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| ART > SEC Filings for ART > Form 10-Q on 9-May-2012 | All Recent SEC Filings |
9-May-2012
Quarterly Report
Introduction
Artio Global Investors Inc. ("Investors" or the "Company") and subsidiaries (collectively, "we," "us" or "our") comprises Investors and its subsidiaries, including Artio Global Holdings LLC ("Holdings"), an intermediate holding company that owns Artio Global Management LLC ("Investment Adviser"), a registered investment adviser under the Investment Advisers Act of 1940, as amended; Artio Global Institutional Services LLC, which is licensed as a limited-purpose broker-dealer; and certain investment vehicles we consolidate because we have a controlling financial interest in them (the "Consolidated Investment Products"). As of March 31, 2012, Holdings was approximately 98% owned by Investors, 1% owned by Richard Pell, our Chairman, Chief Executive Officer and Chief Investment Officer ("Pell"), and 1% owned by Rudolph-Riad Younes, our Head of International Equity ("Younes," together with Pell, the "Principals"). The Principals' interests are reflected in the consolidated financial statements as Non-controlling interests in Holdings. The Consolidated Investment Products have investors whose interests are reflected as Non-controlling interests in the Consolidated Investment Products. In April 2012, the Principals exchanged their interests in Holdings for shares of Investors' Class A common stock, leaving Holdings as a wholly owned subsidiary (see Notes to Consolidated Financial Statements, Note 13. Subsequent Events).
Our MD&A is provided in addition to the accompanying consolidated financial statements and footnotes to assist readers in understanding our results of operations and liquidity and capital resources. The MD&A is organized as follows:
• General Overview. Beginning on page 24, we provide a summary of our overall business and the economic environment.
• Key Performance Indicators. Beginning on page 25, we discuss the operating and financial indicators that guide management's review of our performance.
• Assets Under Management. Beginning on page 27, we provide a detailed discussion of our assets under management ("AuM"), which is a major driver of our operating revenues and key performance indicators.
• Revenues and Other Operating Income. Beginning on page 32, we compare our revenue and other operating income to the corresponding period a year ago.
• Operating Expenses. Beginning on page 32, we compare our operating expenses to the corresponding period a year ago.
• Non-operating Income (Loss). Beginning on page 33, we compare our non-operating income (loss) to the corresponding period a year ago.
• Income Taxes. Beginning on page 33, we compare our effective tax rates to the corresponding period a year ago.
• Liquidity and Capital Resources. Beginning on page 34, we discuss our working capital as of March 31, 2012, and December 31, 2011, and cash flows for the first three months of 2012 and 2011. Also included is a discussion of the financial capacity available to help fund our future activities.
• New Accounting Standards. Beginning on page 36, we discuss new accounting pronouncements that may apply to us.
• Cautionary Note Regarding Forward-Looking Statements. Beginning on page 36, we describe the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this Form 10-Q relating to our financial results, operations, business plans and prospects. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.
23 Artio Global Investors Inc. First Quarter 2012 Form 10-Q
General Overview
Business
We are an asset management company that provides investment management services to institutional and mutual fund clients. We manage and advise proprietary (mutual) funds; commingled institutional investment vehicles; institutional separate accounts; sub-advisory accounts; and a hedge fund. While our operations and clients are primarily U.S.-based, a substantial portion of our AuM is invested outside of the U.S. Historically, our distribution activities were primarily focused within North America. In 2011, we opened offices in London, England, to expand our distribution activities to Europe and the Middle East, and in Sydney, Australia, to expand our distribution activities in Australia, New Zealand and parts of Asia. Our revenues are primarily billed in U.S. dollars and are calculated based on the U.S. dollar value of the investment assets we manage for clients. Our managed portfolios have exposures to currencies other than the U.S. dollar, which can affect our revenues. As of March 31, 2012, 55% of our AuM were exposed to currencies other than the U.S. dollar. Consequently, changes in foreign currency exchange rates will affect our revenues. Our expenses are primarily billed and paid in U.S. dollars and not significantly impacted by foreign currency exchange rates, although our shareholder servicing expenses are driven by average daily market value of proprietary fund AuM and therefore, indirectly impacted by foreign currency exchange rates.
For select new product initiatives, we invest in the related investment vehicles in order to provide critical mass. We refer to these investments as "seed money investments." Income from seed money investments is included in non-operating income. This income is, by nature, variable. Since the third quarter of 2010 through March 31, 2012, we have made aggregate seed money investments of $44 million.
Economic Environment
As an investment manager, we derive substantially all of our operating revenues from providing investment management services to our institutional and mutual fund clients. Such revenues are driven by the amount and composition of our AuM, as well as by our fee structure, making our business results sensitive to the prevailing global economic climate and its impact on investor sentiment and capital markets.
In response to more encouraging economic data from the U.S., equity markets around the world rallied in the first quarter of 2012. Volatility levels also declined, providing a much improved backdrop for investors than witnessed over the past year. High yield bonds also provided solid returns amid a more "risk on" environment while investment grade bonds had a lackluster quarter.
This period of relative market calm is likely to be tested as the rest of the year unfolds. Ahead is the U.S. Presidential election, a pending decision on healthcare by the U.S. Supreme Court, the European Central Bank balancing the sovereign debt crisis with potential inflationary threats, and the Federal Reserve dampening expectations for additional monetary stimulus. These important factors will likely play an important role in shaping investor sentiment in the months ahead.
Overall, equity markets trended upwards during the first quarter of 2012. Our International Equity strategies, which comprise 56% of our total AuM as of March 31, 2012, are measured against the MSCI AC World ex USA Index, which increased 11.2% during the first quarter of 2012.
Key Performance Indicators
Our management reviews our performance on a monthly basis, focusing on the
indicators described below.
Three Months Ended March 31,
(in millions, except basis points, percentages and per share amounts) 2012 2011
Operating indicators
AuM at end of period $26,645 $51,328
Average AuM for period(a) 28,551 52,659
Net client cash flows (5,995 ) (3,230 )
Market appreciation 2,281 1,151
Financial indicators
Investment management fees 43 82
Effective fee rate (basis points)(b) 60.3 63.0
Adjusted operating income(c) 11 42
Adjusted operating margin(d) 24.5 % 50.8 %
Adjusted EBITDA(c) 14 44
Adjusted EBITDA margin(d) 31.0 % 53.9 %
Adjusted compensation ratio(c)(e) 45.3 % 30.9 %
Adjusted net income attributable to Artio Global Investors(c) 6 24
Diluted earnings per share $ 0.08 $ 0.38
Adjusted diluted earnings per share(f) $ 0.11 $ 0.41
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(a) Average AuM for a period is computed on the beginning-of-first-month balance and all end-of-month balances within the period.
(b) The effective fee rate is computed by dividing annualized investment management fees (normalized for the number of days in the period) by average AuM for the period.
(c) See the "Adjusted Performance Measures" section of this MD&A for reconciliations of Employee compensation and benefits to Adjusted compensation; Operating income before income tax expense to Adjusted operating income; Net income to adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"); and Net income attributable to Artio Global Investors to Adjusted net income attributable to Artio Global Investors.
(d) Adjusted operating and Adjusted EBITDA margins are calculated by dividing Adjusted operating income and Adjusted EBITDA by Total revenues and other operating income.
(e) Calculated as Adjusted compensation(c) divided by Total revenues and other operating income.
(f) Adjusted diluted earnings per share is calculated by dividing Adjusted net income attributable to Artio Global Investors by Adjusted weighted average diluted shares (see the "Adjusted Performance Measures" section of this MD&A).
Operating Indicators
Our revenues are driven by the amount and composition of our AuM, as well as by our fee structure. As a result, management closely monitors our AuM. We believe average AuM is more useful than quarter-end AuM in analyzing performance during a period, as most of our fees are calculated based on daily or monthly AuM, rather than quarter-end balances of AuM.
Net client cash flows represent purchases by new or existing clients, less redemptions. Our net client cash flows are driven by the performance of our investment strategies relative to their respective benchmark and/or peers, absolute levels of performance, competitiveness of our fee rates, the success of our marketing and client service efforts, as well as clients' appetite for risk and the state of equity and fixed income markets overall. Net client cash outflows were $6.0 billion in the three months ended March 31, 2012, and $3.2 billion in the three months ended March 31, 2011. In our view, this reflects a variety of contributing factors, with underperformance in our International Equity strategies during 2009 through 2011 being the primary factor driving net client cash outflows.
Net client outflows for the first quarter of 2012 were partially offset by market appreciation of $2.3 billion, of which the International Equity strategies represented $1.8 billion.
25 Artio Global Investors Inc. First Quarter 2012 Form 10-Q
Financial Indicators
Management reviews certain financial ratios to monitor progress with internal forecasts, monitor our business drivers and compare our firm with others in the asset management industry. The effective fee rate represents the amount of investment management fees we earn divided by the average dollar value of AuM we manage. This information can be used as an indicator of the contribution of our products to revenues. Adjusted operating and Adjusted EBITDA margins are important indicators of our profitability and the efficiency of our business model. (See the "Adjusted Performance Measures" section of this MD&A for a discussion of financial indicators not prepared in conformity with U.S. Generally Accepted Accounting Principles ("GAAP").) Other ratios shown in the table on page 25 allow us to review expenses in comparison with our revenues.
Investment management fees are earned from managing clients' assets and fluctuate based on the total value of AuM, composition of AuM among our investment vehicles and among our investment strategies, and changes in the investment management fee rates on our products. Fees from our International Equity strategies are our primary revenue source and as a percentage of Investment management fees were approximately 74% in the first quarter of 2012 and 86% in the first quarter of 2011. The decrease in revenue percentage from our International Equity strategies primarily reflects net client cash outflows in 2011 and the first quarter of 2012.
Our effective fee rate of 60.3 basis points has declined in recent quarters due primarily to a greater proportion of fixed income assets, which typically have average fee rates lower than our equity strategies, within our overall average AuM.
Our Adjusted operating and Adjusted EBITDA margins in the first quarter of 2012 decreased compared to the first quarter of 2011, as revenues declined faster than expenses. We expect our margins to be under pressure throughout 2012, given the significant decline in AuM.
Adjusted Performance Measures
Certain of our financial indicators are adjusted versions of balances in our consolidated financial statements and are not prepared in conformity with GAAP. We believe these adjusted financial indicators are meaningful as they are more representative of our ongoing expense base than their GAAP counterparts. We exclude the amortization expense associated with equity awards granted to employees at the time of our initial public offering ("IPO") in 2009, severance costs associated with our staff reduction program initiated in 2011 and the accelerated amortization of debt expense associated with the termination of our revolving credit facility in the first quarter of 2012. We also present Adjusted net income attributable to Artio Global Investors per diluted share, which assumes the full exchange of our Principals' non-controlling interests for Class A common stock at the beginning of each period presented. (This adjustment does not conform with GAAP, for those periods in which the shares are antidilutive. In such periods, the adjustment has the effect of increasing earnings per share.) These adjustments are reflected in Adjusted operating income, Adjusted operating margin, Adjusted compensation ratio, Adjusted net income attributable to Artio Global Investors, Adjusted EBITDA, Adjusted EBITDA margin and Adjusted diluted earnings per share. Adjusted EBITDA and Adjusted EBITDA margin also exclude non-operating income. We have adjusted Income taxes to reflect the appropriate effective tax rate for each period after taking into consideration these non-GAAP adjustments.
The following table reconciles Employee compensation and benefits to Adjusted compensation, Operating income before income tax expense to Adjusted operating income, Net income to Adjusted EBITDA, and Net income attributable to Artio Global Investors to Adjusted net income attributable to Artio Global Investors.
Three Months Ended March 31,
(in thousands) 2012 2011
Employee compensation and benefits $22,334 $28,018
Less compensation adjustments:
Staff reduction costs 213 -
Amortization expense of IPO-related restricted stock
unit grants 2,209 2,624
Total compensation adjustments 2,422 2,624
Adjusted compensation $19,912 $25,394
Operating income before income tax expense $ 8,234 $39,122
Add: total compensation adjustments 2,422 2,624
Add: write-off of unamortized debt issuance costs 122 -
Adjusted operating income $10,778 $41,746
Net income $ 5,468 $22,936
Less: interest income (934 ) (567 )
Add: interest expense 435 526
Add: income taxes 5,322 16,751
Add: depreciation and amortization 5,066 5,170
EBITDA 15,357 44,816
Less: other non-operating (income) loss(a) (2,057 ) (524 )
Add: Compensation adjustments, excluding amortization 213 -
Add: write off of unamortized debt issuance costs 122 -
Adjusted EBITDA $13,635 $44,292
Net income attributable to Artio Global Investors $ 4,600 $22,032
Add: total compensation adjustments 2,422 2,624
Add: write-off of unamortized debt issuance costs 122 -
Add: Non-operating income related to unamortized debt
issuance costs 71 -
Add: Non-controlling interests in Holdings 190 769
Tax impact of adjustments (944 ) (1,245 )
Adjusted net income attributable to Artio Global
Investors $ 6,461 $24,180
Weighted average diluted shares 58,475 58,404
Adjusted weighted average diluted shares(b) 59,675 59,604
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(a) Other non-operating income (loss) represents primarily gains and losses on investments of the Consolidated Investment Products.
(b) Adjusted weighted average diluted shares assumes that the Principals had exchanged all of their non-voting Class A membership interests in Holdings ("New Class A Units") for Class A common stock. The additional shares are antidilutive in accordance with GAAP.
Assets under Management ("AuM")
Changes to our AuM, the distribution of our AuM among our investment products and investment strategies, and the effective fee rates on our products, all affect our operating results from one period to another.
The amount and composition of our AuM are influenced by a variety of factors including, among other things:
• investment performance, including our investment decisions and fluctuations in both the financial markets and foreign currency exchange rates;
• client cash flows into and out of our investment products;
• the mix of AuM among our various strategies; and
• our introduction or closure of investment strategies and products.
27 Artio Global Investors Inc. First Quarter 2012 Form 10-Q
We manage assets across 10 different strategies, within six asset classes, including:
• International Equity;
• Global Equity;
• U.S. Equity;
• High Grade Fixed Income;
• High Yield; and
• Local Emerging Markets Debt.
Investors invest in our strategies through the investment vehicles set forth in the following table.
The following table sets forth a summary of our AuM by investment vehicle type as of March 31, 2012 and 2011.
As of March 31, As a % of AuM as of March 31,
(in millions, except percentages) 2012 2011 2012 2011
Proprietary Funds(a)
A shares $ 3,922 $ 7,073
I shares(b) 8,940 15,781
Total 12,862 22,854 48.3 % 44.5 %
Institutional commingled funds 4,346 9,374 16.3 18.3
Separate accounts 7,858 14,768 29.5 28.8
Sub-advisory accounts 1,579 4,332 5.9 8.4
Ending AuM $26,645 $51,328 100.0 % 100.0 %
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(a) Proprietary Funds include both SEC-registered funds and private offshore funds. SEC-registered mutual funds within our proprietary funds are: Artio International Equity Fund; Artio International Equity Fund II; Artio Total Return Bond Fund; Artio Global High Income Fund; Artio Global Equity Fund Inc.; Artio U.S. Microcap Fund; Artio U.S. Midcap Fund; Artio U.S. Multicap Fund; Artio U.S. Smallcap Fund; and Artio Local Emerging Markets Debt Fund.
(b) Amounts invested in private offshore funds and in the hedge fund are categorized as "I" shares.
The different fee structures associated with each type of investment vehicle make the composition of our AuM an important determinant of the investment management fees we earn. We typically earn higher effective investment management fee rates from our proprietary funds and institutional commingled funds as compared to our separate and sub-advised accounts.
Artio Global Investors Inc. First Quarter 2012 Form 10-Q 28
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Table of Contents
The following table sets forth the changes in AuM by investment vehicle type.
Three Months Ended March 31,
(in millions, except percentages) 2012 2011 % Change
Proprietary Funds:
Beginning AuM $13,366 $23,013 (42 )%
Gross client cash inflows 1,235 1,788 (31 )
Gross client cash outflows (2,712 ) (2,473 ) (10 )
Net client cash flows (1,477 ) (685 ) (116 )
Transfers between investment vehicles 52 - *
Total client cash flows (1,425 ) (685 ) (108 )
Market appreciation 921 526 75
Ending AuM 12,862 22,854 (44 )
Institutional Commingled Funds:
Beginning AuM 4,912 9,236 (47 )
Gross client cash inflows 32 153 (79 )
Gross client cash outflows (1,107 ) (424 ) (161 )
Net client cash flows (1,075 ) (271 ) *
Transfers between investment vehicles 13 210 (94 )
Total client cash flows (1,062 ) (61 ) *
Market appreciation 496 199 149
Ending AuM 4,346 9,374 (54 )
Separate Accounts:
Beginning AuM 9,799 16,801 (42 )
Gross client cash inflows 101 135 (25 )
Gross client cash outflows (2,694 ) (2,240 ) (20 )
Net client cash flows (2,593 ) (2,105 ) (23 )
Transfers between investment vehicles (65 ) (210 ) 69
Total client cash flows (2,658 ) (2,315 ) (15 )
Market appreciation 717 282 154
Ending AuM 7,858 14,768 (47 )
Sub-advisory Accounts:
Beginning AuM 2,282 4,357 (48 )
Gross client cash inflows 39 151 (74 )
Gross client cash outflows (889 ) (320 ) (178 )
Net client cash flows (850 ) (169 ) *
Transfers between investment vehicles - - -
Total client cash flows (850 ) (169 ) *
Market appreciation 147 144 2
Ending AuM 1,579 4,332 (64 )
Total AuM:
Beginning AuM 30,359 53,407 (43 )
Gross client cash inflows 1,407 2,227 (37 )
Gross client cash outflows (7,402 ) (5,457 ) (36 )
Net client cash flows (5,995 ) (3,230 ) (86 )
Transfers between investment vehicles - - -
Total client cash flows (5,995 ) (3,230 ) (86 )
Market appreciation 2,281 1,151 98
Ending AuM $26,645 $51,328 (48 )
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* Calculation not meaningful.
29 Artio Global Investors Inc. First Quarter 2012 Form 10-Q
Market appreciation for the three months ended March 31, 2012, compared to the corresponding period in 2011, was primarily attributable to the following strategies:
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