APAM-2014-9-30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
| |
(Mark One) | |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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) |
| |
(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):
|
| | | |
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 October 31, 2014 were 34,121,560, 21,463,033 and 17,342,950, respectively.
TABLE OF CONTENTS
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| | Page |
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:
| |
• | our anticipated future results of operations; |
| |
• | 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. Unaudited Consolidated Financial Statements
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Condensed Consolidated Statements of Financial Condition (U.S. dollars in thousands, except per share amount) |
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
ASSETS |
Cash and cash equivalents | $ | 227,975 |
| | $ | 211,839 |
|
Cash and cash equivalents of Launch Equity | 38,600 |
| | 19,156 |
|
Accounts receivable | 67,546 |
| | 64,110 |
|
Accounts receivable of Launch Equity | 703 |
| | 7,428 |
|
Investment securities | 11,782 |
| | 7,804 |
|
Investment securities of Launch Equity | 47,428 |
| | 63,364 |
|
Property and equipment, net | 14,001 |
| | 8,760 |
|
Deferred tax assets | 563,368 |
| | 187,907 |
|
Prepaid expenses and other assets | 12,562 |
| | 11,030 |
|
Total assets | $ | 983,965 |
| | $ | 581,398 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Accounts payable, accrued expenses, and other | $ | 37,812 |
| | $ | 45,369 |
|
Accrued incentive compensation | 77,930 |
| | 3,580 |
|
Borrowings | 200,000 |
| | 200,000 |
|
Amounts payable under tax receivable agreements | 486,535 |
| | 160,663 |
|
Accounts payable of Launch Equity | 2,044 |
| | 7,485 |
|
Securities sold, not yet purchased of Launch Equity | 33,273 |
| | 31,990 |
|
Total liabilities | 837,594 |
| | 449,087 |
|
Commitments and contingencies |
| |
|
|
Common stock | | | |
Class A common stock ($0.01 par value per share, 500,000,000 shares authorized, 34,121,560 and 19,807,436 shares outstanding at September 30, 2014 and December 31, 2013, respectively) | 341 |
| | 198 |
|
Class B common stock ($0.01 par value per share, 200,000,000 shares authorized, 21,463,033 and 25,271,889 shares outstanding at September 30, 2014 and December 31, 2013, respectively) | 215 |
| | 253 |
|
Class C common stock ($0.01 par value per share, 400,000,000 shares authorized, 17,342,950 and 25,206,554 shares outstanding at September 30, 2014 and December 31, 2013, respectively) | 173 |
| | 252 |
|
Convertible preferred stock ($0.01 par value per share, 15,000,000 shares authorized, 0 and 1,198,128 shares outstanding at September 30, 2014 and December 31, 2013, respectively) | — |
| | 34,909 |
|
Additional paid-in capital | 78,897 |
| | 6,388 |
|
Retained earnings | 13,878 |
| | 1,401 |
|
Accumulated other comprehensive income (loss) | 360 |
| | 378 |
|
Total stockholders’ equity | 93,864 |
| | 43,779 |
|
Noncontrolling interest - Artisan Partners Holdings | 1,094 |
| | 38,060 |
|
Noncontrolling interest - Launch Equity | 51,413 |
| | 50,472 |
|
Total equity | 146,371 |
| | 132,311 |
|
Total liabilities and equity | $ | 983,965 |
| | $ | 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 September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues | | | | | | | |
Management fees | $ | 212,225 |
| | $ | 178,092 |
| | $ | 622,350 |
| | $ | 488,222 |
|
Performance fees | 181 |
| | — |
| | 335 |
| | 26 |
|
Total revenues | $ | 212,406 |
| | $ | 178,092 |
| | $ | 622,685 |
| | $ | 488,248 |
|
Operating Expenses | | | | | | | |
Compensation and benefits | | | | | | | |
Salaries, incentive compensation and benefits | 90,743 |
| | 79,470 |
| | 261,893 |
| | 221,401 |
|
Pre-offering related compensation - share-based awards | 12,431 |
| | 23,441 |
| | 52,234 |
| | 380,523 |
|
Pre-offering related compensation - other | — |
| | — |
| | — |
| | 143,035 |
|
Total compensation and benefits | 103,174 |
| | 102,911 |
| | 314,127 |
| | 744,959 |
|
Distribution and marketing | 13,281 |
| | 10,093 |
| | 36,348 |
| | 27,116 |
|
Occupancy | 2,811 |
| | 2,609 |
| | 8,265 |
| | 7,781 |
|
Communication and technology | 5,735 |
| | 3,464 |
| | 15,694 |
| | 10,309 |
|
General and administrative | 6,389 |
| | 5,655 |
| | 19,258 |
| | 17,653 |
|
Total operating expenses | 131,390 |
| | 124,732 |
| | 393,692 |
| | 807,818 |
|
Total operating income (loss) | 81,016 |
| | 53,360 |
| | 228,993 |
| | (319,570 | ) |
Non-operating income (loss) | | | | | | | |
Interest expense | (2,905 | ) | | (2,885 | ) | | (8,690 | ) | | (8,986 | ) |
Net gain (loss) of Launch Equity | (557 | ) | | 5,499 |
| | (2,039 | ) | | 9,068 |
|
Net gain on the valuation of contingent value rights | — |
| | 6,940 |
| | — |
| | 40,360 |
|
Net gain (loss) on the tax receivable agreements | 284 |
| | — |
| | (4,187 | ) | | — |
|
Other non-operating income (expense) | 622 |
| | — |
| | 351 |
| | — |
|
Total non-operating income (loss) | (2,556 | ) | | 9,554 |
| | (14,565 | ) | | 40,442 |
|
Income (loss) before income taxes | 78,460 |
| | 62,914 |
| | 214,428 |
| | (279,128 | ) |
Provision for income taxes | 15,335 |
| | 6,824 |
| | 35,193 |
| | 17,146 |
|
Net income (loss) before noncontrolling interests | 63,125 |
| | 56,090 |
| | 179,235 |
| | (296,274 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 43,243 |
| | 44,614 |
| | 132,939 |
| | (320,067 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Launch Equity | (557 | ) | | 5,499 |
| | (2,039 | ) | | 9,068 |
|
Net income attributable to Artisan Partners Asset Management Inc. | $ | 20,439 |
| | $ | 5,977 |
| | $ | 48,335 |
| | $ | 14,725 |
|
| | | | | | | |
| July 1, 2014 to September 30, 2014 | | July 1, 2013 to September 30, 2013 | | January 1, 2014 to September 30, 2014 | | March 12, 2013 to September 30, 2013 |
Earnings (loss) per share | | | | | | | |
Basic | $ | 0.57 |
| | $ | 0.42 |
| | $ | (1.02 | ) | | $ | 0.97 |
|
Diluted | $ | 0.57 |
| | $ | 0.35 |
| | $ | (1.02 | ) | | $ | 0.90 |
|
Weighted average number of common shares outstanding | | | | | | | |
Basic | 30,370,892 |
| | 12,728,949 |
| | 26,177,724 |
| | 12,728,949 |
|
Diluted | 30,370,892 |
| | 15,294,412 |
| | 26,177,724 |
| | 15,294,412 |
|
| | | | | | | |
Dividends declared per Class A common share | $ | 0.55 |
| | $ | 0.43 |
| | $ | 3.28 |
| | $ | 0.43 |
|
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 September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net income (loss) before noncontrolling interests | $ | 63,125 |
| | $ | 56,090 |
| | $ | 179,235 |
| | $ | (296,274 | ) |
Other comprehensive income (loss), net of tax | | | | | | | |
Unrealized gains on investment securities: | | | | | | | |
Unrealized gain (loss) on investment securities, net of tax of ($138), $406, $18 and $453, respectively | (423 | ) | | 1,004 |
| | (117 | ) | | 2,955 |
|
Less: reclassification adjustment for gain (loss) included in net income | 405 |
| | — |
| | 405 |
| | — |
|
Net unrealized gain (loss) on investment securities | (828 | ) | | 1,004 |
| | (522 | ) | | 2,955 |
|
Foreign currency translation gain (loss) | (458 | ) | | 371 |
| | (190 | ) | | 53 |
|
Total other comprehensive income | (1,286 | ) | | 1,375 |
| | (712 | ) | | 3,008 |
|
Comprehensive income (loss) | 61,839 |
| | 57,465 |
| | 178,523 |
| | (293,266 | ) |
Comprehensive income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 42,401 |
| | 45,250 |
| | 132,245 |
| | (317,885 | ) |
Comprehensive income (loss) attributable to noncontrolling interests - Launch Equity | (557 | ) | | 5,499 |
| | (2,039 | ) | | 9,068 |
|
Comprehensive income attributable to Artisan Partners Asset Management Inc. | $ | 19,995 |
| | $ | 6,716 |
| | $ | 48,317 |
| | $ | 15,551 |
|
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 | 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) | — |
| — |
| — |
| 48,335 |
| — |
| 132,939 |
| (2,039 | ) | 179,235 |
|
Other comprehensive income - foreign currency translation | — |
| — |
| — |
| — |
| (105 | ) | (85 | ) | — |
| (190 | ) |
Other comprehensive income - available for sale investments, net of tax | — |
| — |
| — |
| — |
| (171 | ) | (236 | ) | — |
| (407 | ) |
Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax | — |
| — |
| (12,323 | ) | — |
| 258 |
| 11,950 |
| — |
| (115 | ) |
Capital contribution | — |
| — |
| — |
| — |
| — |
| — |
| 2,980 |
| 2,980 |
|
Amortization of equity-based compensation | — |
| — |
| 26,716 |
| — |
| — |
| 41,392 |
| — |
| 68,108 |
|
Deferred tax assets, net of amounts payable under tax receivable agreements | — |
| — |
| 61,194 |
| — |
| — |
| — |
| — |
| 61,194 |
|
Issuance of Class A common stock, net of issuance costs | 125 |
| — |
| 552,164 |
| — |
| — |
| — |
| — |
| 552,289 |
|
Purchase of equity and subsidiary equity | (85 | ) | (21,652 | ) | (533,340 | ) | — |
| — |
| 647 |
| — |
| (554,430 | ) |
Conversion of preferred stock and exchange of subsidiary equity | (14 | ) | (13,257 | ) | 23,289 |
| — |
| — |
| (10,018 | ) | — |
| — |
|
Distributions | — |
| — |
| — |
| — |
| — |
| (213,555 | ) | — |
| (213,555 | ) |
Dividends | — |
| — |
| (45,191 | ) | (35,858 | ) | — |
| — |
| — |
| (81,049 | ) |
Balance at September 30, 2014 | $ | 729 |
| $ | — |
| $ | 78,897 |
| $ | 13,878 |
| $ | 360 |
| $ | 1,094 |
| $ | 51,413 |
| $ | 146,371 |
|
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 | Accumulated other comprehensive income | Non-controlling interest - Artisan Partners Holdings | Non-controlling interest - Launch Equity | Total equity (deficit) | 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 |
| — |
|
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 | ) | — |
| 662 |
| (17,719 | ) | — |
| — |
| — |
|
Redemption of partnership units | — |
| — |
| — |
| — |
| — |
| (76,319 | ) | — |
| (76,319 | ) | — |
|
Establishment of deferred tax assets, net of amounts payable under tax receivable agreements | — |
| — |
| 18,487 |
| — |
| — |
| — |
| — |
| 18,487 |
| — |
|
Net income (loss) | — |
| — |
| — |
| 14,725 |
| — |
| 114,275 |
| 9,068 |
| 138,068 |
| — |
|
Other comprehensive income, net of tax | — |
| — |
| — |
| — |
| 383 |
| 1,848 |
| — |
| 2,231 |
| — |
|
Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax | — |
| — |
| (33,247 | ) |
| (219 | ) | 33,178 |
| — |
| (288 | ) | |
Capital contribution | — |
| — |
| — |
| — |
| — |
| — |
| 3,150 |
| 3,150 |
| — |
|
Amortization of equity-based compensation | — |
| — |
| 12,835 |
| — |
| — |
| 42,352 |
| — |
| 55,187 |
| — |
|
Forfeitures | (1 | ) | — |
| 1 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Issuance of restricted stock awards | 16 |
| — |
| (16 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
Distributions | — |
| — |
| — |
| — |
| — |
| (59,569 | ) | — |
| (59,569 | ) | — |
|
Dividends | — |
| — |
| — |
| (6,124 | ) | — |
| — |
| — |
| (6,124 | ) | — |
|
Balance at September 30, 2013 | $ | 689 |
| $ | 74,748 |
| $ | (60,305 | ) | $ | 8,601 |
| $ | 826 |
| $ | 22,464 |
| $ | 48,917 |
| $ | 95,940 |
| $ | — |
|
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 Nine Months Ended September 30, |
| 2014 | | 2013 |
Cash flows from operating activities | | | |
Net income (loss) before noncontrolling interests | $ | 179,235 |
| | $ | (296,274 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 2,293 |
| | 2,284 |
|
Deferred income taxes | 10,863 |
| | 7,255 |
|
Reinvested dividends | (213 | ) | | — |
|
Net gain on the valuation of contingent value rights | — |
| | (40,360 | ) |
Capital gains on the sale of investment securities | (405 | ) | | — |
|
Net loss on the tax receivable agreements | 4,187 |
| | — |
|
(Gains) losses of Launch Equity, net | 2,039 |
| | (9,068 | ) |
Proceeds from sale of investments by Launch Equity | 93,146 |
| | 113,951 |
|
Purchase of investments by Launch Equity | (77,598 | ) | | (108,416 | ) |
Loss on disposal of property and equipment | 349 |
| | 6 |
|
Amortization of debt issuance costs | 336 |
| | 336 |
|
Share-based compensation | 68,108 |
| | 627,657 |
|
Excess tax benefit on share-based awards | (901 | ) | | — |
|
Change in assets and liabilities resulting in an increase (decrease) in cash: | | | |
Net change in operating assets and liabilities of Launch Equity | (18,528 | ) | | (8,685 | ) |
Accounts receivable | (3,436 | ) | | (13,376 | ) |
Prepaid expenses and other assets | (1,626 | ) | | (1,592 | ) |
Accounts payable and accrued expenses | 73,304 |
| | 71,888 |
|
Class B liability awards | (5,054 | ) | | (227,793 | ) |
Deferred lease obligations | 16 |
| | (55 | ) |
Net cash provided by operating activities | 326,115 |
| | 117,758 |
|
Cash flows from investing activities | | | |
Acquisition of property and equipment | (3,767 | ) | | (1,466 | ) |
Leasehold improvements | (4,095 | ) | | (500 | ) |
Proceeds from sale of property and equipment | 4 |
| | — |
|
Proceeds from sale of investment securities | 6,156 |
| | — |
|
Purchase of investment securities | (10,021 | ) | | (5,000 | ) |
Change in restricted cash | 260 |
| | — |
|
Net cash used in investing activities | (11,463 | ) | | (6,966 | ) |
ARTISAN PARTNERS ASSET MANAGEMENT INC. Unaudited Consolidated Statements of Cash Flows, continued (U.S. dollars in thousands) |
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2014 | | 2013 |
Cash flows from financing activities | | | |
Partnership distributions | (213,555 | ) | | (160,098 | ) |
Dividends paid | (81,049 | ) | | (6,124 | ) |
Change in other liabilities | (49 | ) | | (47 | ) |
Repayment under revolving credit facility | — |
| | (90,000 | ) |
Payment of amounts owed under the tax receivable agreements | (4,645 | ) | | — |
|
Net proceeds from issuance of common stock | 554,129 |
| | 356,579 |
|
Payment of costs directly associated with the issuance of Class A common stock | (2,797 | ) | | (3,165 | ) |
Purchase of preferred stock and subsidiary equity | (554,129 | ) | | — |
|
Purchase of Class A common units | — |
| | (76,319 | ) |
Taxes paid related to employee net share settlement | (302 | ) | | — |
|
Capital invested into Launch Equity | 2,980 |
| | 3,150 |
|
Excess tax benefit on share-based awards | 901 |
| | — |
|
Net cash provided by (used in) financing activities | (298,516 | ) | | 23,976 |
|
Net increase in cash and cash equivalents | 16,136 |
| | 134,768 |
|
Cash and cash equivalents | | | |
Beginning of period | 211,839 |
| | 141,159 |
|
End of period | $ | 227,975 |
| | $ | 275,927 |
|
| | | |
Supplementary information | | | |
Noncash activity: | | | |
Issuance of preferred stock | $ | — |
| | $ | 74,748 |
|
Establishment of deferred tax assets | 386,324 |
| | 70,862 |
|
Establishment of amounts payable under tax receivable agreements | 326,048 |
| | 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 September 30, 2014, APAM’s total economic interest in Holdings approximated 47% 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 first quarter of 2014 Artisan launched its fourteenth investment strategy, the Artisan Partners High Income strategy, which is managed by the firm’s Credit team.
Strategies are 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:
| |
• | 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 financial statement impact of changes in ownership. |
| |
• | 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. |
| |
• | 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 also reduced net income available to common stockholders. |
Holdings Unit Exchanges
On June 16, 2014, affiliates of Hellman & Friedman LLC (the “H&F Funds”) elected to convert 455,011 shares of convertible preferred stock into, and exchange 1,381,887 preferred units of Holdings for, a total of 1,836,898 shares of APAM’s Class A common stock (the “H&F Conversion”). The H&F Funds subsequently sold all 1,836,898 shares of Class A common stock in an underwritten public offering. After the H&F Conversion, there were no longer any outstanding APAM convertible preferred shares or Holdings preferred units.
Certain limited partners of Artisan Partners Holdings have exchanged common units (along with a corresponding number of shares of Class B or C common stock of APAM) for shares of Class A common stock (the “Holdings Common Unit Exchanges”). The following exchanges have occurred during the nine months ended September 30, 2014:
| |
• | 171,125 Class A common units were exchanged for Class A common stock on June 2, 2014. |
| |
• | 1,567,968 Class A common units were exchanged for Class A common stock on August 25, 2014. |
| |
• | 10,260 Class B common units were exchanged for Class A common stock on August 25, 2014. |
The H&F Conversion and Holdings Common Unit Exchanges increased APAM’s ownership interest in Holdings, and resulted in a combined increase to deferred tax assets of approximately $96.2 million and an increase in amounts payable under tax receivable agreements of approximately $81.8 million.
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 September 30, 2014, APAM does not have a controlling financial interest in any of the funds in which it has made a seed investment.
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.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance will be effective on January 1, 2017 and requires either a retrospective or a modified retrospective approach to adoption. Early application is prohibited. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new guidance will be effective for the year ending December 31, 2016. Earlier adoption is permitted. The Company does not expect the adoption of this ASU to have an impact on its 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 |
September 30, 2014 | | | | | | | |
Mutual funds | $ | 10,672 |
| | $ | 1,128 |
| | $ | (18 | ) | | $ | 11,782 |
|
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 nine months ended September 30, 2014, Artisan made an investment of $10.0 million in Artisan High Income Fund, a series of Artisan Partners Funds, Inc. During the three and nine months ended September 30, 2014, Artisan sold $6.2 million of its investments, resulting in a realized gain of $0.4 million. Dividends earned on mutual fund investments totaled $0.2 million for the three and nine months ended September 30, 2014.
As of September 30, 2014, the total fair value of investments in an unrealized loss position was $5.1 million. The $18 thousand unrealized losses on available-for-sale securities are considered temporary, based on the severity and duration of the unrealized losses. No impairment losses were recorded on these available-for-sale securities.
As of 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 September 30, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value |
| Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2014 | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 120,002 |
| | $ | 120,002 |
| | $ | — |
| | $ | — |
|
Mutual funds | 11,782 |
| | 11,782 |
| | — |
| | — |
|
| | | | | | | |
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 funds, marketable open-end mutual funds or Undertakings for Collective Investment in Transferable Securities (“UCITS”). There were no Level 2 or Level 3 assets or liabilities recorded at fair value as of September 30, 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 and nine months ended September 30, 2014 and 2013.
Note 5. Borrowings
Artisan’s borrowings consist of the following as of September 30, 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 $203.2 million as of September 30, 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 for the three months ended September 30, 2014 and 2013, and $8.3 million and $8.6 million for the nine months ended September 30, 2014 and 2013, respectively.
As of September 30, 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 gain (loss) recognized on derivative instruments for the three and nine months ended September 30, 2014 and 2013: |
| | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, |
| | 2014 | | 2013 |
Income Statement Classification | | Gain | | Loss | | Gain | | Loss |
Contingent value rights | Net gain on the valuation of contingent value rights | | $ | — |
| | $ | — |
| | $ | 6,940 |
| | $ | — |
|
Total | | | $ | — |
| | $ | — |
| | $ | 6,940 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30, |
| | 2014 | | 2013 |
Income Statement Classification | | Gain | | Loss | | Gain | | Loss |
Contingent value rights | Net gain on the valuation of contingent value rights | | $ | — |
| | $ | — |
| | $ | 40,360 |
| | $ | — |
|
Total | | | $ | — |
| | $ | — |
| | $ | 40,360 |
| | $ | — |
|
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 September 30, 2014, APAM held approximately 47% 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 nine months ended September 30, 2014, APAM’s ownership interest in Holdings increased from 29% to 47%, due to the following transactions:
| |
• | The issuance of 1,444,688 Holdings GP units corresponding to 1,444,688 restricted shares of Class A common stock issued by APAM during the period. |
| |
• | The issuance of 9,284,337 Holdings GP units corresponding to the 9,284,337 shares of Class A common stock issued in the 2014 Follow-on Offering. |
| |
• | APAM’s purchase and cancellation of 6,284,337 common units and 3,000,000 preferred units of Holdings in connection with the 2014 Follow-on Offering. |
| |
• | The issuance of 1,381,887 Holdings GP units and cancellation of 1,381,887 Holdings preferred units, corresponding to the 1,381,887 shares of Class A common stock issued in connection with the H&F Conversion. |
| |
• | The issuance of 1,749,353 Holdings GP units and cancellation of 1,749,353 Holdings common units, in connection with the Holdings Common Unit Exchanges. |
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 during the nine months ended September 30, 2014, a deficit of $12.3 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 $0.4 million reduction to Noncontrolling interest and a $0.3 million increase to accumulated other comprehensive income, net of tax. The increased ownership level also resulted in a $2.8 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 either 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 has the right to receive 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 has the right to receive 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 Artisan employees and directors and for this purpose 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, Artisan 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 investment 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 Unaudited Consolidated Statement of Financial Condition as of September 30, 2014 and December 31, 2013 and results into the Unaudited Consolidated Statement of Operations for the three and nine months ended September 30, 2014 and 2013.
Condensed Consolidating Statements of Financial Condition |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2014 | | As of December 31, 2013 |
| Before Consolidation | | Launch Equity | | Eliminations | | As Reported | | Before Consolidation | | Launch Equity | | Eliminations | | As Reported |
Cash and cash equivalents | $ | 227,975 |
| | $ | — |
| | $ | — |
| | $ | 227,975 |
| | $ | 211,839 |
| | $ | — |
| | $ | — |
| | $ | 211,839 |
|
Cash and cash equivalents of Launch Equity | — |
| | 38,600 |
| | — |
| | 38,600 |
| | — |
| | 19,156 |
| | — |
| | 19,156 |
|
Accounts receivable | 67,546 |
| | — |
| | — |
| | 67,546 |
| | 64,110 |
| | — |
| | — |
| | 64,110 |
|
Accounts receivable of Launch Equity | — |
| | 703 |
| | — |
| | 703 |
| | — |
| | 7,428 |
| | — |
| | 7,428 |
|
Investment securities of Launch Equity | 1 |
| | 47,428 |
| | (1 | ) | | 47,428 |
| | 1 |
| | 63,364 |
| | (1 | ) | | 63,364 |
|
Other assets | 601,713 |
| | — |
| | — |
| | 601,713 |
| | 215,501 |
| | — |
| | — |
| | 215,501 |
|
Total assets | $ | 897,235 |
| | $ | 86,731 |
| | $ | (1 | ) | | $ | 983,965 |
| | $ | 491,451 |
| | $ | 89,948 |
| | $ | (1 | ) | | $ | 581,398 |
|
| | | | | | | | | | | | | | | |
Accounts payable of Launch Equity | $ | — |
| | $ | 2,044 |
| | $ | — |
| | $ | 2,044 |
| | $ | — |
| | $ | 7,485 |
| | $ | — |
| | $ | 7,485 |
|
Securities sold, not yet purchased of Launch Equity | — |
| | 33,273 |
| | — |
| | 33,273 |
| | — |
| | 31,990 |
| | — |
| | 31,990 |
|
Other liabilities | 802,277 |
| | — |
| | — |
| | 802,277 |
| | 409,612 |
| | — |
| | — |
| | 409,612 |
|
Total liabilities | 802,277 |
| | 35,317 |
| | — |
| | 837,594 |
| | 409,612 |
| | 39,475 |
| | — |
| | 449,087 |
|
Total stockholders’ equity | 93,864 |
| | — |
| | — |
| | 93,864 |
| | 43,779 |
| | — |
| | — |
| | 43,779 |
|
Noncontrolling interest - Artisan Partners Holdings | 1,094 |
| | 1 |
| | (1 | ) | | 1,094 |
| | 38,060 |
| | 1 |
| | (1 | ) | | 38,060 |
|
Noncontrolling interest - Launch Equity | — |
| | 51,413 |
| | — |
| | 51,413 |
| | — |
| | 50,472 |
| | — |
| | 50,472 |
|
Total equity | 94,958 |
| | 51,414 |
| | (1 | ) | | 146,371 |
| | 81,839 |
| | 50,473 |
| | (1 | ) | | 132,311 |
|
Total liabilities and equity | $ | 897,235 |
| | $ | 86,731 |
| | $ | (1 | ) | | $ | 983,965 |
| | $ | 491,451 |
| | $ | 89,948 |
| | $ | (1 | ) | | $ | 581,398 |
|
Condensed Consolidating Statements of Operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2014 | | September 30, 2013 |
| Before Consolidation | | Launch Equity | | Eliminations | | As Reported | | Before Consolidation | | Launch Equity | | Eliminations | | As Reported |
Total revenues | $ | 212,535 |
| | $ | — |
| | $ | (129 | ) | | $ | 212,406 |
| | $ | 178,214 |
| | $ | — |
| | $ | (122 | ) | | $ | 178,092 |
|
Total operating expenses | 131,519 |
| | — |
| | (129 | ) | | 131,390 |
| | 124,854 |
| | — |
| | (122 | ) | | 124,732 |
|
Operating income (loss) | 81,016 |
| | — |
| | — |
| | 81,016 |
| | 53,360 |
| | — |
| | — |
| | 53,360 |
|
Non-operating income (loss) | (1,999 | ) | | — |
| | — |
| | (1,999 | ) | | 4,055 |
| | — |
| | — |
| | 4,055 |
|
Net gain (loss) of Launch Equity | — |
| | (557 | ) | | — |
| | (557 | ) | | — |
| | 5,499 |
| | — |
| | 5,499 |
|
Total non-operating income (loss) | (1,999 | ) | | (557 | ) | | — |
| | (2,556 | ) | | 4,055 |
| | 5,499 |
| | — |
| | 9,554 |
|
Income (loss) before income taxes | 79,017 |
| | (557 | ) | | — |
| | 78,460 |
| | 57,415 |
| | 5,499 |
| | — |
| | 62,914 |
|
Provision for income taxes | 15,335 |
| | — |
| | — |
| | 15,335 |
| | 6,824 |
| | — |
| | — |
| | 6,824 |
|
Net income (loss) | 63,682 |
| | (557 | ) | | — |
| | 63,125 |
| | 50,591 |
| | 5,499 |
| | — |
| | 56,090 |
|
Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 43,243 |
| | — |
| | — |
| | 43,243 |
| | 44,614 |
| | — |
| | — |
| | 44,614 |
|
Less: Net income (loss) attributable to noncontrolling interests - Launch Equity | — |
| | (557 | ) | | — |
| | (557 | ) | | — |
| | 5,499 |
| | — |
| | 5,499 |
|
Net income attributable to Artisan Partners Asset Management Inc. | $ | 20,439 |
| | $ | — |
| | $ | — |
| | $ | 20,439 |
| | $ | 5,977 |
| | $ | — |
| | $ | — |
| | $ | 5,977 |
|
Condensed Consolidating Statements of Operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2014 | | September 30, 2013 |
| Before Consolidation | | Launch Equity | | Eliminations | | As Reported | | Before Consolidation | | Launch Equity | | Eliminations | | As Reported |
Total revenues | $ | 623,073 |
| | $ | — |
| | $ | (388 | ) | | $ | 622,685 |
| | $ | 488,583 |
| | $ | — |
| | $ | (335 | ) | | $ | 488,248 |
|
Total operating expenses | 394,080 |
| | — |
| | (388 | ) | | 393,692 |
| | 808,153 |
| | — |
| | (335 | ) | | 807,818 |
|
Operating income (loss) | 228,993 |
| | — |
| | — |
| | 228,993 |
| | (319,570 | ) | | — |
| | — |
| | (319,570 | ) |
Non-operating income (loss) | (12,526 | ) | | — |
| | — |
| | (12,526 | ) | | 31,374 |
| | — |
| | — |
| | 31,374 |
|
Net gain (loss) of Launch Equity | — |
| | (2,039 | ) | | — |
| | (2,039 | ) | | — |
| | 9,068 |
| | — |
| | 9,068 |
|
Total non-operating income (loss) | (12,526 | ) | | (2,039 | ) | | — |
| | (14,565 | ) | | 31,374 |
| | 9,068 |
| | — |
| | 40,442 |
|
Income (loss) before income taxes | 216,467 |
| | (2,039 | ) | | — |
| | 214,428 |
| | (288,196 | ) | | 9,068 |
| | — |
| | (279,128 | ) |
Provision for income taxes | 35,193 |
| | — |
| | — |
| | 35,193 |
| | 17,146 |
| | — |
| | — |
| | 17,146 |
|
Net income (loss) | 181,274 |
| | (2,039 | ) | | — |
| | 179,235 |
| | (305,342 | ) | | 9,068 |
| | — |
| | (296,274 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings | 132,939 |
| | — |
| | — |
| | 132,939 |
| | (320,067 | ) | | — |
| | — |
| | (320,067 | ) |
Less: Net income (loss) attributable to noncontrolling interests - Launch Equity | — |
| | (2,039 | ) | | — |
| | (2,039 | ) | | — |
| | 9,068 |
| | — |
| | 9,068 |
|
Net income attributable to Artisan Partners Asset Management Inc. | $ | 48,335 |
| | $ | — |
| | $ | — |
| | $ | 48,335 |
| | $ | 14,725 |
| | $ | — |
| | $ | — |
| | $ | 14,725 |
|
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 September 30, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | |
| Assets and Liabilities at Fair Value: |
| Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2014 | | | | | | | |
Assets | | | | | | | |
Investment securities – long position | $ | 47,428 |
| | $ | 47,428 |
| | $ | — |
| | $ | — |
|
Liabilities | | | | | | | |
Investment securities – short position | $ | 33,273 |
| | $ | 33,273 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
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 September 30, 2014 and December 31, 2013, APAM had the following authorized and outstanding equity:
|
| | | | | | | | | | | | |
| | | Outstanding | | | | |
| Authorized | | September 30, 2014 | | December 31, 2013 | | Voting Rights (1) | | Economic Rights |
Common shares | | | | | | | | | |
Class A, par value $0.01 per share | 500,000,000 |
| | 34,121,560 |
| | 19,807,436 |
| | 1 vote per share | | Proportionate |
Class B, par value $0.01 per share | 200,000,000 |
| | 21,463,033 |
| | 25,271,889 |
| | 5 votes per share | | None |
Class C, par value $0.01 per share | 400,000,000 |
| | 17,342,950 |
| | 25,206,554 |
| | 1 vote per share | | None |
| | | | | | | | | |
Preferred shares | | | | | | | | | |
Convertible preferred, par value $0.01 per share | 15,000,000 |
| | — |
| | 1,198,128 |
| | 1 vote per share | | Proportionate |
(1) 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 September 30, 2014, Artisan’s employees held 2,700,634 shares of Class A common stock subject to the agreement and all 21,463,033 outstanding shares of Class B common stock. |
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 and nine months ended September 30, 2014, APAM paid dividends of $0.55 and $3.28, respectively, per share of outstanding Class A common stock. During the nine months ended September 30, 2014, APAM paid dividends of $3.81 per share of outstanding convertible preferred stock.
Class A Common Stock
During the nine months ended September 30, 2014, APAM issued a total of 14,314,124 shares of Class A common stock, in connection with the 2014 Follow-on Offering, H&F Conversion, Holdings Common Unit Exchanges, restricted share award grants, and the settlement of restricted stock units. APAM also granted a total of 8,670 restricted stock units with respect to Class A common stock to non-employee directors during the year-to-date period. There were 20,612 restricted stock units outstanding as of September 30, 2014.
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) were also exchangeable for Class A common stock generally on a one-for-one basis. APAM’s convertible preferred stock was convertible into Class A common stock generally on a one-for-one basis.
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. During the nine months ended September 30, 2014, APAM canceled a total of 3,808,856 shares of Class B common stock in connection with the 2014 Follow-on Offering, Holdings Common Unit Exchanges and employee-partner terminations.
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. During the nine months ended September 30, 2014, APAM canceled a total of 7,956,747 shares of Class C common stock in connection with the 2014 Follow-on Offering, H&F Conversion and Holdings Common Unit Exchanges. The Class C common stock cancellations were offset by the issuance of 93,143 shares in connection with employee-partner terminations.
Convertible Preferred Stock
As part of the 2014 Follow-on Offering, APAM purchased 743,117 shares of convertible preferred stock and immediately canceled the shares. As part of the H&F Conversion, the remaining 455,011 outstanding shares of convertible preferred stock were converted into 455,011 shares of Class A common stock. There were no shares of convertible preferred stock outstanding as of September 30, 2014.
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 cash distributions to the holders of its partnership units 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 $81.6 million and $58.5 million for the three months ended September 30, 2014 and 2013, respectively, and $329.7 million and $245.1 million for the nine months ended September 30, 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 Unaudited Consolidated Statements of Operations and totaled $65.7 million for the nine months ended September 30, 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 as a reduction to consolidated stockholders’ equity, with the exception of the portion of distributions made to APAM, which is eliminated upon consolidation. Holdings distributions to APAM totaled $35.2 million and $12.5 million for the three months ended September 30, 2014 and 2013, respectively, and $116.1 million and $19.3 million for the nine months ended September 30, 2014 and 2013, respectively.
Note 10. Compensation and Benefits
Total compensation and benefits consists of the following:
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Salaries, incentive compensation and benefits (1) | | $ | 83,834 |
|
| $ | 76,056 |
| | $ | 246,493 |
|
| $ | 217,987 |
|
Restricted share compensation expense | | 6,909 |
|
| 3,414 |
| | 15,400 |
|
| 3,414 |
|
Total salaries, incentive compensation and benefits | | 90,743 |
| | 79,470 |
| | 261,893 |
| | 221,401 |
|
Pre-offering related compensation - share-based awards | | 12,431 |
| | 23,441 |
| | 52,234 |
| | 380,523 |
|
Pre-offering related compensation - other | | — |
| | — |
| | — |
| | 143,035 |
|
Total compensation and benefits | | $ | 103,174 |
| | $ | 102,911 |
| | $ | 314,127 |
| | $ | 744,959 |
|
(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 formulas that are 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 generally 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.
During the three months ended September 30, 2014, 1,402,876 restricted shares of Class A common stock were issued to employees of the Company and its subsidiaries. A portion of these shares will vest pro rata in the third fiscal quarter of each of the next five years. The remaining shares will generally vest upon a combination of both (1) pro-rata annual time vesting and (2) qualifying retirement (as defined in the award agreements). Total compensation expense associated with the July 2014 grant is expected to be approximately $72.2 million.
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 nine months ended September 30, 2014:
|
| | | | | | | |
| | Weighted-Average Grant Date Fair Value | | Number of Awards |
Unvested at January 1, 2014 | | $ | 52.36 |
| | 1,575,157 |
|
Granted | | $ | 52.85 |
| | 1,444,688 |
|
Forfeited | | — |
| | — |
|
Vested | | $ | 52.61 |
| | (319,211 | ) |
Unvested at September 30, 2014 | | $ | 52.59 |
| | 2,700,634 |
|
Compensation expense recognized related to the restricted shares was $6.9 million and $15.4 million for the three and nine months ended September 30, 2014, respectively. The aggregate vesting date fair value of awards that vested during the nine months ended September 30, 2014 was approximately $16.4 million. The unrecognized compensation expense for the unvested restricted shares as of September 30, 2014 was $133.6 million with a weighted average recognition period of 4.4 years remaining.
During the nine months ended September 30, 2014, the Company withheld a total of 5,880 restricted shares as a result of net share settlements to satisfy employee tax withholding obligations. The Company paid $0.3 million in employee tax withholding obligations related to employee share transactions. These net share settlements had the effect of shares repurchased and retired by the Company, as they reduced the number of shares outstanding.
Pre-offering related compensation consists of the following: |
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2014 | | 2013 | | 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 | | 12,431 |
| | 23,441 |
| | 52,234 |
| | 51,289 |
|
Pre-offering related compensation - share-based awards | | 12,431 |
| | 23,441 |
| | 52,234 |
| | 380,523 |
|
| | | | | | | | |
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 | | $ | 12,431 |
| | $ | 23,441 |
| | $ | 52,234 |
| | $ | 523,558 |
|
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 $18.0 million and