Artisan Partners Asset Management Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 4, 2022. Artisan is an active investment manager whose fee revenue is primarily linked to assets under management (AUM). Financial statements are unaudited.
Business context and performance
Markets fell sharply during the quarter amid inflation, central-bank tightening and the war in Ukraine. AUM ended June at $130.5 billion, down $29.1 billion, or 18%, from March 31: investment returns and other effects reduced AUM by $24.8 billion and net client cash outflows were $4.2 billion. Average quarterly AUM was $143.9 billion, down 16% year over year. For the first half, AUM fell from $174.8 billion to $130.5 billion, driven by $40.6 billion of negative investment returns and other effects and $3.5 billion of net outflows.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $251.4 million | $304.9 million | $533.0 million | $595.6 million |
| Operating income | $88.4 million | $137.8 million | $195.4 million | $259.6 million |
| GAAP operating margin | 35.2% | 45.2% | 36.7% | 43.6% |
| Net income attributable to APAM | $44.3 million | $88.2 million | $109.7 million | $165.5 million |
| Diluted EPS | $0.62 | $1.33 | $1.52 | $2.54 |
| Adjusted operating margin (non-GAAP) | 34.4% | 45.3% | 36.1% | 43.6% |
| Adjusted EPS (non-GAAP) | $0.79 | $1.28 | $1.76 | $2.41 |
Q2 management fees were $251.3 million and performance fees were $0.1 million, versus $300.9 million and $4.1 million, respectively, a year earlier. The weighted-average management fee was 70.1 basis points, versus 70.8 basis points.
Operating cash flow for the first half was $218.1 million, compared with $259.5 million in 2021. Investing activities used $53.1 million and financing activities used $201.9 million, including $169.2 million of dividends paid. Cash, cash equivalents and restricted cash ended the period at $163.9 million, versus $200.8 million at year-end 2021. The cash-flow measure includes consolidated investment products; their third-party assets are not available for general corporate use.
Financial position and material changes
At June 30, cash and cash equivalents were $150.7 million, accounts receivable $126.2 million, and investment securities $83.2 million. Borrowings were $199.6 million on the balance sheet (approximately $200 million of contractual debt); total stockholders’ equity was $243.3 million. The $100 million revolving facility was undrawn. The $90 million Series C notes mature August 16, 2022; the company planned to refinance them with $90 million of Series F notes at 3.10%, maturing in 2032, subject to customary closing conditions. Artisan reported compliance with debt covenants and said it had obtained commitments to extend its revolver through August 2027.
Year-over-year revenue and earnings declined principally because of lower average AUM and sharply lower performance fees. Q2 non-operating expense was $28.0 million, versus income of $9.6 million a year earlier, including losses on consolidated investment products and other investments. First-half operating expenses were broadly flat: lower incentive compensation largely offset higher travel, occupancy and technology costs. Total liabilities included $401.0 million payable under tax receivable agreements (TRAs), down from $425.4 million at year-end.
Outlook, commentary and risks
Management gave no specific earnings or revenue guidance. It expects results to remain variable with markets, investment performance and AUM flows; most revenue depends on AUM, and a majority of expenses, including much incentive compensation, varies with revenue. The firm said it will continue investing in new capabilities and strategies. It reported launching the Emerging Markets Debt Opportunities strategy in April and a further EMsights strategy in July. Several strategies were closed or capacity-managed.
The board declared a $0.60-per-share Class A quarterly dividend on August 2, payable August 31. The company described its intended policy as a quarterly dividend of approximately 80% of cash generated, subject to board approval and possible changes; a special dividend may also be considered after year-end. The filing cautions that dividends are not assured. Artisan expected approximately $33.5 million of 2022 TRA payments, of which $25.1 million had been paid by June 30; TRA payments can vary and, in certain cases, may be accelerated or exceed realized tax benefits.
Principal business risks include market declines, weak investment performance, client outflows, loss of key investment professionals, competition, regulatory changes, and operational or reputational harm. Management reported no legal proceedings it believed would materially harm the company and concluded disclosure controls were effective. It also noted a $30 million seed investment made in July after quarter-end.
Important facts for investors to verify
- Whether AUM performance and net client flows stabilize, and how those trends affect fee revenue and margins.
- Completion and terms of the Series F refinancing and revolver extension after quarter-end.
- Cash available for corporate purposes after dividends, seed investments, compensation awards and TRA payments.
- How investment-related losses and the non-GAAP adjustments affect the comparison between adjusted and GAAP earnings.
- Whether the variable dividend policy is maintained; future dividends remain subject to board approval and business conditions.