Artisan Partners Asset Management Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2020. Artisan is an active investment manager operating through nine autonomous teams and managing 18 strategies. Revenue is derived primarily from management fees tied to assets under management (AUM). The company operates as one segment.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $202.8 million | $187.0 million; up 8% |
| Operating income / margin | $71.0 million / 35.0% | $57.7 million / 30.9% |
| Net income attributable to APAM | $34.8 million | $31.5 million; up 10% |
| GAAP diluted EPS | $0.53 | $0.47 |
| Adjusted EPS (non-GAAP) | $0.66 | $0.55 |
| Operating cash flow | $120.5 million | $93.9 million |
| Cash and cash equivalents | $170.7 million | $134.6 million at Dec. 31, 2019 |
| Borrowings | $200.0 million | $200.0 million at Dec. 31, 2019 |
| Ending AUM | $95.2 billion | $121.0 billion at Dec. 31, 2019 |
Average AUM was $113.8 billion, up 8% year over year and down 2% from Q4 2019. Q1 AUM fell $25.8 billion: $25.3 billion of market depreciation and $0.5 billion of net client outflows. The weighted average fee was 71.7 basis points versus 72.3 basis points. Management fees were $199.9 million; performance fees were $2.9 million versus $0.1 million.
Compensation and benefits rose 5% to $104.7 million, while other operating expenses declined 10% to $27.1 million. Net income before noncontrolling interests fell 12% to $43.6 million. Non-operating results shifted from $1.5 million of income to $17.9 million of expense, including a $12.9 million loss on consolidated investment products and $2.3 million of other investment losses.
Cash and cash equivalents were $170.7 million, and the $100 million revolving credit facility was undrawn. Accounts receivable was $96.7 million, including $13.7 million of redeemed seed investments not received until Q2. The company reported $31.6 million in seed investments. Financing cash outflow was $90.3 million, including $72.4 million in dividends paid. Corporate cash and liquidity figures exclude assets and liabilities attributable to third-party investors in consolidated investment products.
Material changes and capital allocation
- Global market declines associated with COVID-19 drove the sharp quarterly AUM decline; the company reported AUM of $125.4 billion on February 19 and $95.2 billion at March 31.
- Ten of 18 strategies had net inflows in Q1; eight strategies had net outflows. Third Generation strategies attracted $1.1 billion in net inflows.
- APAM completed a February follow-on offering of 1.8 million Class A shares and purchased an equivalent number of Holdings units. Holdings unit exchanges and other transactions increased APAM’s ownership of Holdings from 73% to approximately 77%.
- Q1 dividends declared and paid totaled $1.28 per Class A share, including a $0.60 special dividend. The board subsequently declared a $0.61 quarterly dividend payable in May; management said it currently expects quarterly dividends of approximately 80% of cash generated, subject to board approval.
Outlook, risks, contingencies, and unusual items
Management expects AUM declines to reduce revenue and earnings because fees are predominantly based on AUM. It noted that market volatility could prompt redemptions and that remote working, vendor transitions, and increased trading activity could elevate operational, communication, and trade-error risks. Nearly all employees were working remotely and business travel had stopped at the filing date. Management said the firm was operating well but could not assess the longer-term effects of the pandemic. As of April 24, year-to-date net flows were positive in 13 of 18 strategies, totaling $1.3 billion.
Artisan had $200 million of unsecured notes outstanding, maturing in 2022, 2025, and 2027, and was in compliance with debt covenants at March 31. Its tax receivable agreement liability was $406.2 million, up from $375.3 million at year-end; payments may vary with future exchanges, taxable income, and tax rates. The company expected approximately $27 million of 2020 TRA payments and paid $20.3 million on April 15. It reported no material legal proceedings, material off-balance-sheet arrangements, or material changes in market-risk disclosures.
Other notable items: the consolidated investment product investment loss affected GAAP results; a fund deconsolidation during Q1 had no net income statement impact. Management reported that 14 of 18 strategies had generated meaningful net-of-fees outperformance versus broad-based benchmarks since inception, while individual strategy results varied materially. The filing provides no specific full-year earnings or revenue guidance.
Investor verification priorities
- Track AUM, market performance, and client flows after quarter-end, including whether the April net inflows continued.
- Assess the sensitivity of fee revenue, earnings, and dividends to lower AUM and continued market volatility.
- Review the unusual investment losses and the distinction between GAAP results and management’s non-GAAP adjusted measures.
- Monitor liquidity and the timing of TRA payments against the $406.2 million liability, debt maturities, and dividend policy.
- Verify the persistence of strategy performance and flows, particularly where reported outperformance or net outflows differ by strategy.