Artisan Partners Asset Management Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Artisan is an active investment manager serving institutional and intermediary clients through 10 autonomous investment teams and 25 strategies. This unaudited filing covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. APAM owned approximately 86% of Artisan Partners Holdings at quarter-end.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $234.5 million | $281.6 million; down 17% |
| Operating income / margin | $68.3 million / 29.1% | $107.0 million / 38.0% |
| Adjusted operating margin (non-GAAP) | 29.9% | 37.7% |
| Net income attributable to APAM | $50.8 million | $65.4 million; down 22% |
| GAAP diluted EPS | $0.72 | $0.90 |
| Adjusted EPS (non-GAAP) | $0.64 | $0.98 |
| Operating cash flow | $120.9 million | $191.5 million |
| Cash and cash equivalents, company balance sheet | $150.6 million | $114.8 million at Dec. 31, 2022 |
| Borrowings | $199.1 million net of issuance costs | $199.1 million at Dec. 31, 2022 |
At March 31, 2023, total assets were $1.33 billion and total liabilities were $887.9 million. The $100 million revolving facility was undrawn; the company reported compliance with debt covenants. Cash, cash equivalents and restricted cash totaled $173.1 million including $22.5 million held by consolidated investment products, which is not available for general corporate purposes.
Business performance and changes versus prior period
- Quarter-end assets under management (AUM) were $138.5 billion, up $10.6 billion (8%) from year-end 2022. $11.9 billion of investment returns more than offset $1.3 billion of net client outflows.
- Average AUM was $135.4 billion, down 17% from Q1 2022. Management attributed the 17% revenue decline primarily to lower average AUM; the weighted-average management fee was unchanged at 70.4 basis points.
- Fifteen of 25 strategies had net outflows totaling $3.2 billion; the other 10 had net inflows of $1.9 billion. Strategy capacity restrictions remained in place for several offerings.
- Operating expenses decreased 5% to $166.2 million. Lower incentive compensation and distribution expense were partly offset by higher fixed compensation, travel, occupancy and long-term incentive expense. Compensation and benefits were 56% of revenue, versus 50%.
- Non-operating income was $22.1 million, versus a $5.8 million expense in Q1 2022, largely reflecting investment gains: $14.9 million from consolidated investment products and $9.3 million of other investment gains. These market-sensitive gains supported reported pretax income despite lower operating income.
Cash, capital returns and outlook
Operating cash flow declined $70.6 million year over year, reflecting lower operating income, the timing of bonus payments and less favorable cash-flow activity in consolidated investment products, partly offset by working-capital movements. Investing activities used $36.2 million and financing activities used $54.9 million. The company paid $0.90 per Class A share during Q1, comprising a $0.55 quarterly dividend and a $0.35 special annual dividend.
On May 2, 2023, APAM declared a $0.50-per-share quarterly dividend, payable May 31, and Holdings declared a $33.7 million distribution to its partners. Management expects, subject to board approval, quarterly dividends of approximately 80% of cash generated, with the calculation adjusted for items including long-term incentive awards, cash reserved for future franchise capital awards and capital expenditures. The board may also consider a special dividend after year-end; neither the stated policy nor future dividends are assured.
The company reported a $399.8 million tax receivable agreement (TRA) liability at quarter-end and expected approximately $36.2 million of TRA payments in fiscal 2023. It paid $27.2 million in April 2023. TRA payments generally represent 85% of specified realized or expected tax savings; actual amounts and timing depend on taxable income, tax rates, unit exchanges and other factors, and payments may in some cases exceed benefits realized.
Risks, contingencies and other notable items
- Management cited volatile markets, inflation, interest-rate increases and banking-sector concerns, the war in Ukraine and broader economic uncertainty. Since fee revenue depends principally on AUM, market declines, weak investment performance or client outflows can reduce revenue and earnings.
- Other stated risks include losing key investment professionals or senior management, regulatory or legislative changes, operational or technical errors, and reputational harm. Forward-looking statements are subject to uncertainty; the filing gives no specific earnings or AUM guidance.
- Artisan had $115.4 million invested directly in consolidated investment products. Their assets and liabilities are consolidated in the statements, but third-party investors’ balances are not available for corporate use; Artisan’s stated maximum exposure to loss is generally its direct investment.
- Q1 included $57.1 million of long-term incentive awards granted: $18.1 million in share-based awards and $39.0 million in cash-based franchise capital awards. Compensation and related investment values can fluctuate with markets.
- Management reported no legal or administrative proceeding believed likely to have a material adverse effect, and concluded disclosure controls were effective. No material changes to market-risk disclosures or internal control over financial reporting were reported.
Important facts for investors to verify
- Whether investment returns can continue to offset net outflows, and how flows evolve across strategies and investment vehicles.
- Whether lower average AUM continues to pressure management-fee revenue and operating margins.
- How much reported earnings and cash generation depend on market-sensitive investment gains, especially gains associated with consolidated funds and compensation-plan hedges.
- Corporate liquidity after dividends, incentive compensation and expected TRA payments; distinguish company cash from cash held in consolidated investment products.
- The assumptions, timing and potential acceleration of TRA obligations, as well as the terms and covenant status of the senior notes and revolving facility.
- The sustainability of the variable dividend and the assumptions underlying management’s approximately 80%-of-cash-generation framework.