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EXCEL - IDEA: XBRL DOCUMENT - Artio Global Investors Inc. | Financial_Report.xls |
EX-31.1 - EX-31.1 - Artio Global Investors Inc. | y93148exv31w1.htm |
EX-32.1 - EX-32.1 - Artio Global Investors Inc. | y93148exv32w1.htm |
EX-31.2 - EX-31.2 - Artio Global Investors Inc. | y93148exv31w2.htm |
EX-32.2 - EX-32.2 - Artio Global Investors Inc. | y93148exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
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 1-34457
Artio Global Investors Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-6174048 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
330 Madison Ave. | ||
New York, NY | 10017 | |
(Address of principal executive offices) | (Zip Code) |
(212) 297-3600
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report
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 is required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. x Yes o No
Indicate by checkmark 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). x Yes o No
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.
Large accelerated filer | o | Accelerated filer | x | ||||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes x No
As of October 31, 2011, there were 58,051,113 shares outstanding of the registrants Class A common
stock, par value $0.001 per share, 1,200,000 shares outstanding of the registrants Class B common
stock, par value $0.001 per share, and no shares outstanding of the registrants Class C common
stock, par value $0.01 per share.
Artio Global Investors Inc.
Table of Contents
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EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
1 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Financial Position
(Unaudited)
(Unaudited)
As of | |||||||||
(in thousands, except for share amounts) | September 30, 2011 | December 31, 2010 | |||||||
ASSETS |
|||||||||
Cash |
$ | 91,971 | $ | 80,043 | |||||
Investments, at fair value: |
|||||||||
Artio Global funds held for deferred compensation |
9,834 | 9,069 | |||||||
Investments owned by the Consolidated Investment Products, and other seed money investments |
57,499 | 25,959 | |||||||
Fees receivable and accrued fees, net of allowance for doubtful accounts |
41,612 | 54,373 | |||||||
Deferred taxes |
197,107 | 198,863 | |||||||
Income taxes receivable |
13,051 | 8,586 | |||||||
Other assets |
13,234 | 11,554 | |||||||
Total assets |
$ | 424,308 | $ | 388,447 | |||||
LIABILITIES AND EQUITY |
|||||||||
Debt: |
|||||||||
Term loan |
$ | 42,000 | $ | 55,500 | |||||
Due to prime broker by the Consolidated Investment Products |
2,230 | 1,959 | |||||||
Accrued compensation and benefits |
29,487 | 39,256 | |||||||
Accounts payable and accrued expenses |
5,610 | 7,761 | |||||||
Investments sold, not yet purchased by the Consolidated Investment
Products, at fair value |
4,937 | 1,288 | |||||||
Accrued income taxes payable |
4,411 | 4,749 | |||||||
Due under tax receivable agreement |
162,092 | 167,058 | |||||||
Other liabilities |
4,729 | 4,593 | |||||||
Total liabilities |
255,496 | 282,164 | |||||||
Commitments and contingencies (Note 11) |
|||||||||
Common stock: |
|||||||||
Class A common stock (500,000,000 shares authorized, 2011
58,051,113 shares issued and outstanding; 2010 41,552,328 shares issued and outstanding) |
58 | 42 | |||||||
Class B common stock (50,000,000 shares authorized, 2011 and 2010 1,200,000 shares issued and outstanding) |
1 | 1 | |||||||
Class C common stock (210,000,000 shares authorized, 2011 no shares
issued and outstanding ; 2010 16,755,844 shares issued and outstanding) |
| 168 | |||||||
Additional paid-in capital |
624,958 | 613,065 | |||||||
Accumulated deficit |
(471,321 | ) | (509,629 | ) | |||||
Total stockholders equity |
153,696 | 103,647 | |||||||
Non-controlling interests in Holdings |
1,622 | 1,505 | |||||||
Non-controlling interests in the Consolidated Investment Products |
13,494 | 1,131 | |||||||
Total equity |
168,812 | 106,283 | |||||||
Total liabilities and equity |
$ | 424,308 | $ | 388,447 | |||||
See accompanying notes to unaudited consolidated financial statements.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 2
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Unaudited)
Three Months Ended September 30, | |||||||||
(in thousands, except per share information) | 2011 | 2010 | |||||||
Revenues and other operating income: |
|||||||||
Investment management fees |
$ | 65,576 | $ | 80,173 | |||||
Net gains (losses) on funds held for deferred compensation |
(1,798 | ) | 722 | ||||||
Foreign currency gains |
6 | 35 | |||||||
Total revenues and other operating income |
63,784 | 80,930 | |||||||
Expenses: |
|||||||||
Employee compensation and benefits |
28,387 | 24,772 | |||||||
Shareholder servicing and marketing |
4,708 | 5,031 | |||||||
General and administrative |
9,470 | 11,224 | |||||||
Total expenses |
42,565 | 41,027 | |||||||
Operating income before income tax expense |
21,219 | 39,903 | |||||||
Non-operating loss: |
|||||||||
Interest income the Consolidated Investment Products |
1,019 | 33 | |||||||
Interest expense |
(461 | ) | (607 | ) | |||||
Net gains (losses) the Consolidated Investment Products and
other seed money investments |
(6,554 | ) | 145 | ||||||
Expenses the Consolidated Investment Products and other seed
money investments |
(196 | ) | (5 | ) | |||||
Other income |
2 | 3 | |||||||
Total non-operating loss |
(6,190 | ) | (431 | ) | |||||
Income before income tax expense |
15,029 | 39,472 | |||||||
Income taxes |
9,753 | 18,717 | |||||||
Net income |
5,276 | 20,755 | |||||||
Net income attributable to non-controlling interests in Holdings |
319 | 756 | |||||||
Net loss attributable to non-controlling interests in the
Consolidated Investment Products |
(1,456 | ) | | ||||||
Net income attributable to Artio Global Investors |
$ | 6,413 | $ | 19,999 | |||||
Per share information: |
|||||||||
Basic net income attributable to Artio Global Investors |
$ | 0.11 | $ | 0.34 | |||||
Diluted net income attributable to Artio Global Investors |
$ | 0.11 | $ | 0.34 | |||||
Weighted average shares used to calculate per share information: |
|||||||||
Basic |
58,157 | 58,679 | |||||||
Diluted |
58,403 | 59,012 | |||||||
Dividends per basic share declared |
$ | 0.06 | $ | 0.06 | |||||
See accompanying notes to unaudited consolidated financial statements.
3 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Unaudited)
Nine Months Ended September 30, | |||||||||
(in thousands, except per share information) | 2011 | 2010 | |||||||
Revenues and other operating income: |
|||||||||
Investment management fees |
$ | 225,561 | $ | 249,301 | |||||
Net gains (losses) on funds held for deferred compensation |
(1,435 | ) | 582 | ||||||
Foreign currency gains (losses) |
(14 | ) | 13 | ||||||
Total revenues and other operating income |
224,112 | 249,896 | |||||||
Expenses: |
|||||||||
Employee compensation and benefits |
82,217 | 74,588 | |||||||
Shareholder servicing and marketing |
14,736 | 15,177 | |||||||
General and administrative |
29,999 | 31,954 | |||||||
Total expenses |
126,952 | 121,719 | |||||||
Operating income before income tax expense |
97,160 | 128,177 | |||||||
Non-operating loss: |
|||||||||
Interest income the Consolidated Investment Products |
2,314 | 33 | |||||||
Interest expense |
(1,488 | ) | (1,927 | ) | |||||
Net gains (losses) the Consolidated Investment Products and
other seed money investments |
(6,312 | ) | 145 | ||||||
Expenses the Consolidated Investment Products and other seed money investments |
(298 | ) | (5 | ) | |||||
Other income |
3 | 14 | |||||||
Total non-operating loss |
(5,781 | ) | (1,740 | ) | |||||
Income before income tax expense |
91,379 | 126,437 | |||||||
Income taxes |
41,373 | 49,376 | |||||||
Net income |
50,006 | 77,061 | |||||||
Net income attributable to non-controlling interests in Holdings |
1,807 | 19,239 | |||||||
Net loss attributable to non-controlling interests in the
Consolidated Investment Products |
(1,396 | ) | | ||||||
Net income attributable to Artio Global Investors |
$ | 49,595 | $ | 57,822 | |||||
Per share information: |
|||||||||
Basic net income attributable to Artio Global Investors |
$ | 0.85 | $ | 1.14 | |||||
Diluted net income attributable to Artio Global Investors |
$ | 0.85 | $ | 1.13 | |||||
Weighted average shares used to calculate per share information: |
|||||||||
Basic |
58,301 | 50,907 | |||||||
Diluted |
58,431 | 51,137 | |||||||
Dividends per basic share declared |
$ | 0.18 | $ | 0.18 | |||||
See accompanying notes to unaudited consolidated financial statements.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 4
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
(Unaudited)
Non- | ||||||||||||||||||||||||||||||||||||
controlling | ||||||||||||||||||||||||||||||||||||
Interests in | ||||||||||||||||||||||||||||||||||||
Class A | Class B | Class C | the | |||||||||||||||||||||||||||||||||
Common | Common | Common | Non- | Consoli- | ||||||||||||||||||||||||||||||||
Stock | Stock | Stock | Additional | Accum- | Stock- | controlling | dated | |||||||||||||||||||||||||||||
(in thousands, except | (par value | (par value | (par value | Paid-in | ulated | holders' | Interests in | Investment | Total | |||||||||||||||||||||||||||
per share information) | $0.001) | $0.001) | $0.01) | Capital | (Deficit) | Equity | Holdings | Products | Equity | |||||||||||||||||||||||||||
Balance as of January 1, 2010 |
$ | 28 | $ | 15 | $ | 168 | $ | 586,956 | $ | (580,275 | ) | $ | 6,892 | $ | (2,911 | ) | $ | 3,981 | ||||||||||||||||||
Net income |
| | | | 57,822 | 57,822 | 19,239 | 77,061 | ||||||||||||||||||||||||||||
Holdings units exchanged for Class A common stock and cancelation of Class B common stock |
14 | (14 | ) | | 3,253 | | 3,253 | (3,253 | ) | | ||||||||||||||||||||||||||
Net benefit from step- up in tax basis |
| | | 24,176 | | 24,176 | | 24,176 | ||||||||||||||||||||||||||||
Shares issued to the public |
4 | | | 69,286 | | 69,290 | | 69,290 | ||||||||||||||||||||||||||||
Stock repurchases |
(4 | ) | | | (77,249 | ) | | (77,253 | ) | | (77,253 | ) | ||||||||||||||||||||||||
Share-based payments: |
||||||||||||||||||||||||||||||||||||
Directors awards |
| | | 180 | | 180 | | 180 | ||||||||||||||||||||||||||||
Amortization |
| | | 9,662 | | 9,662 | | 9,662 | ||||||||||||||||||||||||||||
Forfeiture |
| | | (172 | ) | | (172 | ) | | (172 | ) | |||||||||||||||||||||||||
RSU dividend equivalents |
| | | 412 | (412 | ) | | | | |||||||||||||||||||||||||||
Distribution to non- controlling interests |
| | | | | | (12,382 | ) | (12,382 | ) | ||||||||||||||||||||||||||
Cash dividends paid ($0.18 per share) |
| | | | (8,871 | ) | (8,871 | ) | | (8,871 | ) | |||||||||||||||||||||||||
Balance as of September 30, 2010 |
$ | 42 | $ | 1 | $ | 168 | $ | 616,504 | $ | (531,736 | ) | $ | 84,979 | $ | 693 | $ | 85,672 | |||||||||||||||||||
Balance as of January 1, 2011 |
$ | 42 | $ | 1 | $ | 168 | $ | 613,065 | $ | (509,629 | ) | $ | 103,647 | $ | 1,505 | $ | 1,131 | $ | 106,283 | |||||||||||||||||
Net income |
| | | | 49,595 | 49,595 | 1,807 | (1,396 | ) | 50,006 | ||||||||||||||||||||||||||
Stock conversion |
17 | | (168 | ) | 151 | | | | | | ||||||||||||||||||||||||||
Stock repurchases |
(1 | ) | | | (6,783 | ) | | (6,784 | ) | | | (6,784 | ) | |||||||||||||||||||||||
Share-based payments: |
||||||||||||||||||||||||||||||||||||
Directors awards |
| | | 311 | | 311 | | | 311 | |||||||||||||||||||||||||||
Amortization |
| | | 17,439 | | 17,439 | | | 17,439 | |||||||||||||||||||||||||||
Forfeiture |
| | | (2 | ) | | (2 | ) | | | (2 | ) | ||||||||||||||||||||||||
RSU dividend equivalents |
| | | 777 | (777 | ) | | | | | ||||||||||||||||||||||||||
Capital contributions from non- controlling interests |
| | | | | | | 13,759 | 13,759 | |||||||||||||||||||||||||||
Distribution to non- controlling interests |
| | | | | | (1,690 | ) | | (1,690 | ) | |||||||||||||||||||||||||
Cash dividends paid ($0.18 per share) |
| | | | (10,510 | ) | (10,510 | ) | | | (10,510 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2011 |
$ | 58 | $ | 1 | $ | | $ | 624,958 | $ | (471,321 | ) | $ | 153,696 | $ | 1,622 | $ | 13,494 | $ | 168,812 | |||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
5 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 50,006 | $ | 77,061 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,863 | 2,012 | ||||||
Deferred compensation |
4,317 | 2,982 | ||||||
Share-based compensation |
17,748 | 9,670 | ||||||
Deferred income taxes |
1,756 | 4,146 | ||||||
(Gains) losses on investments and derivatives |
7,747 | (727 | ) | |||||
Changes in assets and liabilities: |
||||||||
Purchases by the Consolidated Investment Products and of other seed money investments |
(101,361 | ) | (9,879 | ) | ||||
Proceeds from sales or maturities by the Consolidated Investment Products and from other seed money investments |
66,712 | 430 | ||||||
Due to prime broker by the Consolidated Investment Products |
271 | | ||||||
Fees receivable and accrued fees, net of allowance for doubtful accounts |
12,761 | 3,116 | ||||||
Income taxes receivable |
(4,465 | ) | (4,950 | ) | ||||
Other assets |
(1,658 | ) | 632 | |||||
Accrued compensation and benefits |
(14,086 | ) | (4,557 | ) | ||||
Accounts payable and accrued expenses |
(2,137 | ) | (1,998 | ) | ||||
Accrued income taxes payable |
(338 | ) | (8,652 | ) | ||||
Due under tax receivable agreement |
(4,966 | ) | | |||||
Other liabilities |
136 | 4,670 | ||||||
Net cash provided by operating activities |
34,306 | 73,956 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of Artio Global funds held for deferred compensation |
(7,115 | ) | (4,908 | ) | ||||
Proceeds from redemptions of Artio Global funds held for deferred compensation |
4,915 | 3,809 | ||||||
Purchase of fixed assets |
(1,439 | ) | (957 | ) | ||||
Net cash used in investing activities |
(3,639 | ) | (2,056 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayments of borrowing under term credit facility |
(13,500 | ) | | |||||
Proceeds from secondary offering |
| 69,290 | ||||||
Repurchase and retirement of Class A common stock |
(6,784 | ) | (77,253 | ) | ||||
Contributions from non-controlling interests in the Consolidated Investment Products |
13,759 | | ||||||
Distribution paid to GAM Holding AG |
| (40,100 | ) | |||||
Distributions paid to non-controlling interests in Holdings |
(1,690 | ) | (12,382 | ) | ||||
Cash dividends paid |
(10,510 | ) | (8,871 | ) | ||||
Net cash used in financing activities |
(18,725 | ) | (69,316 | ) | ||||
Effect of exchange rates on cash |
(14 | ) | 13 | |||||
Net increase in cash |
11,928 | 2,597 | ||||||
Cash: |
||||||||
Beginning of period |
80,043 | 60,842 | ||||||
End of period |
$ | 91,971 | $ | 63,439 | ||||
Cash paid during period for: |
||||||||
Income taxes, net of refunds |
$ | 44,459 | $ | 59,091 | ||||
Interest expense |
1,632 | 1,487 | ||||||
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 6
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Nine Months Ended September 30, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Supplementary information: |
||||||||
Non-cash transactions: |
||||||||
Net benefit from step-up in tax basis |
$ | | $ | (24,176 | ) | |||
Exchange of New Class A Units for shares of Class A common stock |
| (3,267 | ) | |||||
Cancelation of Class B common stock |
| 14 | ||||||
Conversion of Class C common stock to Class A common stock |
(151 | ) | | |||||
See accompanying notes to unaudited consolidated financial statements.
7 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation
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; Artio Global
Institutional Services LLC, which was licensed as a limited-purpose broker-dealer in April 2011 and
distributes certain of our products; Artio Alpha Investment Funds, LLC (a consolidated investment
vehicle that includes the Artio Global Credit Opportunities Fund, a hedge fund); and the Artio
Local Emerging Markets Debt Fund, an SEC-registered mutual fund launched in May 2011, which is
categorized as a consolidated investment vehicle. We refer to the consolidated investment vehicles
as the Consolidated Investment Products. As of September 30, 2011, 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 and
Global Equities (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.
Investment Adviser is our primary operating entity and provides investment management services to
institutional and mutual fund clients. It manages and advises the Artio Global Funds (the Funds),
which are primarily U.S. registered investment companies; commingled institutional investment
vehicles; separate accounts; sub-advisory accounts; and a hedge fund. A substantial portion of our
assets under management (AuM) are invested outside of the U.S., while our clients are primarily
U.S.-based.
For select new product initiatives, we invest in the related investment vehicles in order to
provide critical asset mass. We refer to these investments as seed money investments. If a seed
money investment is required to be consolidated, it is reflected within the Consolidated Investment
Products. In order to maintain consistency of accounting among all seed money investments, we elect
the fair value option if a seed money investment is required to be carried under the equity method.
The consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). These principles require
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities (including contingent liabilities), revenues and expenses at the date of the
consolidated financial statements. Actual results could differ from those estimates and may have a
material effect on the consolidated financial statements.
Certain comparative amounts for prior periods have been reclassified to conform to the current
periods presentation.
Our interim consolidated financial statements are unaudited. Interim results reflect all normal
recurring adjustments that are, in the opinion of management, necessary for a fair presentation of
the results. Revenues and other operating income, Total non-operating income (loss) and Net income
can vary significantly from quarter to quarter due to the nature of our business activities. The
financial results of interim periods may not be indicative of the financial results for the entire
year.
As part of the preparation of the interim consolidated financial statements, we performed an
evaluation of subsequent events occurring after the Consolidated Statement of Financial Position
date of September 30, 2011, through to the date the interim consolidated financial statements were
issued.
These statements should be read in conjunction with our consolidated financial statements and
related notes as of December 31, 2010, and for the three years then ended, included in our 2010
Annual Report on Form 10-K.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 8
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 2. Stockholders Equity
The table below sets forth the number of shares of Class A, Class B and Class C common stock issued
and outstanding as of December 31, 2010, and September 30, 2011.
Class A | Class B | Class C | ||||||||||
(in thousands) | Common Stock | Common Stock | Common Stock | |||||||||
As of December 31, 2009 |
27,659 | 15,600 | 16,756 | |||||||||
Activity: |
||||||||||||
Exchange by the Principals(a) |
14,400 | (14,400 | ) | | ||||||||
Shares issued to the public(b) |
4,209 | | | |||||||||
Repurchase from the Principals(b) |
(4,209 | ) | | | ||||||||
Share repurchase program(c) |
(1,000 | ) | | | ||||||||
Restricted stock units vested |
485 | | | |||||||||
Shares issued to the independent directors(d) |
8 | | | |||||||||
As of December 31, 2010(e) |
41,552 | 1,200 | 16,756 | |||||||||
Class C common stock conversion(f) |
16,756 | | (16,756 | ) | ||||||||
Share repurchase program(c) |
(774 | ) | | | ||||||||
Restricted stock units vested |
496 | | | |||||||||
Shares issued to independent directors(d) |
21 | | | |||||||||
As of September 30, 2011(e) |
58,051 | 1,200 | | |||||||||
(a) | Represents the issuance of 7.2 million shares of Class A common stock to each of the Principals upon exchange of an equivalent number of non-voting member interests in Holdings (New Class A Units) in 2010. Upon the exchange of New Class A Units for Class A common stock, corresponding shares of Class B common stock were canceled. | |
(b) | Represents the 4.2 million shares of Class A common stock that were issued to the public in connection with a synthetic secondary offering (the secondary offering) in 2010, including 0.4 million shares issued to the underwriters in connection with exercising a portion of their option to purchase additional shares of Class A common stock, and which we subsequently purchased from the Principals with the net proceeds, and retired. | |
(c) | In July 2010, our Board of Directors authorized a share repurchase program of up to 1.0 million shares of our Class A common stock. As of December 31, 2010, we had purchased and retired 1.0 million shares of our Class A common stock for approximately $14.6 million under this program. In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of our common stock. This authority expires on December 31, 2013. As of September 30, 2011, we had purchased and retired 773,939 shares of our Class A common stock for approximately $6.8 million under this program. | |
(d) | Represents the 8,376 shares of fully-vested Class A common stock (subject to transfer restrictions) that were awarded to our independent directors in 2010 and 20,848 shares of fully-vested Class A common stock (subject to transfer restrictions) that were awarded to our independent directors in the first nine months of 2011. | |
(e) | The table does not reflect 1.9 million unvested restricted stock units awarded to certain employees as of December 31, 2010, and 3.8 million unvested restricted stock units awarded to certain employees as of September 30, 2011 (see Note 8. Share-Based Payments). Each restricted stock unit represents the right to receive one share of Class A common stock upon vesting. | |
(f) | On September 29, 2011, the second anniversary of our initial public offering, all outstanding shares of Class C common stock automatically converted into Class A common stock pursuant to our certificate of incorporation. |
The table below sets forth the effect of the change in our ownership in Holdings as of
September 30, 2010, after the exchange by the Principals of New Class A Units for shares of Class A
common stock.
(in thousands) | ||||
Net income attributable to Artio Global Investors for the
nine months ended September 30, 2010 |
$ | 57,822 | ||
Increase in Additional paid-in capital due to exchange by the
Principals of New Class A Units for shares of Class A common stock |
3,253 | |||
As of September 30, 2010 |
$ | 61,075 | ||
9 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 3. Consolidated Investment Products
From time to time, we make seed money investments in the investment vehicles we manage. We evaluate
these investment vehicles for consolidation. They are consolidated if they are (i) variable
interest entities, and we are the primary beneficiary, or (ii) voting interest entities, and we
have a controlling interest.
We have a controlling financial interest in the Consolidated Investment Products, which are
therefore included in our consolidated financial statements. The assets and liabilities of the
Consolidated Investment Products are included in their respective accounts in the Consolidated
Statement of Financial Position, and the results of operations are included in Non-operating income
(loss) in the Consolidated Statement of Operations.
A condensed consolidating statement of financial position as of September 30, 2011, including
balances attributable to the Consolidated Investment Products, is as follows:
Artio Global | ||||||||||||||||
Before | Consolidated Investment |
Investors Inc. and Subsidiaries |
||||||||||||||
(in thousands) | Consolidation (a) | Products | Eliminations | Consolidated | ||||||||||||
Assets: |
||||||||||||||||
Cash |
$ | 89,166 | $ | 2,805 | $ | | $ | 91,971 | ||||||||
Investments, at fair value |
12,491 | 54,842 | | 67,333 | ||||||||||||
Investment in the
Consolidated Investment Products |
39,812 | (39,812 | ) | | ||||||||||||
Other assets |
259,696 | 5,308 | | 265,004 | ||||||||||||
Total assets |
$ | 401,165 | $ | 62,955 | $ | (39,812 | ) | $ | 424,308 | |||||||
Liabilities and Equity: |
||||||||||||||||
Debt |
$ | 42,000 | $ | 2,230 | $ | | $ | 44,230 | ||||||||
Investments sold, not yet
purchased by the Consolidated Investment Products, at fair value |
| 4,937 | | 4,937 | ||||||||||||
Other liabilities |
203,847 | 2,482 | | 206,329 | ||||||||||||
Total liabilities |
245,847 | 9,649 | | 255,496 | ||||||||||||
Members equity |
30,534 | (30,534 | ) | | ||||||||||||
Net asset value |
22,772 | (22,772 | ) | | ||||||||||||
Common stock |
59 | | 59 | |||||||||||||
Additional paid-in capital |
624,958 | | 624,958 | |||||||||||||
Accumulated deficit |
(471,321 | ) | | (471,321 | ) | |||||||||||
Total stockholders equity |
153,696 | 53,306 | (53,306 | ) | 153,696 | |||||||||||
Non-controlling interests |
1,622 | 13,494 | 15,116 | |||||||||||||
Total equity |
155,318 | 53,306 | (39,812 | ) | 168,812 | |||||||||||
Total liabilities and equity |
$ | 401,165 | $ | 62,955 | $ | (39,812 | ) | $ | 424,308 | |||||||
(a) | Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 10
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
A condensed consolidating statement of financial position as of December 31, 2010, including
balances attributable to the Consolidated Investment Products, is as follows:
Artio Global | ||||||||||||||||
Consolidated | Investors Inc. | |||||||||||||||
Before | Investment | and Subsidiaries | ||||||||||||||
(in thousands) | Consolidation (a) | Products | Eliminations | Consolidated | ||||||||||||
Assets: |
||||||||||||||||
Cash |
$ | 79,232 | $ | 811 | $ | | $ | 80,043 | ||||||||
Investments, at fair value |
10,386 | 24,642 | | 35,028 | ||||||||||||
Investment in the
Consolidated Investment Products |
19,912 | | (19,912 | ) | | |||||||||||
Other assets |
273,126 | 250 | | 273,376 | ||||||||||||
Total assets |
$ | 382,656 | $ | 25,703 | $ | (19,912 | ) | $ | 388,447 | |||||||
Liabilities and Equity: |
||||||||||||||||
Debt |
$ | 55,500 | $ | 1,959 | $ | | $ | 57,459 | ||||||||
Investments sold, not yet
purchased by the Consolidated Investment Products, at fair value |
| 1,288 | | 1,288 | ||||||||||||
Other liabilities |
222,004 | 1,413 | | 223,417 | ||||||||||||
Total liabilities |
277,504 | 4,660 | | 282,164 | ||||||||||||
Members equity |
21,043 | (21,043 | ) | | ||||||||||||
Common stock |
211 | | 211 | |||||||||||||
Additional paid-in capital |
613,065 | | 613,065 | |||||||||||||
Accumulated deficit |
(509,629 | ) | | (509,629 | ) | |||||||||||
Total stockholders equity |
103,647 | 21,043 | (21,043 | ) | 103,647 | |||||||||||
Non-controlling interests |
1,505 | 1,131 | 2,636 | |||||||||||||
Total equity |
105,152 | 21,043 | (19,912 | ) | 106,283 | |||||||||||
Total liabilities and equity |
$ | 382,656 | $ | 25,703 | $ | (19,912 | ) | $ | 388,447 | |||||||
(a) | Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method. |
11 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
A condensed consolidating statement of operations for the three months ended September 30, 2011 and
2010, including amounts attributable to the Consolidated Investment Products, is as follows:
Artio Global | ||||||||||||||||
Consolidated | Investors Inc. | |||||||||||||||
Before | Investment | and Subsidiaries | ||||||||||||||
(in thousands) | Consolidation (a) | Products | Eliminations | Consolidated | ||||||||||||
For the three months ended September 30, 2011: |
||||||||||||||||
Total revenues and other operating income |
$ | 63,727 | $ | | $ | 57 | $ | 63,784 | ||||||||
Total expenses |
42,565 | | | 42,565 | ||||||||||||
Operating income before income tax expense |
21,162 | | 57 | 21,219 | ||||||||||||
Non-operating income (loss): |
||||||||||||||||
Equity in earnings of the
Consolidated Investment Products |
(3,426 | ) | 3,426 | | ||||||||||||
Other |
(1,251 | ) | (4,882 | ) | (57 | ) | (6,190 | ) | ||||||||
Total non operating income (loss) |
(4,677 | ) | (4,882 | ) | 3,369 | (6,190 | ) | |||||||||
Income before income tax expense |
16,485 | (4,882 | ) | 3,426 | 15,029 | |||||||||||
Income taxes |
9,753 | | | 9,753 | ||||||||||||
Net income |
6,732 | (4,882 | ) | 3,426 | 5,276 | |||||||||||
Net income attributable to
non-controlling interests |
319 | | (1,456 | ) | (1,137 | ) | ||||||||||
Net income,
excluding non-controlling interests |
$ | 6,413 | $ | (4,882 | ) | $ | 4,882 | $ | 6,413 | |||||||
For the three months ended September 30, 2010: |
||||||||||||||||
Total revenues and other operating income |
$ | 80,930 | $ | | $ | | $ | 80,930 | ||||||||
Total expenses |
41,027 | | | 41,027 | ||||||||||||
Operating income before income tax expense |
39,903 | | | 39,903 | ||||||||||||
Non-operating income (loss): |
||||||||||||||||
Equity in earnings of the
Consolidated Investment Products |
77 | | (77 | ) | | |||||||||||
Other |
(508 | ) | 77 | | (431 | ) | ||||||||||
Total non operating income (loss) |
(431 | ) | 77 | (77 | ) | (431 | ) | |||||||||
Income before income tax expense |
39,472 | 77 | (77 | ) | 39,472 | |||||||||||
Income taxes |
18,717 | | | 18,717 | ||||||||||||
Net income |
20,755 | 77 | (77 | ) | 20,755 | |||||||||||
Net income attributable to
non-controlling interests |
756 | | | 756 | ||||||||||||
Net income,
excluding non-controlling interests |
$ | 19,999 | $ | 77 | $ | (77 | ) | $ | 19,999 | |||||||
(a) | Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 12
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
A condensed consolidating statement of operations for the nine months ended September 30, 2011 and
2010, including amounts attributable to the Consolidated Investment Products, is as follows:
Artio Global | ||||||||||||||||
Consolidated | Investors Inc. | |||||||||||||||
Before | Investment | and Subsidiaries | ||||||||||||||
(in thousands) | Consolidation (a) | Products | Eliminations | Consolidated | ||||||||||||
For the nine
months ended September 30, 2011: |
||||||||||||||||
Total revenues and other operating income |
$ | 224,032 | $ | | $ | 80 | $ | 224,112 | ||||||||
Total expenses |
126,952 | | | 126,952 | ||||||||||||
Operating income before income tax expense |
97,080 | | 80 | 97,160 | ||||||||||||
Non-operating income (loss): |
||||||||||||||||
Equity in earnings of the
Consolidated Investment Products |
(2,100 | ) | 2,100 | | ||||||||||||
Other |
(2,205 | ) | (3,496 | ) | (80 | ) | (5,781 | ) | ||||||||
Total non operating income (loss) |
(4,305 | ) | (3,496 | ) | 2,020 | (5,781 | ) | |||||||||
Income before income tax expense |
92,775 | (3,496 | ) | 2,100 | 91,379 | |||||||||||
Income taxes |
41,373 | | | 41,373 | ||||||||||||
Net income |
51,402 | (3,496 | ) | 2,100 | 50,006 | |||||||||||
Net income attributable to
non-controlling interests |
1,807 | | (1,396 | ) | 411 | |||||||||||
Net income, excluding non-controlling interests |
$ | 49,595 | $ | (3,496 | ) | $ | 3,496 | $ | 49,595 | |||||||
For the nine months ended September 30, 2010: |
||||||||||||||||
Total revenues and other operating income |
$ | 249,896 | $ | | $ | | $ | 249,896 | ||||||||
Total expenses |
121,719 | | | 121,719 | ||||||||||||
Operating income before income tax expense |
128,177 | | | 128,177 | ||||||||||||
Non-operating income (loss): |
||||||||||||||||
Equity in earnings of the
Consolidated Investment Products |
77 | | (77 | ) | | |||||||||||
Other |
(1,817 | ) | 77 | | (1,740 | ) | ||||||||||
Total non operating income (loss) |
(1,740 | ) | 77 | (77 | ) | (1,740 | ) | |||||||||
Income before income tax expense |
126,437 | 77 | (77 | ) | 126,437 | |||||||||||
Income taxes |
49,376 | | | 49,376 | ||||||||||||
Net income |
77,061 | 77 | (77 | ) | 77,061 | |||||||||||
Net income attributable to
non-controlling interests |
19,239 | | | 19,239 | ||||||||||||
Net income, excluding non-controlling interests |
$ | 57,822 | $ | 77 | $ | (77 | ) | $ | 57,822 | |||||||
(a) | Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method. |
13 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 4. Related Party Activities
We engage in transactions with our mutual funds and with affiliates of our former sole stockholder,
GAM Holding AG (GAM), a Swiss corporation.
Affiliate Transactions Mutual and Offshore Funds
We earn management fees from the Funds, as Investment Adviser provides investment management
services to the Funds pursuant to investment management agreements with the Funds. The investment
management agreements are subject to annual review and approval by their boards. Investment Adviser
also derives investment management revenue from sub-advising certain offshore funds sponsored by
affiliates of GAM. Revenues related to these services are included in Investment management fees in
the Consolidated Statement of Operations as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Funds investment management fees |
$ | 38,186 | $ | 44,911 | $ | 129,633 | $ | 141,245 | ||||||||
Sub-advisory investment management
fees on GAM-sponsored funds |
472 | 723 | 1,887 | 1,930 | ||||||||||||
Fees receivable related to investment management fees are included in Fees receivable and accrued
fees, net of allowance for doubtful accounts in the Consolidated Statement of Financial Position as
follows:
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Funds investment management fees |
$ | 10,925 | $ | 15,850 | ||||
Sub-advisory investment management fees on GAM-sponsored funds |
497 | 802 | ||||||
Tax Receivable Agreement
We have a tax receivable agreement that requires us to share certain tax benefits with our
Principals. During the nine months ended September 30, 2011, we made an aggregate payment of $5.0
million to the Principals pursuant to this agreement towards the liability relating to the 2010 tax
returns.
Other Related Party Transactions
Investors sponsors the non-contributory qualified defined contribution retirement plan (which
covers most employees) and the supplemental non-qualified defined contribution plan, and manages
the assets of those plans at no cost to the plans.
In the third quarter of 2010, we made a $40.1 million payment to GAM to settle a capital
distribution declared prior to the initial public offering.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 14
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the Consolidated
Investment Products, at Fair Value
In the first nine months of 2011, we made a seed money investment in the Artio U.S. Midcap Fund. We
elected the fair value option to account for this investment, which otherwise would have been
accounted for using the equity method. Gains or losses on this investment are reported in
non-operating income as Net gains (losses) the Consolidated Investment Products and other seed
money investments in the Consolidated Statement of Operations.
Investments, at fair value, as of September 30, 2011, and December 31, 2010, consist of the
following:
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Artio Global funds held for deferred compensation Artio Global funds |
$ | 9,834 | $ | 9,069 | ||||
Total Artio Global funds held for deferred compensation |
$ | 9,834 | $ | 9,069 | ||||
Investments owned by the Consolidated Investment Products, and other seed money investments: |
||||||||
Investments owned by the Consolidated Investment Products: |
||||||||
Equity securities |
$ | 1,686 | $ | 3,142 | ||||
Fixed income investments: |
||||||||
Corporate bonds |
22,809 | 17,075 | ||||||
Foreign government debt |
13,506 | | ||||||
Term loans |
14,697 | 4,425 | ||||||
Warrants |
109 | | ||||||
Repurchase agreements |
2,035 | | ||||||
Total investments owned by the Consolidated Investment Products |
54,842 | 24,642 | ||||||
Other seed money investments: |
||||||||
Equity fund(a) |
1,584 | | ||||||
Equity securities |
1,073 | 1,317 | ||||||
Total other seed money investments |
2,657 | 1,317 | ||||||
Total investments owned by the Consolidated Investment Products, and other seed money investments |
$ | 57,499 | $ | 25,959 | ||||
Investments sold, not yet purchased by the Consolidated Investment Products: |
||||||||
Equity securities |
$ | | $ | (62 | ) | |||
Corporate bonds |
(3,317 | ) | (1,226 | ) | ||||
Repurchase agreements |
(1,620 | ) | | |||||
Total investments sold, not yet purchased by the Consolidated Investment Products |
$ | (4,937 | ) | $ | (1,288 | ) | ||
(a) | As of September 30, 2011, includes the fair value of a $2.0 million investment in the Artio U.S. Midcap Fund made during the second quarter of 2011 that would have been accounted for under the equity method had we not elected the fair value option. We did not make any seed money investments that would have been accounted for under the equity method in 2010. |
15 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Net gains (losses) for the three months and nine months ended September 30, 2011 and 2010, are
as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net gains
(losses) on Artio
Global funds held
for deferred compensation |
$ | (1,798 | ) | $ | 722 | $ | (1,435 | ) | $ | 582 | ||||||
Less: Net gains
(losses) on
redeemed Artio Global funds held for deferred compensation |
19 | (7 | ) | 867 | 122 | |||||||||||
Unrealized gains
(losses) on Artio
Global funds held for deferred compensation |
$ | (1,817 | ) | $ | 729 | $ | (2,302 | ) | $ | 460 | ||||||
Net gains (losses)
the Consolidated
Investment Products and other seed money investments: |
||||||||||||||||
Net gains
(losses) on
investments of
the Consolidated Investment Products |
$ | (5,772 | ) | $ | 46 | $ | (5,628 | ) | $ | 46 | ||||||
Less: Net gains
(losses) on
investments of
the Consolidated Investment Products sold or matured |
(383 | ) | 19 | (123 | ) | 19 | ||||||||||
Unrealized gains
(losses) on
investments of the Consolidated Investment Products |
$ | (5,389 | ) | $ | 27 | $ | (5,505 | ) | $ | 27 | ||||||
Net gains
(losses) on
other seed money investments |
$ | (782 | )(a) | $ | 99 | $ | (684 | )(a) | $ | 99 | ||||||
Less: Net gains
(losses) on
other seed money investments sold, matured or redeemed |
(32 | ) | 1 | 153 | 1 | |||||||||||
Unrealized gains
(losses) on
other seed money investments |
$ | (750 | )(a) | $ | 98 | $ | (837 | )(a) | $ | 98 | ||||||
Total net gains
(losses) the
Consolidated Investment Products and other seed money investments |
$ | (6,554 | ) | $ | 145 | $ | (6,312 | ) | $ | 145 | ||||||
Less: Total net
gains on the
Consolidated Investment Products and other seed money investments sold, matured or redeemed |
(415 | ) | 20 | 30 | 20 | |||||||||||
Total unrealized
gains (losses) on
the Consolidated Investment Products and other seed money investments |
$ | (6,139 | ) | $ | 125 | $ | (6,342 | ) | $ | 125 | ||||||
(a) | Includes Funds that would have been accounted for under the equity method had we not elected the fair value option. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 16
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
The Consolidated Investment Products investment income, including income from derivative
contracts, is recorded in Non-operating income (loss): Net gains (losses) the Consolidated
Investment Products and other seed money investments in the Consolidated Statement of Operations
and is derived from the following investment categories:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Equity securities |
$ | (486 | ) | $ | 31 | $ | (710 | ) | $ | 31 | ||||||
Fixed income investments: |
||||||||||||||||
Corporate bonds |
(3,176 | ) | 22 | (2,626 | ) | 22 | ||||||||||
Foreign government and organization debt |
(1,475 | ) | | (1,222 | ) | | ||||||||||
Term loans |
(1,834 | ) | (6 | ) | (1,690 | ) | (6 | ) | ||||||||
Credit default swaps |
644 | (1 | ) | 594 | (1 | ) | ||||||||||
Foreign exchange forward contracts |
372 | | 17 | | ||||||||||||
Options |
37 | | (163 | ) | | |||||||||||
Warrants |
(94 | ) | | (137 | ) | | ||||||||||
Repurchase agreements |
240 | | 240 | | ||||||||||||
Other |
| | 69 | | ||||||||||||
Total net gains (losses) the Consolidated |
||||||||||||||||
Investment Products |
$ | (5,772 | ) | $ | 46 | $ | (5,628 | ) | $ | 46 | ||||||
Fair Value
We carry our investments portfolio at fair value using a valuation hierarchy based on the
transparency of the inputs to the valuation techniques used to measure fair value. Classification
within the hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. The valuation hierarchy contains three levels: (i) valuation inputs comprising
unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1);
(ii) valuation inputs comprising quoted prices for identical assets or liabilities in markets that
are not active, quoted market prices for similar assets and liabilities in active markets, and
other observable inputs directly or indirectly related to the asset or liability being measured
(Level 2); and (iii) valuation inputs that are unobservable and are significant to the fair value
measurement (Level 3). Unobservable inputs are inputs that reflect our own assumptions about the
assumptions participants would use in pricing the asset or liability, developed based on the best
information available in the circumstances.
17 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Our investments as of September 30, 2011, are valued using prices as follows:
Level 2 | Level 3 | |||||||||||||||
Level 1 | Other Observable |
Significant Unobservable |
||||||||||||||
(in thousands) | Total | Quoted Prices | Inputs | Inputs | ||||||||||||
Artio Global funds held for
deferred compensation: |
||||||||||||||||
Artio Global funds |
$ | 9,834 | $ | 9,834 | $ | | $ | | ||||||||
Total Artio Global funds held for
deferred compensation |
$ | 9,834 | $ | 9,834 | $ | | $ | | ||||||||
Investments owned by the
Consolidated Investment Products, and other seed money investments: |
||||||||||||||||
Investments owned by the
Consolidated Investment Products: |
||||||||||||||||
Equity securities |
$ | 1,686 | $ | 1,621 | $ | 65 | $ | | ||||||||
Fixed income investments: |
||||||||||||||||
Corporate bonds |
22,809 | 263 | 21,917 | 629 | ||||||||||||
Foreign government debt |
13,506 | | 13,506 | | ||||||||||||
Term loans |
14,697 | | 12,753 | 1,944 | ||||||||||||
Warrants |
109 | 109 | | | ||||||||||||
Repurchase agreements |
2,035 | | 2,035 | | ||||||||||||
Total investments owned by the
Consolidated Investment Products |
54,842 | 1,993 | 50,276 | 2,573 | ||||||||||||
Other seed money investments: |
||||||||||||||||
Equity fund(a) |
1,584 | 1,584 | | | ||||||||||||
Equity securities |
1,073 | 1,073 | | | ||||||||||||
Total other seed money investments |
2,657 | 2,657 | | | ||||||||||||
Total investments owned by the
Consolidated Investment Products, and other seed money investments |
$ | 57,499 | $ | 4,650 | $ | 50,276 | $ | 2,573 | ||||||||
Investments sold, not yet purchased
by the Consolidated Investment Products: |
||||||||||||||||
Fixed income investments: |
||||||||||||||||
Corporate bonds |
$ | (3,317 | ) | $ | (769 | ) | $ | (2,548 | ) | $ | | |||||
Repurchase agreements |
(1,620 | ) | (1,620 | ) | | |||||||||||
Total investments sold, not yet
purchased by the Consolidated Investment Products |
$ | (4,937 | ) | $ | (2,389 | ) | $ | (2,548 | ) | $ | | |||||
(a) | Investment that would have been accounted for under the equity method had we not elected the fair value option. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 18
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Our investments as of December 31, 2010, are valued using prices as follows:
Level 2 | Level 3 | |||||||||||||||
Other | Significant | |||||||||||||||
Level 1 | Observable | Unobservable | ||||||||||||||
(in thousands) | Total | Quoted Prices | Inputs | Inputs | ||||||||||||
Artio Global funds held for
deferred Compensation and other investments: |
||||||||||||||||
Artio Global funds |
$ | 9,069 | $ | 9,069 | $ | | $ | | ||||||||
Total Artio Global funds held for
deferred compensation and other investments |
$ | 9,069 | $ | 9,069 | $ | | $ | | ||||||||
Investments owned by the
Consolidated Investment Products, and other seed money investments: |
||||||||||||||||
Investments owned by the
Consolidated |
||||||||||||||||
Investment Products:
|
||||||||||||||||
Equity securities |
$ | 3,142 | $ | 2,367 | $ | 629 | $ | 146 | ||||||||
Fixed income investments: |
||||||||||||||||
Corporate bonds |
17,075 | | 17,075 | | ||||||||||||
Term loans |
4,425 | | 3,470 | 955 | ||||||||||||
Total investments owned by the
Consolidated Investment Products |
24,642 | 2,367 | 21,174 | 1,101 | ||||||||||||
Other seed money investments: |
||||||||||||||||
Equity securities |
1,317 | 1,317 | | | ||||||||||||
Total other seed money investments |
1,317 | 1,317 | | | ||||||||||||
Total investments owned by the
Consolidated Investment Products, and other seed money investments |
$ | 25,959 | $ | 3,684 | $ | 21,174 | $ | 1,101 | ||||||||
Investments sold, not yet purchased
by the Consolidated Investment Products: |
||||||||||||||||
Equity securities |
$ | (62 | ) | $ | (62 | ) | $ | | $ | | ||||||
Fixed income investments: |
||||||||||||||||
Corporate bonds |
(1,226 | ) | | (1,226 | ) | | ||||||||||
Total investments sold, not yet
purchased by the Consolidated Investment Products |
$ | (1,288 | ) | $ | (62 | ) | $ | (1,226 | ) | $ | | |||||
Derivative contracts, which are included in Other assets and Other liabilities in the Consolidated
Statement of Financial Position, are valued using Level 2 inputs.
There were no transfers between Level 1 and Level 2 securities.
19 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Significant changes in Level 3 securities are as follows:
As of | ||||
September 30, | ||||
(in thousands) | 2011 | |||
Equity securities owned by the Consolidated Investment Products: |
||||
Beginning of period |
$ | 146 | ||
Sales |
(44 | ) | ||
Transfers to level 2 |
(65 | ) | ||
Net losses during the period |
(37 | ) | ||
End of period |
$ | | ||
Equity securities total losses for the period attributable to the
change in unrealized gains or losses relating to assets still held as of September 30, 2011 |
$ | (10 | ) | |
Corporate bonds owned by the Consolidated Investment Products: |
||||
Beginning of period |
$ | | ||
Purchases |
733 | |||
Sales |
(47 | ) | ||
Net losses during the period |
(57 | ) | ||
End of period |
$ | 629 | ||
Corporate bonds total losses for the period attributable to the
change in unrealized gains or losses relating to assets still held as of September 30, 2011 |
$ | (57 | ) | |
Term loans owned by the Consolidated Investment Products: |
||||
Beginning of period |
$ | 955 | ||
Purchases |
1,948 | |||
Sales |
(765 | ) | ||
Transfers to level 2 |
(118 | ) | ||
Amortization |
16 | |||
Net losses during the period |
(92 | ) | ||
End of period |
$ | 1,944 | ||
Term loans total gains for the period attributable to the change
in unrealized gains or losses relating to assets still held as of September 30, 2011 |
$ | (108 | ) | |
During the nine months ended September 30, 2011, $0.1 million in equity securities and $0.1 million
in term loans were transferred from Level 3 to Level 2 due to the availability of an additional
external observable pricing source.
Unrealized gains are included in Non-operating income (loss): Net gains (losses) the
Consolidated Investment Products and other seed money investments in the Consolidated Statement of
Operations.
Note 6. Derivative Contracts
The Consolidated Investment Products employ credit default swaps and foreign exchange contracts as
part of their trading strategies and are accounted for as trading products.
Notional/Nominal Amount as of | ||||||||
September 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Credit default swaps |
$ | 13,660 | $ | 5,200 | ||||
Foreign exchange forward contracts |
25,957 | 2,582 | ||||||
Option contracts |
13,432 | | ||||||
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 20
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
During the nine months ended September 30, 2011, we had an average notional amount outstanding of
$16.7 million related to foreign exchange forward contracts, $9.3 million related to option
contracts and $6.4 million related to credit default swaps.
Fair value of derivative contracts as of September 30, 2011, and December 31, 2010, is as follows:
Assets | Liabilities | |||||||||||||||
Statement of | Statement of | |||||||||||||||
Financial | Financial | |||||||||||||||
(in thousands) | Position Location | Fair Value | Position Location | Fair Value | ||||||||||||
As of September 30, 2011: |
||||||||||||||||
Credit default swaps |
Other assets | $ | 950 | |||||||||||||
Foreign exchange forward contracts | Other assets | 344 | ||||||||||||||
Option contracts |
Other assets | 395 | ||||||||||||||
As of December 31, 2010: |
||||||||||||||||
Credit default swaps |
Other assets | $ | 21 | Other assets | $ | 107 | ||||||||||
Foreign exchange forward contracts |
Other liabilities |
58 | ||||||||||||||
Please see Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the
Consolidated Investment Products, at Fair Value for income from derivative contracts that is
included in investment income by investment categories.
Note 7. Debt
Credit Facilities
Holdings has a $160.0 million credit facility consisting of a $60.0 million three-year term credit
facility and a $100.0 million three-year revolving credit facility. In January 2011, Holdings
increased the capacity of its undrawn revolving credit facility from $50.0 million to $100.0
million.
Holdings borrowed $60.0 million under the term credit facility. The interest rate associated with
the borrowing under the term credit facility was 3.23% (LIBOR plus 300 basis points) as of
September 30, 2011. The amortization schedule requires quarterly principal payments of $4.5 million
in both years two and three, which began on December 31, 2010, with a final payment of $24.0
million at maturity (October 2012). As of September 30, 2011, $42.0 million is outstanding under
the term credit facility. Holdings has not borrowed under the revolving credit facility.
The covenants in the credit facility agreement require compliance with certain financial ratios. As
of September 30, 2011, Holdings was in compliance with all such debt covenants.
Due to Prime Broker
Certain Consolidated Investment Products employ leverage to finance their investments. Interest is
payable on such loans at the Fed Funds rate plus a range of 40 to 125 basis points. The loans are
collateralized by securities held by the borrowing entity.
21 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 8. Share-Based Payments
Activity under the Artio Global Investors Inc. 2009 Stock Incentive Plan (the Plan) was as
follows:
Units/Shares | ||||
Available for grant at inception |
9,700,000 | |||
Restricted
stock units (RSUs) granted, including dividend equivalents |
(4,969,411 | ) | ||
Fully-vested restricted stock granted to independent directors |
(43,867 | ) | ||
RSUs
forfeited, including dividend equivalents |
151,654 | |||
Available for grant as of September 30, 2011 |
4,838,376 | |||
Certain of the RSUs we have granted have only service conditions, while others have performance or
market conditions.
Awards Having Only Service Conditions
Weighted-Average | ||||||||||||
Grant Date Fair | RSU Dividend | |||||||||||
Value(a) | Number of RSUs | Equivalents | ||||||||||
Granted and unvested as of December 31, 2010 |
1,856,997 | 27,225 | ||||||||||
Grants: |
||||||||||||
RSUs |
$ | 14.81 | 450,976 | |||||||||
Dividend equivalents |
33,440 | |||||||||||
Vesting: |
||||||||||||
RSUs |
25.74 | (482,865 | ) | |||||||||
Dividend equivalents |
(13,220 | ) | ||||||||||
Forfeitures: |
||||||||||||
RSUs |
25.33 | (3,072 | ) | |||||||||
Dividend equivalents |
(57 | ) | ||||||||||
Granted and unvested as of September 30, 2011(b) |
1,822,036 | 47,388 | ||||||||||
Granted and unvested as of December 31, 2009 |
2,146,758 | | ||||||||||
Grants: |
||||||||||||
RSUs |
$ | 21.86 | 232,983 | |||||||||
Dividend equivalents |
22,990 | |||||||||||
Vesting: |
||||||||||||
RSUs |
26.25 | (481,070 | ) | |||||||||
Dividend equivalents |
(4,083 | ) | ||||||||||
Forfeitures: |
||||||||||||
RSUs |
26.10 | (41,674 | ) | |||||||||
Dividend equivalents |
(206 | ) | ||||||||||
Granted and unvested as of September 30, 2010 |
1,856,997 | 18,701 | ||||||||||
(a) | Weighted-average grant date fair value for grants is based on the closing price on the grant date. | |
(b) | In September 2011, we implemented organizational changes, which included a staff reduction. As a result, there are 231,368 RSUs outstanding without any service requirements. We charged the unamortized costs of these RSUs, which totaled $3.1 million, to expense in the third quarter of 2011. Certain of these RSUs were to be forfeited upon the individuals departure, but we waived the forfeitures. The unamortized costs of these 100,550 otherwise forfeitable RSUs totaled $0.9 million. The $3.1 million total cost is included in Employee compensation and benefits in the Consolidated Statement of Operations. |
Compensation expense related to awards with only service conditions is recognized using a
straight-line method over the requisite service period (generally a three- or five-year period from
the date of the grant for the entire award), unless an award meets retirement eligibility
requirements. Compensation expense related to the amortization of RSU grants is included in
Employee compensation and benefits in the Consolidated Statement of Operations and was $7.2 million
for the three months ended September 30, 2011, and $3.0 million for the three months ended
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 22
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2010. Compensation expense related to the amortization of RSU grants was $14.4
million for the nine months ended September 30, 2011, and $9.5 million for the nine months ended
September 30, 2010. Compensation expense related to the amortization of RSU grants for the periods
ended September 30, 2011, includes a charge of $3.1 million associated with our staff reduction in
September 2011.
Awards Having Performance or Market Conditions
In the first quarter of 2011, we adopted a long-term incentive program (the LTIP). Awards issued
pursuant to the LTIP are in the form of RSUs and granted pursuant to the overall Plan. The LTIP
awards are subject to either performance- or market-based conditions. The conditions of the
performance-based awards correspond with the responsibilities of the recipients and are linked to
either investment performance or sales targets, while the conditions associated with the
market-based awards relate to increasing the price/earnings multiple of our Class A common stock as
compared to our peer group. The LTIP awards have three-year cliff vesting. The fair value of the
awards with performance conditions is based on the probable outcome of the performance target and
is amortized over the vesting period. In some cases, performance targets may be set on an annual
basis and communicated to employees after the initial grant date. In such cases, grant date (for
purposes of determining fair value and commencement of amortization) is when the performance
targets are set and communicated. The assumptions used to derive the fair value of the
performance-based awards are reviewed by management on a quarterly basis. Changes to the fair value
of such awards are reflected in Employee compensation and benefits. The fair value of the awards
with market conditions was determined at the initial grant date and is being amortized over the
three-year vesting period. The entire expense will be recognized unless the service condition is
not met.
Weighted-Average | ||||||||||||
Grant Date Fair | Number of | LTIP RSU Dividend | ||||||||||
Value(a) | LTIP RSUs | Equivalents | ||||||||||
LTIP RSUs as of December 31, 2010 |
| | ||||||||||
Grants: |
||||||||||||
LTIP RSUs |
$ | 14.81 | 1,863,772 | |||||||||
Awarded LTIP RSUs with a future grant date(b) |
178,695 | |||||||||||
Dividend equivalents |
30,245 | |||||||||||
Forfeitures: |
||||||||||||
LTIP RSUs |
$ | 14.81 | (104,104 | ) | ||||||||
Dividend equivalents |
(1,541 | ) | ||||||||||
LTIP RSUs as of September 30, 2011 |
1,938,363 | 28,704 | ||||||||||
(a) | Weighted-average grant date fair value for grants is based on the closing price on the grant date. Market-based grants do not use the weighted-average grant date fair value to calculate amortization expense, but a fair value using a Monte Carlo pricing model. The model requires management to develop estimates regarding certain input variables. If we used different methods to estimate our variables for the Monte Carlo model, or if we used a different type of pricing model, the fair value of our grants might differ. | |
(b) | Performance targets have not yet been set, as they are set on an annual basis. |
Compensation expense related to the LTIP RSU grants is included in Employee compensation and
benefits in the Consolidated Statement of Operations and was $1.1 million for the three months
ended September 30, 2011, and $3.1 million for the nine months ended September 30, 2011. The LTIP
had not been established in 2010.
23 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 9. Income Taxes
A summary of the provisions for income taxes is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Current: |
||||||||||||||||
Federal |
$ | 7,935 | $ | 9,093 | $ | 30,319 | $ | 30,204 | ||||||||
State and local |
2,508 | 4,089 | 9,298 | 15,026 | ||||||||||||
Total |
10,443 | 13,182 | 39,617 | 45,230 | ||||||||||||
Deferred: |
||||||||||||||||
Federal |
(542 | ) | 4,220 | 936 | 2,925 | |||||||||||
State and local |
(148 | ) | 1,315 | 820 | 1,221 | |||||||||||
Total |
(690 | ) | 5,535 | 1,756 | 4,146 | |||||||||||
Income tax expense |
$ | 9,753 | $ | 18,717 | $ | 41,373 | $ | 49,376 | ||||||||
Tax years 2008 to the present are open for examination by Federal, state and local tax authorities.
We are currently under examination by New York State tax authorities for the years 2006 through
2008 and by New York City tax authorities for Investment Adviser for the years 2006 and 2007. There
are waivers extending our 2006 and 2007 tax years to September 2012.
|
||||||||||||||||
A reconciliation between the Federal statutory tax rate of 35% and the effective tax rates is as
follows:
|
||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in percentages) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Federal statutory rate |
35 | % | 35 | % | 35 | % | 35 | % | ||||||||
State and local, net of Federal benefit, and other |
6 | 8 | 6 | 8 | ||||||||||||
Non-controlling interests |
3 | (1 | ) | | (7 | ) | ||||||||||
Permanent differences: |
||||||||||||||||
Vesting of RSUs(a) |
19 | 5 | 3 | 2 | ||||||||||||
Other |
2 | | 1 | 1 | ||||||||||||
Total |
65 | % | 47 | % | 45 | % | 39 | % | ||||||||
(a) | We wrote down the carrying value of the deferred tax asset by $2.8 million in the quarter ended September 30, 2011, and by $3.1 million in the nine months ended September 30, 2011, due to the vesting of RSUs at a price lower than their grant-date price. We wrote down the carrying value of the deferred tax asset by $1.9 million in the quarter and nine months ended September 30, 2010, due to the vesting of RSUs at a price lower than their grant-date price. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 24
Table of Contents
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 10. Earnings Per Share (EPS)
Basic and diluted EPS from continuing operations were calculated using the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net income attributable to Artio Global Investors Basic |
$ | 6,413 | $ | 19,999 | $ | 49,595 | $ | 57,822 | ||||||||
Net income attributable to non-controlling interests(a) |
| | | | ||||||||||||
Income tax related to non-controlling interests(a) |
| | | | ||||||||||||
Net income Diluted |
$ | 6,413 | $ | 19,999 | $ | 49,595 | $ | 57,822 | ||||||||
Weighted average shares for basic EPS |
58,157 | 58,679 | 58,301 | 50,907 | ||||||||||||
Dilutive potential shares from exchange of New Class A Units by the Principals(a) |
| | | | ||||||||||||
Dilutive potential shares from grants of RSUs(b) |
246 | 333 | 130 | 230 | ||||||||||||
Weighted average shares for diluted EPS |
58,403 | 59,012 | 58,431 | 51,137 | ||||||||||||
(a) | The potential impact of the exchange of New Class A Units by the Principals, and cancelation of corresponding shares of Class B common stock, for Class A common stock of 1.2 million weighted average shares for the three months and nine months ended September 30, 2011, was antidilutive. The potential impact of the exchange of New Class A Units by the Principals, and cancelation of corresponding shares of Class B common stock, for Class A common stock of 1.2 million weighted average shares for the three months ended September 30, 2010, and 9.1 million weighted average shares for the nine months ended September 30, 2010, was antidilutive. | |
(b) | The potential impact of an additional 1.7 million granted RSUs for the three months ended September 30, 2011, and an additional 1.6 million granted RSUs for the nine months ended September 30, 2011, was antidilutive. The potential impact of an additional 1.8 million granted RSUs for the three months and nine months ended September 30, 2010, was antidilutive. |
On October 24, 2011, our Board of Directors declared a dividend of $0.06 per share to be paid
on November 22, 2011, to holders of record of our Class A common stock as of the close of business
on November 9, 2011. To provide funding for the dividend payable to the holders of record of our
Class A common stock, a distribution by Holdings of $0.06 per New Class A Unit will be paid to all
members of Holdings, including the Principals.
Note 11. Commitments and Contingencies
There are no claims against us that are considered probable or reasonably possible of having a
material effect on our financial position, results of operations or cash flows.
Although we may not have an explicit legal obligation to do so, we have, at our discretion,
reimbursed client accounts for certain operational losses incurred.
25 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A).
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; Artio Global
Institutional Services LLC, which was licensed as a limited-purpose broker-dealer in April 2011 and
distributes certain of our products; Artio Alpha Investment Funds, LLC (a consolidated investment
vehicle that includes the Artio Global Credit Opportunities Fund, a hedge fund); and the Artio
Local Emerging Markets Debt Fund, an SEC-registered mutual fund launched in May 2011, which is
categorized as a consolidated investment vehicle. We refer to the consolidated investment vehicles
as the Consolidated Investment Products. As of September 30, 2011, 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 and
Global Equities (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.
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 27, we provide a summary of our overall business, the economic environment and trends in our industry. | |
| Key Performance Indicators. Beginning on page 29, we discuss the operating and financial indicators that guide managements review of our performance. | |
| Assets Under Management. Beginning on page 31, 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 37, we compare our revenue and other operating income to the corresponding periods a year ago. | |
| Operating Expenses. Beginning on page 37, we compare our operating expenses to the corresponding periods a year ago. | |
| Non-operating Income (Loss). Beginning on page 39, we compare our non-operating income (loss) to the corresponding periods a year ago. | |
| Income Taxes. Beginning on page 39, we compare our effective tax rates to the corresponding periods a year ago. | |
| Liquidity and Capital Resources. Beginning on page 40, we discuss our working capital as of September 30, 2011, and December 31, 2010, and cash flows for the first nine months of 2011 and 2010. Also included is a discussion of the financial capacity available to help fund our future activities. | |
| Cautionary Note Regarding Forward-Looking Statements. Beginning on page 42, 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 managements current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 26
Table of Contents
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 funds; commingled institutional
investment vehicles; institutional separate accounts; sub-advisory accounts; and a hedge fund.
While our operations are based principally in the U.S. and our clients are primarily U.S.-based, a
substantial portion of our AuM are invested outside of the U.S. Historically, our distribution
activities have been 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, which can fluctuate with changes in foreign currency
exchange rates. As of September 30, 2011, 57% 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 certain of our shareholder servicing expenses are driven by the
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 asset mass. We refer to these investments as seed money investments. If a seed
money investment is required to be consolidated, it is reflected within the Consolidated Investment
Products. In order to maintain consistency of accounting among all seed money investments, we elect
the fair value option if a seed money investment is required to be carried under the equity method.
Income from seed money investments is included in non-operating income. This income is, by nature,
variable. Since the third quarter of 2010, 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.
The quarter ended September 30, 2011, marked a return to large declines in markets, reminiscent of
the 2008-2009 period. While there were numerous global challenges over this period, the most
relevant were the unresolved sovereign debt crisis in the euro zone and fears of a global
recession, both of which gathered momentum during the third quarter of 2011. The resulting effect
on investor confidence was evident as equity markets suffered large declines in August and
September. European equities and emerging markets were among the hardest hit in U.S. dollar terms,
as were those sectors and companies exhibiting more cyclical characteristics amid the global
slowdown scenario. This market deterioration resulted in a significant reduction to our AuM during
the quarter.
Macro factors appear to be driving current market movements to a much greater extent than
fundamentals, a scenario that also played out during the 2008-2009 financial crisis. While we
expect markets will be held captive to speculation over potential policy actions for some time, we
remain focused on seeking out geographic and sector opportunities that we believe are less affected
by strains in the developed world. We anticipate important secular trends unfolding in emerging
markets leading to their growing share of global Gross Domestic Product (GDP) over the next
decade. The dichotomy in economic growth rates and debt/GDP levels between the developed and
emerging world continues to influence our investment positioning decisions on behalf of the
portfolio strategies we manage for our clients, as well as the types of products we choose to offer
as an institutional investment management firm. We believe the move by many emerging market
countries, including China, to support local consumption growth, provides an important long-term
opportunity for investment. Such opportunities are apparent within both emerging market equity and
fixed income markets, as well as in those industries and companies within the developed world able
to exploit these dynamics. However, geopolitical events will continue to largely dictate market
movement over the near term.
27 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
Industry Trends
Overall, the equity markets have trended downwards throughout the quarter. Our International Equity
strategies, which comprise 70% of our total AuM, are measured against the MSCI AC World ex USA
Index, which decreased 19.9% during the three months ended September 30, 2011, and decreased 16.8%
during the nine months ended September 30, 2011. Heightened volatility may lead to de-risking among
certain investors. During the third quarter of 2011, high volatility resulted in significant net
client cash outflows across multiple asset classes in the industry.
Industry commentators have identified several industry trends that may affect our client cash flows
in the future, including: growing interest from U.S. institutions in cross-border investing across
asset classes; reduction in use of defined benefit plans; growing interest in passive equity,
absolute return products and alternative investments; and a move by certain corporate pension plans
towards a liability-driven investment approach.
Appetite for cross-border investing across asset classes is constructive for many of our investment
strategies, particularly interest from U.S. institutions in global equity as an asset class. In
light of a general move away from a home-country bias, a gradual increase in risk appetite in line
with a global economic recovery and the potential for continued weakness in the U.S. dollar, we
expect increased interest in cross-border investing to continue.
Over the past few years, certain corporate pension plans have replaced defined benefit plans with
defined contribution plans. We believe this trend will continue and result in a migration of assets
away from defined benefit plans. This presents both opportunities and risks for active managers.
While there remains a strong case for active investment management across many asset classes,
sustained growth in the market share of passive investments is viewed as unfavorable for active
managers, such as us, as would a sustained move towards a liability-driven investment approach.
Expanded interest in both absolute return products and alternative investments present
opportunities for active managers. The extent to which our strategies participate in activity
resulting from these trends will depend upon a number of factors, including product design,
investment performance and access to decision makers.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 28
Table of Contents
Key Performance Indicators
Our management reviews our performance on a monthly basis, focusing on the indicators described
below.
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions, except basis points, percentages and | September 30, | September 30, | ||||||||||||||
per share amounts) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Operating indicators |
||||||||||||||||
AuM at end of period |
$ | 34,252 | $ | 53,860 | $ | 34,252 | $ | 53,860 | ||||||||
Average AuM for period(a) |
41,670 | 51,004 | 47,829 | 52,945 | ||||||||||||
Net client cash flows |
(4,183 | ) | (1,420 | ) | (11,941 | ) | (3,140 | ) | ||||||||
Market appreciation (depreciation) |
(8,400 | ) | 6,285 | (7,214 | ) | 1,007 | ||||||||||
Financial indicators |
||||||||||||||||
Investment management fees |
66 | 80 | 226 | 249 | ||||||||||||
Effective fee rate (basis points)(b) |
62.4 | 62.4 | 63.1 | 63.0 | ||||||||||||
Adjusted operating income(c) |
32 | 43 | 113 | 137 | ||||||||||||
Adjusted operating margin(d) |
50.0 | % | 52.5 | % | 50.5 | % | 54.6 | % | ||||||||
Operating EBITDA(c) |
30 | 44 | 116 | 140 | ||||||||||||
Operating EBITDA margin(d) |
47.3 | % | 53.9 | % | 52.0 | % | 56.0 | % | ||||||||
Adjusted compensation ratio(c)(e) |
27.8 | % | 27.4 | % | 29.6 | % | 26.5 | % | ||||||||
Adjusted net income attributable to Artio Global
Investors(c) |
16 | 24 | 63 | 76 | ||||||||||||
Diluted earnings per share |
$ | 0.11 | $ | 0.34 | $ | 0.85 | $ | 1.13 | ||||||||
Adjusted diluted earnings per share(f) |
$ | 0.27 | $ | 0.40 | $ | 1.06 | $ | 1.26 | ||||||||
(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 operating Earnings before Interest, Taxes, Depreciation and Amortization (Operating EBITDA); and Net income attributable to Artio Global Investors to Adjusted net income attributable to Artio Global Investors. | |
(d) | Adjusted operating and Operating EBITDA margins are calculated by dividing Adjusted operating income and Operating 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.
As noted
in the Industry Trends section of this MD&A, global
markets have generally declined, which
has adversely affected our AuM and revenues. As of September 30, 2011, market depreciation
decreased AuM by $8.4 million, or 18%, from June 30, 2011.
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. Our net client cash flows also
reflect client-specific actions, such as portfolio rebalancing or decisions to change investment
portfolio managers. Net client cash outflows were $4.2 billion in the three months ended September
30, 2011, and $11.9 billion in the nine months ended September 30, 2011. Gross client cash outflows
increased $2.2 billion in the three months ended September 30, 2011, and $5.9 billion in the nine
months ended September 30, 2011, compared to the corresponding periods in 2010. In our view, this
reflects a variety of contributing factors, including
29 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
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underperformance in our International Equity
strategies, client rebalancing decisions, asset reallocations and clients
adopting a different investment approach. However, we believe underperformance was the primary
factor driving net client cash outflows during the most recent quarter.
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. We use this information to evaluate the contribution of our
products to revenue. Adjusted operating and Operating 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 29 allow us to review expenses in comparison with our revenues.
Our effective fee rate of 62.4 basis points has remained relatively stable in recent periods.
In the third quarter of 2011, we implemented organizational changes, which included a staff
reduction. Charges related to the staff reduction include severance and acceleration of deferred
and share-based compensation.
Our Adjusted operating income and Operating EBITDA margins in the three months and nine months
ended September 30, 2011, decreased compared to the corresponding periods in 2010, as expenses
increased while revenues decreased. Although the decline in AuM in the last year has impacted our
revenues, we continued to generate solid Adjusted operating income and Operating EBITDA margins,
which we believe reflects the strength of our business model and the variability of a substantial
portion of our expense base.
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 one-time severance and related costs associated with our staff
reduction in September 2011 and amortization expense associated with equity awards granted to
employees at the time of our initial public offering (IPO) in 2009. 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 and Adjusted diluted
earnings per share. In addition, we adjust EBITDA to remove the effects of non-operating income. We
refer to the resulting amounts as Operating EBITDA and Operating EBITDA margin. We have adjusted
Income taxes to reflect the appropriate effective tax rate for each period after taking into
consideration these non-GAAP adjustments.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 30
Table of Contents
The following table reconciles Employee compensation and benefits to Adjusted compensation,
Operating income before income tax expense to Adjusted operating income, Net income to Operating
EBITDA, and Net income attributable to Artio Global Investors to Adjusted net income attributable
to Artio Global Investors.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Employee compensation and benefits |
$ | 28 | $ | 25 | $ | 82 | $ | 75 | ||||||||
Less compensation adjustments: |
||||||||||||||||
Staff reduction costs |
8 | | 8 | | ||||||||||||
Amortization expense of IPO-related restricted stock unit grants |
3 | 3 | 8 | 9 | ||||||||||||
Total compensation adjustments |
11 | 3 | 16 | 9 | ||||||||||||
Adjusted compensation |
$ | 17 | $ | 22 | $ | 66 | $ | 66 | ||||||||
Operating income before income tax expense |
$ | 21 | $ | 40 | $ | 97 | $ | 128 | ||||||||
Add: total compensation adjustments |
11 | 3 | 16 | 9 | ||||||||||||
Adjusted operating income |
$ | 32 | $ | 43 | $ | 113 | $ | 137 | ||||||||
Net income |
$ | 5 | $ | 21 | $ | 50 | $ | 77 | ||||||||
Less: interest income |
(1 | ) | | (2 | ) | | ||||||||||
Add: interest expense |
1 | 1 | 1 | 2 | ||||||||||||
Add: income taxes |
9 | 18 | 41 | 49 | ||||||||||||
Add: depreciation and amortization |
10 | 4 | 20 | 12 | ||||||||||||
EBITDA |
24 | 44 | 110 | 140 | ||||||||||||
Less: other non-operating (income) loss(a) |
6 | | 6 | | ||||||||||||
Operating EBITDA |
$ | 30 | $ | 44 | $ | 116 | $ | 140 | ||||||||
Net income attributable to Artio
Global Investors |
$ | 6 | $ | 20 | $ | 50 | $ | 58 | ||||||||
Add: net income attributable to non- controlling interests in Holdings |
| 1 | 1 | 19 | ||||||||||||
Add: total compensation adjustments |
11 | 3 | 16 | 9 | ||||||||||||
Tax impact of adjustments |
(1 | ) | | (4 | ) | (10 | ) | |||||||||
Adjusted net income attributable to Artio Global Investors |
$ | 16 | $ | 24 | $ | 63 | $ | 76 | ||||||||
Weighted average diluted shares |
58 | 59 | 58 | 51 | ||||||||||||
Adjusted weighted average diluted shares(b) |
60 | 60 | 60 | 60 | ||||||||||||
(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 member interests in Holdings (New Class A Units) for Class A common stock. |
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, and will continue to be, 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; |
31 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
| the mix of AuM among our various strategies; and | |
| our introduction or closure of investment strategies and products. |
Our core asset classes are:
| 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 September 30,
2011 and 2010.
As of September 30, | As a % of AuM as of September 30, | |||||||||||||||
(in millions, except percentages) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Proprietary Funds(a) |
||||||||||||||||
A shares |
$ | 4,706 | $ | 7,334 | ||||||||||||
I shares(b) |
10,758 | 15,431 | ||||||||||||||
Total |
15,464 | 22,765 | 45.2 | % | 42.3 | % | ||||||||||
Institutional commingled funds |
5,769 | 8,894 | 16.8 | 16.5 | ||||||||||||
Separate accounts |
10,838 | 17,611 | 31.6 | 32.7 | ||||||||||||
Sub-advisory accounts |
2,181 | 4,590 | 6.4 | 8.5 | ||||||||||||
Ending AuM |
$ | 34,252 | $ | 53,860 | 100.0 | % | 100.0 | % | ||||||||
(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. Third Quarter 2011 Form 10-Q 32
Table of Contents
The following table sets forth the changes in AuM by investment vehicle type.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in millions, except percentages) | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
Proprietary Funds: |
||||||||||||||||||||||||
Beginning AuM |
$ | 21,192 | $ | 21,030 | 1 | % | $ | 23,013 | $ | 24,482 | (6 | )% | ||||||||||||
Gross client cash inflows |
1,085 | 1,160 | (6 | ) | 4,009 | 4,838 | (17 | ) | ||||||||||||||||
Gross client cash outflows |
(2,887 | ) | (2,045 | ) | (41 | ) | (8,099 | ) | (6,884 | ) | (18 | ) | ||||||||||||
Net client cash flows |
(1,802 | ) | (885 | ) | (104 | ) | (4,090 | ) | (2,046 | ) | (100 | ) | ||||||||||||
Transfers between investment
vehicles |
(38 | ) | | * | (38 | ) | | * | ||||||||||||||||
Total client cash flows |
(1,840 | ) | (885 | ) | (108 | ) | (4,128 | ) | (2,046 | ) | (102 | ) | ||||||||||||
Market appreciation (depreciation) |
(3,888 | ) | 2,620 | * | (3,421 | ) | 329 | * | ||||||||||||||||
Ending AuM |
15,464 | 22,765 | (32 | ) | 15,464 | 22,765 | (32 | ) | ||||||||||||||||
Institutional Commingled Funds: |
||||||||||||||||||||||||
Beginning AuM |
8,285 | 7,842 | 6 | 9,236 | 9,198 | | ||||||||||||||||||
Gross client cash inflows |
60 | 199 | (70 | ) | 317 | 667 | (52 | ) | ||||||||||||||||
Gross client cash outflows |
(919 | ) | (302 | ) | * | (2,492 | ) | (1,098 | ) | (127 | ) | |||||||||||||
Net client cash flows |
(859 | ) | (103 | ) | * | (2,175 | ) | (431 | ) | * | ||||||||||||||
Transfers between investment
vehicles |
38 | 22 | 73 | 226 | 22 | * | ||||||||||||||||||
Total client cash flows |
(821 | ) | (81 | ) | * | (1,949 | ) | (409 | ) | * | ||||||||||||||
Market appreciation (depreciation) |
(1,695 | ) | 1,133 | * | (1,518 | ) | 105 | * | ||||||||||||||||
Ending AuM |
5,769 | 8,894 | (35 | ) | 5,769 | 8,894 | (35 | ) | ||||||||||||||||
Separate Accounts: |
||||||||||||||||||||||||
Beginning AuM |
14,221 | 16,001 | (11 | ) | 16,801 | 17,854 | (6 | ) | ||||||||||||||||
Gross client cash inflows |
111 | 308 | (64 | ) | 277 | 1,411 | (80 | ) | ||||||||||||||||
Gross client cash outflows |
(1,232 | ) | (688 | ) | (79 | ) | (4,149 | ) | (2,161 | ) | (92 | ) | ||||||||||||
Net client cash flows |
(1,121 | ) | (380 | ) | (195 | ) | (3,872 | ) | (750 | ) | * | |||||||||||||
Transfers between investment
vehicles |
| (22 | ) | 100 | (188 | ) | (22 | ) | * | |||||||||||||||
Total client cash flows |
(1,121 | ) | (402 | ) | (179 | ) | (4,060 | ) | (772 | ) | * | |||||||||||||
Market appreciation (depreciation) |
(2,262 | ) | 2,012 | * | (1,903 | ) | 529 | * | ||||||||||||||||
Ending AuM |
10,838 | 17,611 | (38 | ) | 10,838 | 17,611 | (38 | ) | ||||||||||||||||
Sub-advisory Accounts: |
||||||||||||||||||||||||
Beginning AuM |
3,137 | 4,122 | (24 | ) | 4,357 | 4,459 | (2 | ) | ||||||||||||||||
Gross client cash inflows |
33 | 184 | (82 | ) | 250 | 877 | (71 | ) | ||||||||||||||||
Gross client cash outflows |
(434 | ) | (236 | ) | (84 | ) | (2,054 | ) | (790 | ) | (160 | ) | ||||||||||||
Net client cash flows |
(401 | ) | (52 | ) | * | (1,804 | ) | 87 | * | |||||||||||||||
Transfers between investment
vehicles |
| | | | | | ||||||||||||||||||
Total client cash flows |
(401 | ) | (52 | ) | * | (1,804 | ) | 87 | * | |||||||||||||||
Market appreciation (depreciation) |
(555 | ) | 520 | * | (372 | ) | 44 | * | ||||||||||||||||
Ending AuM |
2,181 | 4,590 | (52 | ) | 2,181 | 4,590 | (52 | ) | ||||||||||||||||
Total AuM: |
||||||||||||||||||||||||
Beginning AuM |
46,835 | 48,995 | (4 | ) | 53,407 | 55,993 | (5 | ) | ||||||||||||||||
Gross client cash inflows |
1,289 | 1,851 | (30 | ) | 4,853 | 7,793 | (38 | ) | ||||||||||||||||
Gross client cash outflows |
(5,472 | ) | (3,271 | ) | (67 | ) | (16,794 | ) | (10,933 | ) | (54 | ) | ||||||||||||
Net client cash flows |
(4,183 | ) | (1,420 | ) | (195 | ) | (11,941 | ) | (3,140 | ) | * | |||||||||||||
Transfers between investment
vehicles |
| | | | | | ||||||||||||||||||
Total client cash flows |
(4,183 | ) | (1,420 | ) | (195 | ) | (11,941 | ) | (3,140 | ) | * | |||||||||||||
Market appreciation (depreciation) |
(8,400 | ) | 6,285 | * | (7,214 | ) | 1,007 | * | ||||||||||||||||
Ending AuM |
$ | 34,252 | $ | 53,860 | (36 | ) | $ | 34,252 | $ | 53,860 | (36 | ) | ||||||||||||
* | Calculation not meaningful. |
33 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
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Market appreciation for the three months and nine months ended September 30, 2011, compared to the
corresponding periods in 2010, was primarily attributable to the following strategies:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in millions, except percentages) | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
Market appreciation
(depreciation): |
||||||||||||||||||||||||
International Equity I |
$ | (3,408 | ) | $ | 2,562 | * | % | $ | (3,130 | ) | $ | 146 | * | % | ||||||||||
International Equity II |
(4,316 | ) | 2,994 | * | (3,893 | ) | 102 | * | ||||||||||||||||
Other strategies |
(676 | ) | 729 | (193 | ) | (191 | ) | 759 | (125 | ) | ||||||||||||||
Total market appreciation (depreciation) |
$ | (8,400 | ) | $ | 6,285 | * | $ | (7,214 | ) | $ | 1,007 | * | ||||||||||||
* | Calculation not meaningful. |
The MSCI AC World ex USA Index decreased 19.9% during the three months ended September 30,
2011, and increased by 16.6% during the three months ended September 30, 2010. In the three months
ended September 30, 2011, the gross performance of our International Equity I strategy trailed the
index by 3.5%, and our International Equity II strategy trailed the index by 3.3%. In the three
months ended September 30, 2010, the gross performance of our International Equity I strategy
trailed the index by 1.4%, and our International Equity II strategy trailed the index by 1.6%.
The MSCI AC World ex USA Index decreased 16.8% during the nine months ended September 30, 2011, and
increased by 3.7% during the nine months ended September 30, 2010. In the nine months ended
September 30, 2011, the gross performances of our International Equity I strategy trailed the index
by 5.0% and our International Equity II strategy trailed the index by 4.9%. In the nine months
ended September 30, 2010, the gross performances of our International Equity I strategy trailed the
index by 1.6% and our International Equity II strategy trailed the index by 2.1%.
Absolute returns for the nine months ended September 30, 2011, for our International Equity
strategies and the MSCI AC World ex USA Index turned negative during the months of August and
September, amid large declines in overseas markets. These declines were fueled by continued worries
over the unresolved euro zone sovereign debt crisis and growing fears of a renewed global economic
downturn. The returns of our International Equity strategies were below the index for the quarter
and the nine months ended September 30, 2011.
Relative returns versus the index for the quarter and the first nine months of 2011 were negatively
impacted by stock selection across developed and emerging markets as well as the allocation between
developed and emerging markets. Within developed markets, while we were correctly positioned with
an underweight to financials amid the euro zone crisis for the quarter and year-to-date periods,
stock selection negated this effect and detracted from performance. As global growth concerns
mounted, positions held within the consumer-related sectors detracted for the quarter and
year-to-date periods. Within materials, the overweight position and stock selection detracted for
the year-to-date period, whereas there was relatively less effect on the quarter. The underweight
to Japan, as well as stock selection, detracted, particularly during the third quarter, whereas
these effects were less pronounced for the year-to-date period. For the third quarter, the
overweight to and stock selection within China, overweight to Russia and stock selection in India
detracted amid a general sell off across emerging markets. For the year-to-date period, stock
selection detracted, primarily due to stock-specific issues in Brazil and Russia, while stock
selection in Korea was a positive contributor. The overweight to China and India also detracted
over this period.
Net client cash flows across all investment vehicles decreased $2.8 billion during the three months
ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result of:
| a $1.6 billion increase in our International Equity II strategys net client cash outflows; | |
| a $0.8 billion decrease in High Yield strategys net client cash flows, as the three months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010; and | |
| a $0.8 billion increase in our International Equity I strategys net client cash outflows, |
partially offset by:
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 34
Table of Contents
| a $0.5 billion increase in our High Grade Fixed Income strategys net client cash flows, as the three months ended September 30, 2011, had net client cash inflows compared to net client cash outflows in the corresponding period in 2010. |
Net client cash flows across all investment vehicles decreased $8.8 billion during the nine months
ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result of:
| a $4.4 billion increase in our International Equity II strategys net client cash outflows; | |
| a $2.3 billion increase in our International Equity I strategys net client cash outflows; | |
| a $1.6 billion decrease in our High Yield strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010; | |
| a $0.4 billion decrease in our Global Equity strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010; and | |
| a $0.1 billion decrease in our U.S. Equity strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010. |
Proprietary Funds
Net client cash flows related to proprietary funds decreased $0.9 billion during the three months
ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result of:
| a $0.6 billion increase in our International Equity II Funds net client cash outflows; | |
| a $0.4 billion decrease in our Global High Income Funds net client cash flows, as the three months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010; and | |
| a $0.2 billion increase in our International Equity I Funds net client cash outflows, |
partially offset by:
| a $0.3 billion increase in net client cash flows in our Global Fixed Income Funds net client cash flows, as the three months ended September 30, 2011, had net client cash inflows compared to net client cash outflows in the corresponding period in 2010. |
Net client cash flows related to proprietary funds decreased $2.0 billion during the nine months
ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result of:
| a $1.0 billion increase in our International Equity II Funds net client cash outflows; | |
| a $0.6 billion increase in our International Equity I Funds net client cash outflows; and | |
| a $0.5 billion decrease in our Global High Income Funds net client cash inflows, |
partially offset by:
| a $0.2 billion decrease in our Global Fixed Income Funds net client cash flows, as the nine months ended September 30, 2011, had net client cash inflows compared to net client cash outflows in the corresponding period in 2010. |
Institutional Commingled Funds
Net client cash flows related to institutional commingled funds decreased $0.8 billion during the
three months ended September 30, 2011, compared to the corresponding period in 2010, mainly as a
result of:
| a $0.5 billion increase in our International Equity II vehicles net client cash outflows; and | |
| a $0.2 billion increase in our International Equity I vehicles net client cash outflows. |
35 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
Net client cash flows related to institutional commingled funds decreased $1.7 billion during the
nine months ended September 30, 2011, compared to the corresponding period in 2010, mainly as a
result of:
| a $1.2 billion increase in our International Equity II vehicles net client cash outflows; and | |
| a $0.5 billion increase in our International Equity I vehicles net client cash outflows. |
Separate Accounts
Net client cash flows related to separate accounts decreased $0.7 billion during the three months
ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result of:
| a $0.5 billion increase in our International Equity II strategys net client cash outflows; and | |
| a $0.4 billion increase in our International Equity I strategys net client cash outflows, |
partially offset by:
| a $0.2 billion increase in our High Grade Fixed Income strategys net client cash flows, as the three months ended September 30, 2011, had net client cash inflows compared to net client cash outflows in the corresponding period in 2010. |
Net client cash flows related to separate accounts decreased $3.1 billion during the nine months
ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result of:
| a $1.5 billion increase in our International Equity II strategys net client cash outflows; | |
| a $1.2 billion increase in our International Equity I strategys net client cash outflows; | |
| a $0.3 billion decrease in our Global Equity strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010; and | |
| a $0.2 billion decrease in our High Yield strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010, |
partially offset by:
| a $0.1 billion increase in our High Grade Fixed Income strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash inflows compared to net client cash outflows in the corresponding period in 2010. |
Sub-advisory Accounts
Net client cash flows related to sub-advised accounts decreased $0.3 billion during the three
months ended September 30, 2011, compared to the corresponding period in 2010, mainly as a result
of:
| a $0.4 billion decrease in our High Yield strategys net client cash flows as the three months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010. |
Net client cash flows related to sub-advised accounts decreased $1.9 billion during the nine months
ended September 30, 2011, compared to the corresponding period in 2010, as a result of:
| a $0.8 billion decrease in our High Yield strategys net client cash flows, as the nine months ended September 30, 2011, had net client cash outflows compared to net client cash inflows in the corresponding period in 2010; | |
| a $0.7 billion increase in our International Equity II strategys net client cash outflows; and | |
| a $0.3 billion increase in our low margin short-term U.S. dollar fixed income products net client cash outflows. |
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 36
Table of Contents
Revenues and Other Operating Income
Our revenues are driven by investment management fees earned from managing clients assets.
Investment management fees fluctuate based on the total value of AuM, composition of AuM among our
investment vehicles and among our investment strategies, changes in the investment management fee
rates on our products.
The following table sets forth average AuM, the effective fee rate and Total revenues and other
operating income for the three months and nine months ended September 30, 2011.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands, except for Average AuM, | ||||||||||||||||||||||||
effective fee rate and percentages) | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
Average AuM (in millions) |
$ | 41,670 | $ | 51,004 | (18 | )% | $ | 47,829 | $ | 52,945 | (10 | )% | ||||||||||||
Effective fee rate (basis points) |
62.4 | 62.4 | bp | 63.1 | 63.0 | 0.1bp | ||||||||||||||||||
Investment management fees |
$ | 65,576 | $ | 80,173 | (18 | )% | $ | 225,561 | $ | 249,301 | (10 | )% | ||||||||||||
Net gains (losses) on funds held for deferred compensation |
(1,798 | ) | 722 | * | (1,435 | ) | 582 | * | ||||||||||||||||
Foreign currency gains (losses) |
6 | 35 | (83 | ) | (14 | ) | 13 | * | ||||||||||||||||
Total revenues and other operating
income |
$ | 63,784 | $ | 80,930 | (21 | ) | $ | 224,112 | $ | 249,896 | (10 | ) | ||||||||||||
* | Calculation not meaningful. |
Total revenues and other operating income decreased by $17.1 million for the three months
ended September 30, 2011, compared to the corresponding period in 2010, due primarily to an 18%
decline in average AuM and net losses in 2011 compared to net gains in 2010 on funds held for
deferred compensation.
Total revenues and other operating income decreased by $25.8 million for the nine months ended
September 30, 2011, compared to the corresponding period in 2010, due primarily to a 10% decline in
average AuM and net losses in 2011 compared to net gains in 2010 on funds held for deferred
compensation.
Operating Expenses
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands, except percentages) | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
Employee compensation and benefits(a) |
$ | 28,387 | $ | 24,772 | 15 | % | $ | 82,217 | $ | 74,588 | 10 | % | ||||||||||||
Shareholder servicing and marketing |
4,708 | 5,031 | (6 | ) | 14,736 | 15,177 | (3 | ) | ||||||||||||||||
General and administrative |
9,470 | 11,224 | (16 | ) | 29,999 | 31,954 | (6 | ) | ||||||||||||||||
Total operating expenses |
$ | 42,565 | $ | 41,027 | 4 | $ | 126,952 | $ | 121,719 | 4 | ||||||||||||||
(a) | The three months and nine months ended September 30, 2011, includes costs of $7.6 million associated with a staff reduction in 2011. |
Operating expenses increased by $1.5 million for the three months ended September 30, 2011,
compared to the corresponding period in 2010, mainly due to the $7.6 million cost associated with a
staff reduction in 2011, partially offset by lower other employee compensation costs and lower
general and administrative costs.
Operating expenses increased by $5.2 million for the nine months ended September 30, 2011, compared
to the corresponding period in 2010, mainly due to the $7.6 million cost associated with a staff
reduction in 2011, partially offset by lower general and administrative costs.
37 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
Employee Compensation and Benefits
In September 2011, we implemented organizational changes, which included a staff reduction. In
aggregate, we reduced our workforce by approximately 11% of headcount.
Employee compensation and benefits increased $3.6 million for the three months ended September 30,
2011, compared to the corresponding period in 2010, due primarily to the $7.6 million cost related
to a staff reduction in 2011 and accruals related to our long-term incentive program, partially
offset by a decrease in current year incentive compensation awards.
Employee compensation and benefits increased $7.6 million for the nine months ended September 30,
2011, compared to the corresponding period in 2010, due primarily to the $7.6 million cost related
to a staff reduction in 2011, increased amortization expense related to deferred incentive
compensation awards and share-based compensation, partially offset by a decrease in current year
incentive compensation awards.
Shareholder Servicing and Marketing
Shareholder servicing and marketing expenses decreased $0.3 million for the three months ended
September 30, 2011, compared to the corresponding period in 2010, due primarily to lower marketing
and custody costs.
Shareholder servicing and marketing expenses decreased $0.4 million for the nine months ended
September 30, 2011, compared to the corresponding period in 2010, due primarily to lower marketing
expenses and a decline in custody costs, partially offset by increased platform charges.
General and Administrative
General and administrative expenses decreased $1.8 million for the three months ended September 30,
2011, compared to the corresponding period in 2010, due primarily to higher costs in 2010
associated with client trading errors and professional fees relating to our secondary stock
offering in June 2010.
General and administrative expenses decreased $2.0 million for the nine months ended September 30,
2011, compared to the corresponding period in 2010, due primarily to higher costs in 2010
associated with client trading errors and professional fees relating to our secondary stock
offering in June 2010.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 38
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Non-operating Income (Loss)
Non-operating income (loss) primarily results from income on seed money investments, including the
results from the Consolidated Investment Products, and interest expense incurred on borrowings
under our term credit facility. The following table sets forth Non-operating income (loss).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands, except percentages) | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
Interest income the
Consolidated Investment Products(a) |
$ | 1,019 | $ | 33 | * | % | $ | 2,314 | $ | 33 | * | % | ||||||||||||
Interest expense |
(461 | ) | (607 | ) | 24 | (1,488 | ) | (1,927 | ) | 23 | ||||||||||||||
Net gains (losses) the
Consolidated Investment Products and other seed money investments(a) |
(6,554 | ) | 145 | * | (6,312 | ) | 145 | * | ||||||||||||||||
Expenses the Consolidated
Investment Products and other seed money investments(a) |
(196 | ) | (5 | ) | * | (298 | ) | (5 | ) | * | ||||||||||||||
Other income |
2 | 3 | (33 | ) | 3 | 14 | (79 | ) | ||||||||||||||||
Total non-operating loss |
$ | (6,190 | ) | $ | (431 | ) | * | $ | (5,781 | ) | $ | (1,740 | ) | * | ||||||||||
* | Calculation not meaningful. | |
(a) | Includes aggregate non-operating losses of $1.5 million for the three months ended September 30, 2011, and $1.4 million for the nine months ended September 30, 2011, related to non-controlling interests in the Consolidated Investment Products. |
Non-operating losses in the third quarter of 2011 increased, due primarily to losses in 2011
by the Consolidated Investment Products and other seed money investments, partially offset by lower
interest expense on our borrowing under our term credit facility, resulting from the partial
pay-down of our debt. The Consolidated Investment Products had net losses for the three months
ended September 30, 2011, due primarily to market declines.
Non-operating losses for the nine months ended September 30, 2011, increased, due primarily to
losses in 2011 by the Consolidated Investment Products and other seed money investments, which
began in the third quarter of 2010, partially offset by lower interest expense on our borrowing
under our term credit facility, resulting from the partial pay-down of our debt. The Consolidated
Investment Products had net losses for the nine months ended September 30, 2011, due primarily to
market declines.
Income Taxes
Investors is organized as a Delaware corporation, and therefore is subject to U.S. Federal, state
and local income taxes. As a member of Holdings, Investors incurs U.S. Federal, state and local
income taxes on its allocable share of income of Holdings, including Holdings subsidiaries.
Our effective tax rates were 65% for the three months ended September 30, 2011, and 47% for the
three months ended September 30, 2010. Due to the vesting of RSUs at a price lower than their
grant-date price, we wrote off $2.8 million of the deferred tax asset in the third quarter of 2011
and $1.9 million in the third quarter of 2010. This increased our effective tax rate by 19% for the
three months ended September 30, 2011, and 5% in the three months ended September 30, 2010.
Our effective tax rates were 45% for the nine months ended September 30, 2011, and 39% for the nine
months ended September 30, 2010. Due to the vesting of RSUs at a price lower than their grant-date
price, we wrote off $3.1 million of the deferred tax asset in the nine months ended September 30,
2011, and $1.9 million in the nine months ended September 30, 2010. This increased our effective
tax rate by 3% for the nine months ended September 30, 2011, and 2% in the nine months ended
September 30, 2010.
39 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
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Liquidity and Capital Resources
Working Capital
Below is a table showing our working capital, excluding the Consolidated Investment Products.
As of September 30, | As of December 31, | |||||||||||
(in thousands, except percentages) | 2011 | 2010 | % Change | |||||||||
Cash |
$ | 89,166 | $ | 79,232 | 13 | % | ||||||
Investments, fair value Artio Global
funds held for deferred compensation |
9,834 | 9,069 | 8 | |||||||||
Fees receivable and accrued fees, net
of allowance for doubtful accounts |
41,612 | 54,373 | (23 | ) | ||||||||
Income tax receivable |
13,051 | 8,586 | 52 | |||||||||
153,663 | 151,260 | 2 | ||||||||||
Less: |
||||||||||||
Term loan due within one year |
(18,000 | ) | (18,000 | ) | | |||||||
Accrued compensation and benefits |
(29,487 | ) | (39,256 | ) | 25 | |||||||
Accounts payable and accrued expenses |
(5,610 | ) | (7,761 | ) | 28 | |||||||
Accrued income taxes payable |
(4,411 | ) | (4,749 | ) | 7 | |||||||
Working capital |
$ | 96,155 | $ | 81,494 | 18 | |||||||
In the first nine months of 2011, we made seed money investments of $24.0 million, repaid $13.5
million in borrowings under our term credit facility, paid $10.5 million in dividends, purchased
and retired shares of our Class A common stock for approximately $6.8 million, paid $5.0 million to
our Principals under the tax receivable agreement and paid 2010 incentive compensation awards,
which were accrued during 2010.
In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million
shares of our common stock, which expires on December 31, 2013. As of September 30, 2011, we have
purchased and retired 773,939 shares of our Class A common stock for approximately $6.8 million
under this program.
On October 24, 2011, our Board of Directors declared a dividend of $0.06 per share to be paid on
November 22, 2011, to holders of record of our Class A common stock as of the close of business on
November 9, 2011. To provide funding for the dividend payable to the holders of record of our Class
A common stock, a distribution by Holdings of $0.06 per New Class A Unit will be paid to all
members of Holdings, including the Principals.
Our working capital requirements historically have been met through operating cash flows. We
believe our current working capital and $100.0 million revolving credit facility are sufficient to
meet our current obligations and support our organic growth initiatives. We did not use the
revolving credit facility during the nine months ended September 30, 2011 or 2010.
Debt
In September 2009, Holdings entered into a $110.0 million credit facility consisting of a $60
million three-year term credit facility and a $50.0 million three-year revolving credit facility.
In October 2009, we borrowed $60 million under the term credit facility and began quarterly
repayments in December 2010. In January 2011, Holdings increased the capacity of its revolving
credit facility from $50.0 million to $100.0 million. As of September 30, 2011, we have repaid
$18.0 million of our borrowings under the term credit facility.
The credit facility agreement also contains customary affirmative and negative covenants, including
limitations on indebtedness, liens, cash dividends and fundamental corporate changes. As of
September 30, 2011, our consolidated leverage ratio was 0.3:1 and our consolidated interest
coverage ratio was 62.8:1 each in compliance with our debt covenants.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 40
Table of Contents
Our average outstanding borrowings under the term credit facility were $50.5 million in the nine
months ended September 30, 2011. We have not borrowed under the revolving credit facility.
Cash Flows
The following table sets forth our cash flows for the first nine months of 2011 and 2010.
Nine Months Ended September 30, | ||||||||||||
(in thousands, except percentages) | 2011 | 2010 | % Change | |||||||||
Cash flow data: |
||||||||||||
Net cash provided by operating activities |
$ | 34,306 | $ | 73,956 | (54 | )% | ||||||
Net cash used in investing activities |
(3,639 | ) | (2,056 | ) | (77 | ) | ||||||
Net cash used in financing activities |
(18,725 | ) | (69,316 | ) | 73 | |||||||
Effect of exchange rate changes on cash |
(14 | ) | 13 | * | ||||||||
Net increase in cash |
$ | 11,928 | $ | 2,597 | * | |||||||
* Calculation not meaningful.
Net cash provided by operating activities decreased $39.7 million for the nine months ended
September 30, 2011, primarily reflecting net investment purchases of $34.6 million by the
Consolidated Investment Products that were partially funded with $13.8 million of contributions
from non-controlling interests (reflected as financing cash flows), lower net income and $5.0
million paid to the Principals under the tax receivable agreement.
Net cash used in investing activities increased $1.6 million for the nine months ended September
30, 2011, compared to the corresponding period in 2010, primarily reflecting an increase in
investments held for deferred compensation.
Net cash used by financing activities decreased $50.6 million for the nine months ended September
30, 2011, compared to the corresponding period in 2010, primarily reflecting a $40.1 million
payment to GAM in 2010, capital contributions to the Consolidated Investment Products and lower
distributions paid to non-controlling interests, partially offset by a $13.5 million repayment of
the borrowing under the term credit facility in 2011.
Deferred Taxes
The majority of our deferred tax assets are a result of the step-up in tax basis relating to the
exchanges by the Principals of New Class A Units for Class A common stock, and are recoverable over
a 15-year period. Recovery will depend on our ability to generate sufficient taxable income. These
deferred tax assets would require an annual average taxable income of $32.8 million (at an
estimated effective tax rate of 40%) to be recovered in full. Based on several factors, including
historical taxable income and current levels of AuM, we believe that it is more likely than not
that there will be sufficient annual taxable income to realize the deferred tax asset and,
therefore, no valuation allowance is necessary. We realized $5.8 million of this deferred tax asset
in 2010 and expect to realize approximately $8.8 million of this deferred tax asset in 2011.
The tax benefits arising from the step-up in tax basis are shared between us and the Principals
under a tax receivable agreement. If we are unable to utilize all of the tax benefits from the
step-up in tax basis, 85% of the unused amount, representing the Principals portion of such
benefits, will reduce the amounts payable to them, which are classified as Due under tax receivable
agreement in the Consolidated Statement of Financial Position, and the remaining 15% will be
charged to Income taxes in the Consolidated Statement of Operations.
In the nine months ended September 30, 2011, we wrote off $3.1 million of the deferred tax asset
due to the vesting of restricted stock units at a price lower than their grant-date fair value, of
which $2.8 million was written off in the third quarter. Deferred tax assets that arise out of the
amortization of restricted stock units may be subject to write-offs if restricted stock units vest
at a price lower than their grant-date fair value.
41 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
Off-Balance Sheet Arrangements
The Consolidated Investment Products held credit default swaps, foreign exchange forward contracts
and options as of September 30, 2011. As of September 30, 2011, the aggregate notional/nominal
amount of credit default swaps,
foreign exchange forward contracts and options was $53.0
million. (See Notes to the Consolidated Financial Statements, Note 6. Derivative Contracts.)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in our Managements Discussion and Analysis of Financial Condition and
Results of Operations and in other sections of this Report on Form 10-Q that are forward-looking
statements. In some cases, you can identify these statements by forward-looking words such as
may, might, will, should, expects, 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, our anticipated growth
strategies, descriptions of new business initiatives, investor behavior, our free cash flow and
anticipated trends in our business. These statements are only predictions based on our current
expectations and projections about future events. There are important factors that could cause our
actual results, level of activity, performance or achievements to differ materially from the
results, level of activity, performance or achievements expressed or implied by the forward-looking
statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, level of activity, performance or achievements. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness of any of these
forward-looking statements. We are under no duty to update any of these forward-looking statements
after the date of this Report on Form 10-Q to conform our prior statements to actual results or
revised expectations.
Our 2010 Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission
(SEC) on February 25, 2011 (Form 10-K), pursuant to the provisions of the Securities Act of
1934, listed various important factors that could cause actual results to differ materially from
projected and historic results. We note these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. You can find them in our Form 10-K under the heading
Risk Factors. We incorporate that section of the Form 10-K in this filing and readers of this
Report on Form 10-Q should refer to it. It is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a complete set of all potential risks or
uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Revenues and Other Operating Income
Our exposure to market risk is directly related to the value of the proprietary funds,
institutional commingled funds, separate accounts and sub-advised accounts we manage. Substantially
all of our revenue is derived from investment advisory agreements with these funds and accounts.
Under these agreements, the fees we receive are based on the fair value of the assets under
management (AuM) and our fee rates. Accordingly, our revenue and income may decline as a result
of:
| the value of AuM decreasing; | |
| our clients withdrawing funds; or | |
| a shift in product mix to lower margin products. |
Our AuM was $34.3 billion as of September 30, 2011. Assuming a 10% increase or decrease in the
value of the AuM and the change being proportionally distributed over all our products, the fair
value would increase or decrease by $3.4 billion, which would cause an annualized increase or
decrease in Total revenues and other operating income of approximately $21.6 million at our current
effective fee rate.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 42
Table of Contents
We have not adopted a corporate-level risk management policy regarding the hedging of client
assets, nor have we historically attempted to hedge revenue risks that would arise from
fluctuations in the fair value of separate client portfolios or our overall AuM.
Investments
We are subject to market risk from a decline in the price of investments that we own to fund future
deferred compensation liabilities, as well as from changes in the price of investments held by our
seed money investments. As of September 30, 2011, the securities we own to fund future deferred
compensation liabilities consisted of Artio Global Funds. Management regularly monitors the value
of these investments; however, we have not adopted a specific risk management policy to manage the
associated market risk. Gains or losses on investments that we own to manage future deferred
compensation liabilities match the related adjustments to compensation expense over the entire
service period of the deferred compensation, but will not match in any single fiscal period.
As of September 30, 2011, the securities owned by the Consolidated Investment Products and other
seed money investments, net of investments sold, not yet purchased, consisted primarily of equity
securities, corporate bonds, term loans and asset-backed securities. The fair value of these
investments was $57.5 million as of September 30, 2011. Assuming a 10% increase or decrease in the
values of these investments, the fair value would increase or decrease by $5.7 million as of
September 30, 2011, of which a pro rata portion would be
allocable to non-controlling interests.
Exchange Rate Risk
A substantial portion of the accounts that we advise, or sub-advise, hold investments that are
exposed to currencies other than the U.S. dollar. These client portfolios may hold currency
forwards or other derivative instruments. The fair value of these investments and instruments are
affected by movements in the rate of exchange between the U.S. dollar and the underlying foreign
currency. Such movements in exchange rates affect the fair value of assets held in accounts we
manage, thereby affecting the amount of revenue we earn. The fair value of the assets we manage was
$34.3 billion as of September 30, 2011. The U.S. dollar fair value of AuM would decrease, with an
increase in the value of the U.S. dollar, or increase, with a decrease in the value of the U.S.
dollar. Our exposure to foreign currencies may change significantly on a daily basis, therefore,
our average daily foreign currency exposure may be significantly different than at period end. A
10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value
of the AuM by $2.0 billion, which would cause an annualized increase or decrease in Total revenues
and other operating income of $12.3 million. As of September 30, 2011, approximately 57% of our AuM
had exposure to currencies other than the U.S. dollar.
The composition of the exposure within our AuM approximates:
As of | ||||
September 30, 2011 |
||||
British pound |
13 | % | ||
Japanese yen |
8 | |||
Hong Kong dollar |
8 | |||
Euro |
6 | |||
Canadian dollar |
5 | |||
Other (representing approximately 44 currencies) |
17 | |||
57 | % | |||
The net assets of the Consolidated Investment Products held as of September 30, 2011, were
primarily denominated in U.S. dollars. The investments held pursuant to the deferred compensation
plan include Artio Global Funds, whose underlying assets are primarily non-dollar denominated. The
effect of a 10% change in exchange rates on such securities would not have a material effect on the
financial statements.
43 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
Table of Contents
The composition of the non-U.S. dollar exposure from the Consolidated Investment Products
approximates:
As of | ||||
September 30, 2011 |
||||
Malaysian ringgit |
6 | % | ||
Turkish lira |
5 | |||
South African rand |
5 | |||
Indonesian rupiah |
4 | |||
Brazilian real |
4 | |||
Euro |
(5 | ) | ||
Other (representing approximately 13 currencies) |
12 | |||
31 | % | |||
Interest Rate Risk
The Consolidated Investment Products and certain of the accounts we advise or sub-advise own fixed
income securities. Further, from time to time, we may invest our excess cash balances in short-term
U.S. government fixed income securities. Interest rate changes affect the fair value of such
investments or the revenue we earn from them.
Assuming a 100 basis point increase or decrease in interest rates, we estimate that the value of
the fixed income securities we manage or sub-advise would change by approximately $391.5 million.
The impact of such changes would not be material to our revenues or net income.
In connection with borrowings under our $60 million term credit facility, assuming a 100 basis
point increase or decrease in the LIBOR rate, the impact of such a change would not be material to
our net income.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our principal executive officer and principal financial
and accounting officer, of the effectiveness of the design and operation of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, our principal executive
officer and principal financial and accounting officer concluded that our disclosure controls and
procedures are effective in alerting them in a timely manner to information required to be
disclosed in our periodic reports filed with the SEC.
During our most recent fiscal quarter, no changes have occurred in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We have been named in certain litigation. In the opinion of management, the possibility of an
outcome from this litigation that is materially adverse to us is remote.
Item 1A. Risk Factors.
Our 2010 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on
February 25, 2011 (Form 10-K), contains a section entitled Risk Factors. We incorporate that
section of the Form 10-K in this filing and readers should refer to it.
Artio Global Investors Inc. Third Quarter 2011 Form 10-Q 44
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Investors share repurchase activity for each of the three months in the period ended September 30,
2011, was as follows:
Total Number of | Approximate | |||||||||||||||
Shares Purchased | Shares that May | |||||||||||||||
Total Number of | as Part of Publicly | Yet be Purchased | ||||||||||||||
Shares | Average Price Paid | Announced Plans | Under the Plans or | |||||||||||||
Period | Repurchased(a) | Per Share | or Programs(a) | Programs(a) | ||||||||||||
July 1, 2011 through July 31, 2011 |
| $ | | | 3,000,000 | |||||||||||
August 1, 2011 through August 31, 2011 |
773,939 | 8.77 | 773,939 | 2,226,061 | ||||||||||||
September 1, 2011 through September 30, 2011 |
| | | 2,226,061 | ||||||||||||
For the quarter ended September 30, 2011 |
773,939 | 8.77 | 773,939 | 2,226,061 | ||||||||||||
(a) | In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of our Class A common stock, which expires on December 31, 2013. As of September 30, 2011, we have purchased 773,939 shares of our Class A common stock for approximately $6.8 million under this program. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
Item 6. Exhibits.
1) Exhibit 31.1 | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
2) Exhibit 31.2 | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
3) Exhibit 32.1 | Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
4) Exhibit 32.2 | Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
5) Exhibit 101: | ||||
EX-101.INS | XBRL Instance Document | |||
EX-101.SCH | XBRL Taxonomy Extension Schema | |||
EX-101.CAL | XBRL Taxonomy Calculation Linkbase | |||
EX-101.LAB | XBRL Taxonomy Label Linkbase | |||
EX-101.PRE | XBRL Taxonomy Presentation Linkbase | |||
EX-101.DEF | XBRL Taxonomy Definition Document |
45 Artio Global Investors Inc. Third Quarter 2011 Form 10-Q
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on November 8, 2011.
Artio Global Investors Inc. | ||||
By: | /s/ Francis Harte | |||
Name: | Francis Harte | |||
Title: | Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
46 Artio
Global Investors Inc. Third Quarter 2011 Form 10-Q