oversee fourteen distinct U.S., non-U.S. and global investment strategies. Strategies are offered through multiple investment vehicles to accommodate a broad range of client mandates. During the March quarter of 2014 we launched our fourteenth investment strategy, the Artisan Partners High Income strategy, which is managed by our Credit team.
As of March 31, 2014, our assets under management (“AUM”) were $107.4 billion. During the three months ended March 31, 2014 we generated $201.8 million in revenues on $106.2 billion in average AUM. A combination of net client cash inflows of $1.4 billion and market appreciation of $648 million contributed to our growth in AUM and revenues for the three months ended March 31, 2014. For the three months ended March 31, 2014 we had positive net client cash flows in 10 of our 14 strategies and in four out of five distribution channels, sourced from clients located in the U.S. and abroad. As of March 31, 2014 and 2013, 11% of our AUM was sourced from non-U.S. clients.
We post updated information about our assets under management under the Financial Information section of our Investor Relations website (www.apam.com) after the conclusion of the seventh NYSE trading day of each month.
As of March 31, 2014 we had approximately 320 employees.
Factors Impacting our Results of Operations
Economic Environment
Global equity market conditions can materially affect our financial performance. Global equity markets were generally positive for the three months ended March 31, 2014 and 2013, as reflected by the total returns of the S&P 500, MSCI All Country World and MSCI EAFE indices:
|
| | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
S&P 500 total returns | 1.8 | % | | 10.6 | % |
MSCI All Country World total returns | 1.1 | % | | 6.5 | % |
MSCI EAFE total returns | 0.7 | % | | 5.1 | % |
Organizational Structure
On March 12, 2013, APAM and the intermediary holding company through which APAM conducts its operations, Artisan Partners Holdings, completed a series of transactions (the “IPO Reorganization”) to reorganize their capital structures in connection with the initial public offering (“IPO”) of APAM’s Class A common stock. The IPO Reorganization and IPO were completed on March 12, 2013. The IPO Reorganization was designed to create a capital structure that preserves our ability to conduct our business through Holdings, while permitting us to raise additional capital and provide access to liquidity through a public company. The IPO Reorganization is described in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 26, 2014.
The historical results of operations discussed below are the combined results of APAM and Holdings. Because APAM and Holdings were under common control at the time of the IPO Reorganization, APAM’s acquisition of control of Holdings was accounted for as a transaction among entities under common control. APAM has been allocated a part of Holdings’ net income since March 12, 2013, when it became Holdings’ general partner. Our employees and other investors held approximately 59% of the equity interests in Holdings as of March 31, 2014. Our post-IPO results reflect that significant noncontrolling interest. As of March 31, 2014, our net income represented approximately 41% of Holdings’ net income.
On March 12, 2014, we completed an offering of 9,284,337 shares of Class A common stock and utilized all of the net proceeds to purchase an aggregate of 6,284,337 common units and 2,256,883 preferred units of Holdings from certain of the limited partners of Holdings and 743,117 shares of APAM convertible preferred stock from a private equity fund controlled by Hellman & Friedman LLC. In connection with the offering, APAM received 9,284,337 general partnership units of Holdings, and APAM’s ownership interest in Holdings increased from 29% to 41%.
Changes Related to Class B Common Units of Artisan Partners Holdings
A significant portion of our historical compensation and benefits expense related to Holdings’ Class B limited partnership interests. Prior to the IPO Reorganization, Class B limited partnership interests were granted to certain employees. The Class B limited partnership interests provided both an interest in future profits of Holdings as well as an interest in the overall value of Holdings. Class B limited partnership interests generally vested ratably over a five-year period from the date of grant. Holders of Class B limited partnership interests were entitled to fully participate in profits from and after the date of grant. The distribution of profits associated with these limited partnership interests was recorded as compensation and benefits expense.
Prior to the IPO Reorganization, all vested Class B limited partnership interests were subject to mandatory redemption on termination of employment for any reason, with payment in cash typically in annual installments over the five years following termination of employment. Unvested Class B limited partnership interests were forfeited on termination of employment. Due to the redemption feature, the Class B grants were considered liability awards. Compensation cost was measured at the grant date based on the fair value of the limited partnership interests granted, and was re-measured each period. Changes in the fair value that occurred after the end of the vesting period were recorded as compensation cost of the period in which the changes occurred through settlement of the limited partnership interests.
As part of the IPO Reorganization, the grant agreements pursuant to which the Class B interests were granted were amended to eliminate the cash redemption feature. As a result, liability award accounting no longer applied and the costs associated with distributions to our Class B partners and changes in the value of Class B liability awards were no longer recognized as compensation expense. However, we continue to record compensation expense for Class B common units that were unvested at the time of the IPO Reorganization over their remaining vesting period, based on the fair value of the awards upon modification. As a result of the IPO Reorganization, we recognized a non-recurring compensation expense based on the difference between the carrying value of the liability associated with the vested Class B common units immediately prior to the IPO Reorganization and the value based on the offering price per share of Class A common stock ($30.00 per share). The amount of this non-recurring charge was $287.3 million. In the March quarter of 2013, we also recognized $56.8 million of compensation expense relating to a cash incentive compensation payment we made to certain of our portfolio managers in connection with the IPO and $20.5 million of compensation expense associated with the reallocation of profits after the IPO which otherwise would have been allocable and distributable to Holdings’ pre-IPO non-employee partners but were instead allocated to certain of Artisan Partners Holdings’ employee-partners.
Issuance of CVRs
As part of the IPO Reorganization, Holdings issued Partnership CVRs and APAM issued APAM CVRs in order to provide holders of Holdings preferred units and APAM convertible preferred stock with economic rights following the reorganization and IPO similar (although not identical) to the economic rights they possessed with respect to Holdings prior to the reorganization and IPO. The CVRs were terminated in conjunction with our common stock offering that closed on November 6, 2013 with no amounts paid or payable by us. Prior to their termination, the CVRs were classified as liabilities and accounted for under ASC 815 as derivatives. For the three months ended March 31, 2013, a gain of $24.8 million was recorded in other non-operating income (loss) to reflect a decrease in the fair value of the CVR liability from March 12 to March 31, 2013.
Tax Impact of IPO Reorganization
Historically, our business was not subject to U.S. federal and certain state income taxes. However, APAM, which became the general partner of Holdings as part of the IPO Reorganization, is subject to U.S. federal and state income taxation on its allocable portion of the income of Holdings.
In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). Under the first TRA, APAM generally is required to pay to the holders of convertible preferred stock issued as consideration for the H&F Corp Merger (or Class A common stock issued upon conversion of that convertible preferred stock) 85% of the applicable cash savings, if any, in U.S. federal and state income tax that APAM actually realizes (or is deemed to realize in certain circumstance) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.
Under the second TRA, APAM generally is required to pay to the holders of limited partnership units of Holdings (or Class A common stock or convertible preferred stock issued upon exchange of limited partnership units) 85% of the amount of cash savings, if any, in U.S. federal and state income tax that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their units sold to APAM or exchanged (for shares of Class A common stock or convertible preferred stock) and that are created as a result of the sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.
As of March 31, 2014, deferred tax assets of $474.8 million and amounts payable under the TRAs of $405.2 million have been recorded in the Condensed Consolidated Statements of Financial Condition primarily as a result of the above items and other tax impacts of the IPO Reorganization. APAM’s purchase of Holdings’ common and preferred units with a portion of the 2014 Follow-on Offering proceeds resulted in an increase to deferred tax assets of approximately $287.4 million and an increase in amounts payable under tax receivable agreements of approximately $244.3 million.
Costs of Being a Public Company
Following the IPO, we have incurred, and expect to continue to incur, additional expenses as a result of becoming a public company, including expenses related to additional staffing, directors’ and officers’ liability insurance, directors fees, SEC reporting and compliance (including Sarbanes-Oxley compliance), transfer agent fees, professional fees and other similar expenses. These additional expenses have increased and will continue to increase our general and administrative expenses and reduce our net income. Further, we may incur significant legal, accounting and other fees and expenses associated with future offerings of Class A common stock. We incurred $1.1 million of expenditures in the March quarter of 2014 in connection with the 2014 Follow-on Offering. Those expenses were capitalized and reduced our equity.
Financial Overview
Key Performance Indicators
When we review our performance we consider, among other things, the following:
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| | | | | | | |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
| (unaudited; dollars in millions) |
Assets under management at period end | $ | 107,397 |
| | $ | 83,178 |
|
Average assets under management (1) | $ | 106,172 |
| | $ | 79,152 |
|
Net client cash flows | $ | 1,413 |
| | $ | 2,186 |
|
Total revenues | $ | 201.8 |
| | $ | 148.2 |
|
Weighted average fee (2) | 77 |
| | 76 |
|
Adjusted operating margin (3) | 45.1 | % | | 37.0 | % |
|
(1) We compute average assets under management by averaging day-end assets under management for the applicable period. |
(2) We compute our weighted average fee by dividing annualized investment management fees by average assets under management for the applicable period. |
(3) Adjusted measures are non-GAAP measures and are explained and reconciled to the comparable GAAP measures in “-Supplemental Non-GAAP Financial Information” below. |
Assets Under Management and Investment Performance
Changes to our operating results from one period to another are primarily caused by changes in the amount of our assets under management. Changes in the relative composition of our assets under management among our investment strategies and products and the effective fee rates on our products could also impact our operating results, and in some periods the impact could be material. However, for the three months ended March 31, 2014 and 2013, our operating results were primarily impacted by changes in the amount of our assets under management.
Our assets under management increase or decrease with the net inflows or outflows of client assets into our various investment strategies and with the investment performance of these strategies. The amount and composition of our assets under management are, and will continue to be, influenced by a variety of factors including, among others:
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• | investment performance, including fluctuations in both the financial markets and foreign currency exchange rates and the quality of our investment decisions; |
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• | flows of client assets into and out of our various strategies and investment vehicles; |
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• | our decision to close strategies or limit the growth of assets in a strategy when we believe it is in the best interest of our clients; |
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• | our ability to attract and retain qualified investment, management, and marketing and client service professionals; |
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• | competitive conditions in the investment management and broader financial services sectors; and |
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• | investor sentiment and confidence. |
The table below sets forth changes in our total AUM: |
| | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | Period-to-Period |
| 2014 | | 2013 | | $ | | % |
| (unaudited; in millions) | | | | |
Beginning assets under management | $ | 105,477 |
| | $ | 74,334 |
| | $ | 31,143 |
| | 41.9 | % |
Gross client cash inflows | 6,639 |
| | 6,324 |
| | 315 |
| | 5.0 | % |
Gross client cash outflows | (5,226 | ) | | (4,138 | ) | | (1,088 | ) | | (26.3 | )% |
Net client cash flows | 1,413 |
| | 2,186 |
| | (773 | ) | | (35.4 | )% |
Market appreciation (depreciation) | 648 |
| | 6,658 |
| | (6,010 | ) | | (90.3 | )% |
Net transfers (1) | $ | (141 | ) | | $ | — |
| | (141 | ) | | (100.0 | )% |
Ending assets under management | $ | 107,397 |
| | $ | 83,178 |
| | $ | 24,219 |
| | 29.1 | % |
Average assets under management | $ | 106,172 |
| | $ | 79,152 |
| | $ | 27,020 |
| | 34.1 | % |
(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle. The $141 million transferred out of one strategy in the first quarter was transferred back into another strategy in early April 2014. |
For the three months ended March 31, 2014, 10 of our 14 investment strategies experienced net client cash inflows, resulting in net client cash inflows of $1.4 billion for the period. Our Non-U.S. Growth strategy, managed by our Global Equity team, and our Global Value strategy, managed by our Global Value team, received the most net inflows during the quarter, gathering net inflows of $1.4 billion and $524 million, respectively. During the three months ended March 31, 2014, each of the three strategies managed by our U.S. Value team and our Emerging Markets strategy experienced net client cash outflows. Artisan Funds and Artisan Global Funds had $2.3 billion of net inflows primarily sourced through our broker-dealer and financial advisor channels.
Separate accounts net outflows of $911 million include the effect of a $722 million outflow resulting from a separate account client termination in March within our Value Equity strategy. The pension fund client communicated that the termination was a result of its decision to consolidate assets with a smaller number of managers and reduce its overall cost structure. The termination is evidence that our flows will be lumpy over time and also reflects our commitment to fee discipline which is one of the cornerstones of our financial model. Over the long-term our financial model has been critical to our ability to attract and retain investment talent, deliver strong financial results and produce a stable and diverse business able to weather all market environments.
Historically, we have observed that client activity tends to be higher in the first and fourth quarters of the calendar year, and lower in the second and third quarters. However, there can be no guarantee that past experience will be indicative of future activity.
We monitor the availability of attractive investment opportunities relative to the amount of assets we manage in each of our investment strategies. When appropriate, we will close a strategy to new investors or otherwise take action to slow or restrict its growth, even though our aggregate AUM may be negatively impacted in the short term. We may also re-open a strategy, widely or selectively, to fill available capacity or manage the diversification of our client base in that strategy. We believe that management of our investment capacity protects our ability to manage assets successfully, which protects the interests of our clients and, in the long term, protects our ability to retain client assets and maintain our profit margins.
As of the date of this filing, our Non-U.S. Small-Cap Growth, Non-U.S. Value, U.S. Mid-Cap Growth, U.S. Small-Cap Value, U.S. Mid-Cap Value, U.S. Small-Cap Growth and Global Value strategies are closed to most new investors and client relationships.
When we close a strategy, we typically continue to allow additional investments in the strategy by existing clients and certain related entities, which means that during a given period we could have net client cash inflows even in a closed strategy. However, when a strategy is closed or its growth is restricted we expect there to be periods of net client cash outflows.
On February 14, 2014, we closed our Global Value strategy, including Artisan Global Value Fund, to most new investors and client relationships. The Global Value strategy had net client cash inflows of $524 million and $959 million for the three months ended March 31, 2014 and 2013, respectively. We manage capacity for each of our strategies individually, taking an approach that considers total assets under management, the velocity of asset growth and the mix of business across distribution channels, geographic regions and client types. We also consider other factors, such as the exceptional market performance over the past five years, which has contributed to the rate of asset growth in the Global Value strategy.
We believe that growth in AUM in an investment strategy requires the availability of attractive investment opportunities relative to the amount of AUM in the strategy at a time when the strategy has a competitive performance track record and there is stable or growing client demand for the strategy or asset class. When we believe that each of these factors is present with respect to an investment strategy, we say we have “realizable capacity” in that strategy. We believe that we currently have realizable capacity particularly in some of our non-U.S. and global strategies (such as our Non-U.S. Growth, Global Equity and Global Opportunities strategies), where we believe we are well-positioned to take advantage of increasing client and investor demand.
The table below sets forth the total AUM for each of our investment teams and strategies as of March 31, 2014, the inception date for each investment composite, and the value-added by each strategy over a multi-horizon time period as of March 31, 2014. |
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| Inception | | Strategy AUM | | Value-Added (1) (bps) |
Investment Team and Strategy | Date | | (in $MM) | | 1 YR | 3 YR | 5 YR | 10 YR | Inception |
Global Equity Team | | | (unaudited) |
Non-U.S. Growth Strategy | 1/1/1996 | | $26,324 | | (1) | 557 | 400 | 287 | 648 |
Non-U.S. Small-Cap Growth Strategy | 1/1/2002 | | $1,819 | | 312 | 624 | 445 | 571 | 544 |
Global Equity Strategy | 4/1/2010 | | $304 | | 123 | 803 | N/A | N/A | 648 |
Global Small-Cap Growth Strategy | 7/1/2013 | | $157 | | N/A | N/A | N/A | N/A | 225 |
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| | | | | | |
U.S. Value Team | | | | | | | | | |
U.S. Mid-Cap Value Strategy | 4/1/1999 | | $15,916 | | (320) | 108 | (93) | 283 | 569 |
U.S. Small-Cap Value Strategy | 6/1/1997 | | $4,048 | |