Artisan Partners Asset Management Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated financial statements; amounts below are U.S. dollars unless otherwise stated.
Business context and results
Artisan is an active investment manager whose revenue is primarily management fees based on assets under management (AUM). Q2-ending AUM was $109.4 billion, up 15.2% from $95.0 billion a year earlier. Compared with March 31, 2017, AUM increased 5.4%, as $7.2 billion of market appreciation more than offset $1.5 billion of net client outflows.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $196.3 million | $180.8 million | $380.3 million | $355.3 million |
| Operating income | $66.5 million | $59.0 million | $124.5 million | $113.7 million |
| Operating margin | 33.9% | 32.6% | 32.7% | 32.0% |
| Adjusted operating margin (non-GAAP) | 37.1% | 36.6% | 36.1% | 36.2% |
| Net income attributable to APAM | $26.6 million | $18.4 million | $46.4 million | $34.6 million |
| Basic and diluted EPS | $0.45 | $0.38 | $0.86 | $0.74 |
Revenue growth reflected higher average AUM, partly offset by lower weighted average fees: 73.4 basis points in Q2 versus 75.2 basis points a year earlier. Management attributed the fee-rate decline mainly to a shift in AUM mix, including a lower proportion in Artisan Funds. Compensation and benefits rose 8% in Q2, primarily due to higher incentive compensation, increased post-IPO equity compensation and costs of a newer investment team.
Cash flow, balance sheet and capital
- For the first six months, operating cash flow was $169.4 million, versus $184.1 million in 2016; investing activities provided $0.8 million, and financing activities used $136.7 million. Cash ended June at $190.3 million, up from $156.8 million at year-end.
- At June 30, borrowings were $199.6 million carrying value ($200 million principal); the $100 million revolving facility was undrawn. A $60 million note maturity and scheduled revolver termination were due in August 2017. The company reported refinancing commitments, subject to standard closing conditions, to refinance the notes and extend the facility.
- Accounts receivable were $67.8 million; the company reported none considered uncollectible. Debt covenants were reported as satisfied.
- Deferred tax assets were $787.7 million and the tax receivable agreement (TRA) liability was $669.9 million, up from $586.2 million at year-end. The company expected approximately $30 million of TRA payments in 2017, including $22.8 million paid in April.
- APAM declared and paid a $0.60-per-share quarterly dividend in Q2. Six-month dividends declared per Class A share were $1.56, including a $0.36 special dividend.
Changes, outlook and risks
- Six-month net client outflows were $1.8 billion, improved from $3.7 billion in the prior-year period; market appreciation contributed $14.4 billion, compared with $1.2 billion of market depreciation in 2016. Q2 outflows were concentrated in Non-U.S. Growth and U.S. Mid-Cap Growth. Management expected continued outflows in those strategies, while anticipating inflows in Global Opportunities.
- Management reported that eight of 11 strategies with at least five years of history had outperformed their broad benchmarks since inception after fees; these represented over 90% of AUM. Investment performance and market conditions remain important drivers of AUM and fee revenue.
- The company launched its Thematic strategy and a second Credit-team strategy during the quarter. It also seeded a privately offered strategy with $20 million; the funds were consolidated, with third-party interests shown as redeemable noncontrolling interests.
- Management expected a $0.60 quarterly dividend per Class A share during 2017, subject to quarterly board approval, and said the board expected to consider a special dividend after year-end. No broader earnings or revenue guidance was provided.
- Key risks include market declines, weak investment performance, client outflows, fee pressure, and the loss of key investment personnel. TRA payments may vary and, in certain cases, may be accelerated or exceed realized tax benefits. The filing reported no material legal proceedings, no material change in market-risk disclosures, and effective disclosure controls.
Most important facts for investors to verify
- Whether the August 2017 debt refinancing and revolver extension closed, and the resulting terms and maturities.
- Subsequent AUM and client-flow trends, especially in Non-U.S. Growth and U.S. Mid-Cap Growth, and whether investment performance supports management’s outlook.
- How fee mix and average AUM affect revenue and margins; adjusted measures are non-GAAP and exclude specified items.
- Changes in TRA estimates, timing of payments, and realization of the related tax benefits.
- Dividend decisions and cash available after operating needs, debt obligations, distributions and TRA payments.
- The effect of the 2017 share offering and exchanges: APAM’s ownership of Holdings rose from 57% to approximately 66%, affecting the share of earnings attributable to APAM and noncontrolling holders.