Artisan Partners Asset Management Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Artisan is an active investment manager; its nine autonomous teams managed 17 strategies. Results are unaudited and presented against Q1 2018 unless otherwise noted.
Financial and operating performance
- Assets under management: Quarter-end AUM was $107.8 billion, up 12% from December 31, 2018, primarily from $12.7 billion in market appreciation, partly offset by $1.1 billion of net client outflows. Average AUM was $104.9 billion, down 11% year over year.
- Revenue and fees: Revenue was $187.0 million, down 12%. Management fees were $186.9 million; performance fees were $0.1 million. The weighted average fee was 72.3 basis points versus 72.8 basis points, reflecting a higher share of assets in separate accounts.
- Profit and margins: Operating income was $57.7 million, down 28%; operating margin was 30.9% versus 37.7%. Net income attributable to APAM was $31.5 million, down 24%, and diluted EPS was $0.47 versus $0.75. Adjusted net income, a non-GAAP measure, was $42.3 million versus $59.3 million; adjusted EPS was $0.55 versus $0.78.
- Expenses and tax: Operating expenses declined 2% to $129.2 million. Lower compensation and distribution costs were partly offset by higher occupancy and technology expenses. The effective tax rate was 15.9% versus 14.6%.
- Cash flow and liquidity: Operating cash flow was $93.9 million versus $167.3 million; the filing cites working-capital timing, lower operating income and consolidated investment product activity. Investing cash outflow was $4.8 million and financing cash outflow was $109.6 million, including $86.4 million of dividends paid. Cash and cash equivalents were $152.2 million at quarter-end; the $100 million revolving facility was undrawn.
- Debt and obligations: Borrowings had a $200 million face amount ($199.3 million carrying value). $50 million of notes mature in August 2019; management intends to refinance them, subject to lender negotiations and market conditions, or use excess cash to repay them. Tax receivable agreement (TRA) liabilities were $374.7 million.
Changes, outlook and material items
- Revenue and earnings declined year over year as average AUM fell. Broad markets rebounded in Q1 2019, while the comparison quarter had negative returns for several major indices.
- Net outflows were concentrated in Global Equity ($672 million), U.S. Value ($225 million) and Growth ($368 million); International Value, Credit and Thematic recorded inflows. Management expects outflows from Non-U.S. Growth, U.S. Mid-Cap Growth and U.S. Mid-Cap Value to continue weighing on firm-wide flows.
- Management said 13 of 15 strategies with publicly available mutual funds had outperformed their broad-based benchmarks since inception, net of fees. It also cautioned that short-term results can be lumpy and depend on markets, investment performance and client flows. No specific earnings or revenue guidance was provided.
- The board’s stated policy is to consider a quarterly dividend of approximately 80% of cash generated, subject to approval; future dividends are not assured. APAM declared a $0.55-per-share quarterly dividend after quarter-end. Q1 dividends paid included $0.56 quarterly and $1.03 special per Class A share.
- Q1 included $2.0 million of asset impairment and approximately $2.0 million of incremental occupancy costs related to an investment-team office relocation and exited space. Lease accounting adoption added $95.9 million of operating lease assets and $107.5 million of liabilities, with no stated impact on Q1 earnings or cash flows.
- On April 15, 2019, the company paid $19 million under the TRAs and expected approximately $25 million of TRA payments for 2019. The filing warns that certain circumstances can accelerate payments or make them exceed realized tax benefits. One investment fund was deconsolidated during Q1, with no net income statement impact.
- Management reported no material legal proceedings, no material off-balance-sheet arrangements, and compliance with debt covenants at March 31. Forward-looking risks include adverse markets, poor investment performance, loss of key personnel, regulatory changes, operational errors and reputational damage.
Important facts for investors to verify
- Whether continued outflows in the named strategies offset market-driven AUM gains and pressure fee revenue.
- The refinancing or repayment plan for the $50 million notes maturing in August 2019, alongside dividend and TRA cash requirements.
- Cash generation excluding working-capital timing and consolidated investment product activity, and the sustainability of the reported dividend policy.
- Movements in the $374.7 million TRA liability, expected payments and assumptions about taxable income and future tax benefits.
- Whether investment performance, including the cited since-inception comparisons, remains favorable across relevant periods and after fees.