Artisan Partners Asset Management Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; this annual filing includes fourth-quarter results but is not a quarterly filing. Artisan is an active investment manager whose fees are primarily based on client assets under management (AUM).
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $799.0 million | $828.6 million |
| Operating income | $283.5 million | $304.9 million |
| Operating margin | 35.5% | 36.8% |
| Net income attributable to APAM | $156.5 million | $158.3 million |
| Diluted EPS | $2.65 | $2.84 |
| Adjusted net income (non-GAAP) | $208.0 million | $226.1 million |
| Adjusted EPS (non-GAAP) | $2.67 | $2.94 |
| Operating cash flow | $292.8 million | $333.3 million |
Year-end AUM rose 26% to $121.0 billion from $96.2 billion, driven by $28.1 billion in market appreciation and partly offset by $3.3 billion in net client outflows. Average AUM declined 2.4% to $111.0 billion. The weighted average fee fell to 72.0 basis points from 72.9 basis points.
At December 31, 2019, cash and cash equivalents were $134.6 million, borrowings were $200.0 million, and the $100 million revolving credit facility was undrawn. Debt had a 0.6x leverage ratio and 32.3x interest coverage; the company reported covenant compliance. Debt maturities are $90 million in 2022 and $110 million thereafter. The company reported $375.3 million payable under tax receivable agreements (TRAs).
Material changes and notable items
- Revenue declined 4%, mainly reflecting lower average AUM and a lower overall fee rate. Operating income fell 7%; lower compensation and distribution costs partly offset increased occupancy and technology expenses.
- Net income attributable to APAM was nearly flat year over year, while adjusted net income declined from $226.1 million to $208.0 million.
- Eleven of 17 strategies had net inflows; newer “Third Generation” strategies recorded $3.9 billion of inflows. Management reported continued near-term outflow expectations for several strategies, including Non-U.S. Growth, U.S. Mid-Cap Growth and U.S. Mid-Cap Value.
- Management said 13 of 17 strategies outperformed their broad benchmarks net of fees in 2019. Strategy returns vary; the filing reports gross composite returns and cautions that past performance does not assure future results.
- A change in estimated state tax rates increased deferred tax assets by $23.0 million and reduced the income-tax provision; the related TRA remeasurement produced a $19.6 million non-operating loss. The effective tax rate was 10.3%; the adjusted tax rate was 24.1%.
- Adoption of the lease accounting standard put operating lease assets of $87.2 million and lease liabilities of $101.2 million on the balance sheet. A $2.1 million impairment related to an abandoned office location was recorded.
- Operating, investing and financing cash flows were $292.8 million, $(17.5) million and $(306.6) million, respectively. Financing uses included $188.2 million of dividends and $25.0 million of TRA payments.
Outlook, risks and contingencies
Management expected a 2020 adjusted tax rate of 24.5%–25.0%, fixed compensation costs to rise about $7 million, first-quarter compensation-related costs to be about $4 million higher than in the fourth quarter of 2019, and communication and technology expense of approximately $41 million. It expected to continue inflows in newer strategies and near-term outflows in certain established strategies. The Global Value team expected to launch its Select Equity strategy in the first quarter of 2020. Management described results as potentially “lumpy” because of market movements and AUM fluctuations; the filing does not provide a formal earnings or revenue forecast.
The board declared a $0.68 per-share variable dividend for fourth-quarter 2019 and a $0.60 special dividend, payable in February 2020. Management said it expected, subject to board approval, quarterly dividends of approximately 80% of cash generated, with a possible year-end special dividend; payments are discretionary and depend on cash, legal and debt-covenant constraints.
- Results are exposed to market declines, client withdrawals, investment underperformance, fee pressure, and foreign-exchange movements. About 45% of AUM was invested in non-U.S.-dollar securities; management estimated a 10% U.S. dollar move could change annualized revenue by about $39.2 million, all else equal.
- Business continuity depends on retaining key investment professionals and on operational, vendor and technology systems; the filing discusses cybersecurity and regulatory risks.
- TRA payments are subject to estimates and future taxable income. The company estimated a $375.3 million recorded liability and expected about $27 million of TRA payments in 2020. A separate hypothetical scenario estimated roughly $577 million of aggregate payments over generally at least 15 years, subject to assumptions.
- Management reported no legal or administrative proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements. The auditor issued unqualified opinions on the financial statements and internal controls; deferred taxes and TRA estimates were identified as a critical audit matter.
Investor verification priorities
- Track AUM flows separately from market appreciation, especially outflows in the strategies management flagged and continued growth in newer strategies.
- Reconcile GAAP and adjusted earnings, including the tax-rate remeasurement and TRA-related non-operating charge.
- Review cash generation against dividends, debt service, capital spending and projected TRA payments; confirm covenant headroom and debt maturities.
- Assess whether fee rates and AUM mix are stabilizing, given the decline in average AUM and weighted average fee.
- Monitor delivery of the stated 2020 cost and tax expectations, the planned strategy launch, and key portfolio-manager retention.