Artisan Partners Asset Management Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Artisan is an active investment manager operating through nine autonomous teams and 18 strategies. Unless otherwise noted, amounts below are U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $202.9 million | $200.7 million | $405.8 million | $387.7 million |
| Operating income | $76.6 million | $70.9 million | $147.6 million | $128.6 million |
| Operating margin | 37.8% | 35.3% | 36.4% | 33.2% |
| Net income attributable to APAM | $46.2 million | $39.2 million | $81.0 million | $70.7 million |
| GAAP diluted EPS | $0.72 | $0.66 | $1.26 | $1.15 |
| Adjusted EPS (non-GAAP) | $0.71 | $0.67 | $1.37 | $1.22 |
- Q2 management fees were $194.9 million and performance fees were $8.0 million, versus $196.4 million and $4.3 million, respectively, a year earlier. Average AUM was $109.3 billion, down 1% year over year; the weighted-average management fee, excluding performance fees, was 71.8 basis points versus 71.5.
- Six-month revenue growth reflected higher average AUM and performance fees. Six-month performance fees were $10.9 million versus $4.4 million; average AUM increased 4% to $111.6 billion, while the weighted-average management fee was 71.2 basis points versus 71.9.
- Q2 operating expenses declined 3% to $126.3 million. Lower share-based compensation, travel and entertainment, and technology costs were partly offset by higher incentive compensation. The Q2 non-operating result included a $12.9 million gain from consolidated investment products; six-month non-operating income was a $6.5 million expense, including investment losses.
- For the first six months, operating cash flow was $203.9 million versus $182.6 million. Cash and cash equivalents were $190.9 million at June 30, 2020, compared with $134.6 million at year-end 2019; cash, including restricted cash and consolidated-product cash, totaled $196.3 million. Financing used $168.9 million, including dividends and partnership distributions.
- Debt principal totaled $200 million: $90 million due in 2022, $60 million in 2025, and $50 million in 2027. The $100 million revolving facility was undrawn; the company reported compliance with debt covenants. Borrowings were carried at $199.2 million on the balance sheet.
Business changes and management commentary
- AUM ended Q2 at $120.6 billion, up $25.4 billion from March 31. The increase comprised $22.0 billion of investment returns and $3.3 billion of net client inflows. Sixteen of 18 strategies had net inflows; 10 exceeded $100 million. Non-US Growth and US Mid-Cap Value together had $1.6 billion of outflows.
- The rebound followed a decline in AUM from $125.4 billion on February 19 to $95.2 billion on March 31 amid COVID-19 market disruption. For the first half, net inflows of $2.9 billion were offset by negative investment returns and other effects of $3.3 billion.
- Management said long-term results depend primarily on investment performance and described shorter-term results as potentially “lumpy.” It reported that 15 of 18 strategies had outperformed their broad-based benchmarks since inception on a net-of-fees basis. The filing also presents composite performance gross of fees and notes that excluded accounts represented about 10% of AUM.
- Most employees were working remotely and business travel was largely eliminated. Management said operations were functioning well but noted uncertainty over how long remote work would continue and possible effects on redemptions, operating efficiency, communication, and operational or trading errors.
Outlook, distributions, and risks
- The filing provides no specific revenue or earnings guidance. Management said it expects to pay a quarterly dividend, subject to board approval, of approximately 80% of quarterly cash generated; it may also consider a year-end special dividend. Dividends are not assured.
- APAM paid $0.61 per Class A share during Q2. After quarter-end, the board declared a $0.67 quarterly dividend, payable August 31, 2020, and Holdings declared a $37.0 million distribution.
- The tax receivable agreement liability was $392.1 million at June 30, up from $375.3 million at year-end. The company expected about $27 million of TRA payments in 2020 and had paid $20.3 million by June 30. Payments generally transfer 85% of specified tax savings to counterparties; amounts and timing depend on taxable income, unit exchanges, and other factors, and certain payments may be accelerated.
- Principal risks include market volatility and investment performance, client redemptions, loss of key investment professionals, and disruptions affecting the company or critical vendors. Management reported no legal or administrative proceedings believed likely to have a material financial effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether AUM recovery and positive net flows persist, and how much future AUM movement comes from market returns versus client flows.
- Performance-fee variability, strategy-specific performance, and the distinction between gross composite returns and net client returns.
- The sustainability of operating margins as compensation and other expenses respond to revenue, and the impact of investment gains or losses on reported earnings.
- Cash available for dividends after operating needs, partnership distributions, debt obligations, and TRA payments; dividends remain variable and board-dependent.
- COVID-19 effects on client behavior, remote operations, vendors, and operational controls, as well as compliance with debt covenants and future debt maturities.