Artisan Partners Asset Management Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; unaudited results compared with the three and nine months ended September 30, 2019. The filing was signed November 3, 2020. Artisan is an active investment manager; substantially all revenue comes from investment advisory fees.
Key financial results
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $232.8 million | $203.0 million | $638.5 million | $590.7 million |
| Operating income | $97.2 million | $75.5 million | $244.8 million | $204.1 million |
| Operating margin | 41.8% | 37.2% | 38.3% | 34.6% |
| Net income attributable to APAM | $58.5 million | $41.3 million | $139.5 million | $112.0 million |
| GAAP diluted EPS | $0.93 | $0.71 | $2.22 | $1.87 |
| Adjusted EPS (non-GAAP) | $0.90 | $0.70 | $2.27 | $1.92 |
- Q3 management fees were $232.5 million; performance fees were $0.3 million. Nine-month performance fees were $11.2 million, versus $4.6 million a year earlier.
- Average assets under management (AUM) were $131.0 billion in Q3, up 16% year over year. Period-end AUM was $134.3 billion, up from $112.5 billion a year earlier.
- Q3 AUM rose $13.7 billion: $11.6 billion from investment returns and $2.1 billion from net client inflows. Nine-month net inflows were $5.0 billion, compared with $2.3 billion of net outflows in 2019.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $298.7 million, versus $261.6 million in 2019. Investing activities provided $16.2 million, compared with $16.7 million used in 2019; financing activities used $228.3 million, versus $246.5 million.
- At September 30, cash and cash equivalents were $200.4 million, accounts receivable $98.4 million, and investment securities $6.7 million. The filing reports $230.9 million of cash, cash equivalents and restricted cash including consolidated investment products; those product assets are not available for general corporate use.
- Borrowings were $200.0 million: $90 million due 2022, $60 million due 2025 and $50 million due 2027. The $100 million revolving facility was undrawn; Artisan reported compliance with debt covenants.
- Amounts payable under tax receivable agreements (TRAs) were $386.0 million, up from $375.3 million at year-end 2019. Operating lease liabilities were $95.5 million.
- Artisan paid $0.67 per Class A share in Q3. The board subsequently declared a $0.83 quarterly dividend, payable November 30, 2020. The company says it currently expects, subject to quarterly board approval, to distribute approximately 80% of quarterly cash generated.
Material changes and management commentary
- Year-over-year Q3 revenue growth of 15% was driven primarily by higher average AUM. The weighted average management fee declined to 70.7 basis points from 71.2 basis points.
- Q3 operating expenses increased 6%, mainly from higher incentive compensation tied to revenue; lower travel costs partially offset the increase. Nine-month expenses rose 2%, with lower travel and equity-based compensation costs offsetting higher salaries and incentives.
- Operating results benefited from stronger markets and net inflows. AUM had fallen from $125.4 billion on February 19 to $95.2 billion on March 31 during the COVID-19 market shock, then recovered to $134.3 billion at quarter-end.
- Management said most employees were working remotely and travel was reduced. It expected many operating costs to return to pre-pandemic levels when employees return to offices and resume travel, but said the duration and longer-term business effects remained uncertain.
- The company launched its International Small Cap Value strategy on October 1, 2020; a separate Greater China-focused strategy was also being developed. Management said all strategies were open, though US Small-Cap Growth and Global Opportunities had limited availability for most new clients.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management noted that AUM and results can be volatile with market conditions, investment performance, client flows, fee mix and retention of key investment professionals.
- Artisan estimated that November 2020 fund distributions could produce about $450 million of net client cash outflows from investors who do not reinvest, compared with approximately $470 million in November 2019.
- Management expected approximately $30 million of TRA payments in 2021 and no further TRA payments in 2020. The filing cautions that TRA payments may be accelerated or exceed realized tax benefits in certain circumstances; cash on hand or borrowing could be needed.
- Q3 non-operating results included a $7.8 million gain from consolidated investment products and a $0.2 million TRA estimate gain. The comparable 2019 quarter included a $19.6 million TRA estimate loss, related to remeasurement of deferred tax assets after an estimated state tax expense increase. Such items affect comparisons of reported earnings.
- COVID-19 risks include market-driven redemptions, operational or trading errors, disruption at third-party vendors and potential loss or unavailability of key professionals. Management reported no legal proceedings it believed would materially affect financial condition or results, and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether AUM growth and positive client flows continue, and how strategy-level performance and outflows affect fee revenue.
- Whether the Q3 margin improvement persists as incentive compensation rises and pandemic-related travel savings reverse.
- Actual fund-distribution-related redemptions and their effect on subsequent-quarter AUM and revenue.
- The timing and cash impact of the $386.0 million TRA liability, including the expected 2021 payment and any changes in tax assumptions.
- Dividend capacity and sustainability, given the variable payout policy, debt obligations and planned investment in growth.