Artisan Partners Asset Management Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts below are generally in millions. Artisan is an active investment manager operating through nine autonomous investment teams and managing 17 strategies. APAM owned approximately 72% of Artisan Partners Holdings at quarter-end.
Financial and operating performance
- Assets under management (AUM): $112.5 billion at September 30, down 1% from $113.8 billion at June 30 and 3.5% from $116.6 billion a year earlier. Q3 net client outflows were $727 million and market depreciation was $624 million. Average AUM was $113.0 billion, down 2.7% year over year.
- Q3 revenue and earnings: Revenue was $203.0 million, down 5% year over year; operating income was $75.5 million, down 8%. Operating margin was 37.2%, versus 38.5%. Net income attributable to APAM was $41.3 million versus $42.5 million, and diluted EPS was $0.71 versus $0.77.
- Nine-month results: Revenue was $590.7 million, down 7%; operating income was $204.1 million, down 15%; and operating margin was 34.6%, versus 37.8%. Net income attributable to APAM was $112.0 million versus $125.8 million; diluted EPS was $1.87 versus $2.27.
- Non-GAAP measures: Adjusted net income was $54.8 million and adjusted EPS was $0.70 for Q3, versus $60.8 million and $0.79 a year earlier. For nine months, adjusted net income was $149.5 million and adjusted EPS was $1.92, versus $178.7 million and $2.32. These measures exclude specified tax, investment and ownership-structure effects.
- Cash flow and liquidity: Nine-month operating cash flow was $261.6 million, compared with $328.2 million in 2018. Investing cash outflow was $16.7 million and financing cash outflow was $246.5 million. Cash and cash equivalents were $169.6 million at quarter-end; the $100 million revolving facility was undrawn.
- Debt and other obligations: Borrowings totaled $200 million, comprising senior notes; $90 million matures in 2022 and $110 million thereafter. The $50 million 5.32% Series B notes that matured in August were refinanced with $50 million of 4.53% Series E notes. Operating lease liabilities were $102.8 million, and the tax receivable agreement (TRA) liability was $373.7 million.
- Capital returns: APAM paid a $0.60 quarterly dividend per Class A share during Q3. After quarter-end, the board declared a $0.65 dividend, payable November 29, 2019. The company said it currently expects, subject to quarterly board approval, to distribute approximately 80% of quarterly cash generated; a year-end special dividend may also be considered.
Material changes versus prior periods
- Revenue declines reflected lower average AUM and a lower weighted-average fee: 71.3 basis points in Q3 versus 72.7 basis points a year earlier, partly due to a higher share of assets in separate accounts.
- Q3 operating expenses fell 3% year over year, mainly from lower incentive and equity compensation, but this did not fully offset lower revenue. Nine-month occupancy and technology costs increased, including costs related to team relocations and an exited office.
- Non-operating results included a $19.6 million loss from a revised estimate of TRA obligations, versus a $0.3 million gain in the prior-year periods. The remeasurement of deferred taxes increased deferred tax assets by approximately $23 million and reduced income tax expense; the tax-related effects also affected the TRA estimate.
- GAAP income taxes included a Q3 benefit of $7.4 million, compared with $14.2 million of expense in Q3 2018. The nine-month effective tax rate was 7.3%, versus 15.7%.
- Adoption of the lease accounting standard in January 2019 put operating lease assets and liabilities on the balance sheet without a reported impact on previously reported results. A $2.1 million impairment charge in 2019 related to abandonment of a leased office location.
Outlook, commentary and risks
- Management describes results as sensitive to markets, investment performance, client flows, asset mix and fee rates, and expects results to fluctuate over time. In Q3, 10 of 17 strategies had net inflows totaling $1.1 billion, offset by $1.8 billion of outflows in other strategies. Management expected near-term outflows to continue in Non-U.S. Growth, U.S. Mid-Cap Growth and U.S. Mid-Cap Value.
- Management estimated that November 2019 fund distributions could cause approximately $450 million of net client outflows from investors who do not reinvest, compared with approximately $852 million in November 2018. This is an estimate, not a reported actual result.
- The company expected its 2020 adjusted effective tax rate to be 24.5%–25.0% and TRA payments of approximately $27 million in 2020; it did not expect additional TRA payments in 2019. TRA payments and liabilities depend on taxable income, tax rates, unit exchanges and other assumptions, and payments may in certain circumstances exceed realized tax benefits.
- Principal risks include adverse markets, weak strategy performance, client withdrawals, loss of key investment professionals, competition, and regulatory or operational issues. Certain strategies were closed or restricted to new investors to manage capacity. Management reported no material legal proceedings, no material market-risk changes from its prior annual report, and effective disclosure controls.
Investor facts to verify
- Whether AUM flows and performance in strategies with expected near-term outflows stabilize, and how market movements affect fee revenue.
- Actual November fund-distribution-related redemptions versus the company’s $450 million estimate.
- Changes in the $373.7 million TRA liability, future payment timing, and the tax assumptions underlying the estimate.
- Cash generation after dividends, partnership distributions, lease costs and TRA payments, alongside debt maturities and covenant compliance.
- Reported GAAP results versus management’s adjusted measures, particularly the tax remeasurement and TRA-related items.