Artisan Partners Asset Management Inc. — Q1 2017 Form 10-Q
Business context and period. The filing reports unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Artisan is an active investment manager whose revenue is primarily asset-based management fees. APAM consolidated Artisan Partners Holdings and held approximately 65% of its equity at quarter-end.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $184.1 million | $174.5 million; up 6% |
| Operating income / margin | $58.0 million / 31.5% | $54.7 million / 31.4% |
| Adjusted operating margin (non-GAAP) | 35.0% | 35.8% |
| Net income attributable to APAM | $19.8 million | $16.3 million |
| GAAP diluted EPS | $0.37 | $0.35 |
| Adjusted net income per adjusted share (non-GAAP) | $0.52 | $0.51 |
| Operating cash flow | $119.0 million | $111.7 million |
| Cash and cash equivalents | $222.2 million | $156.8 million at Dec. 31, 2016 |
| Borrowings | $199.5 million on the balance sheet; $200.0 million contractual principal | Approximately $200.0 million |
| Dividends declared per Class A share | $0.96, including $0.60 quarterly and $0.36 special | $1.00, including $0.60 quarterly and $0.40 special |
Average AUM was $101.1 billion, up 8.9% year over year. Period-end AUM was $103.8 billion, up 6.9% year over year and 7.1% from year-end 2016. Q1 net client cash outflows were $272 million, more favorable than $1.34 billion of outflows in Q1 2016; market appreciation added $7.19 billion in Q1 2017. The weighted average fee fell to 74 basis points from 76 basis points.
Total operating expenses increased 5% to $126.0 million. Compensation and benefits rose 5% to $99.6 million, while other operating expenses rose 9% to $26.5 million. The effective tax rate was 23.1%, versus 22.2%. Cash increased during the quarter; operating cash flow was partly offset by $58.2 million of financing outflows, including dividends and partnership distributions.
Material changes and significant items
- Higher average AUM drove most of the revenue increase, partly offset by the lower weighted average fee, which management attributed principally to a shift in asset mix.
- The February 2017 follow-on offering issued 5.63 million Class A shares. APAM used the proceeds to purchase an equal number of Holdings units; its Holdings ownership rose from 57% to approximately 65%. The offering and unit purchase were equity transactions, not a source of net financing cash flow.
- The offering and unit exchanges increased deferred tax assets to $788.0 million and tax receivable agreement (TRA) liabilities to $685.4 million, from $678.5 million and $586.2 million, respectively, at year-end.
- Artisan granted approximately 1.27 million restricted stock awards and 1,250 restricted stock units. Expected compensation expense associated with the 2017 grants was approximately $35.9 million.
- The Global Small-Cap Growth strategy and Artisan Global Small Cap Fund were liquidated during Q1. The Thematic team launched its first strategy in April 2017.
Outlook, risks and contingencies
- Management said it expected a $0.60 quarterly Class A dividend during 2017, subject to quarterly board approval. The board expected to consider a special dividend after year-end based on adjusted earnings, business conditions and desired cash retention. A subsequent $0.60 quarterly dividend was declared April 26, payable May 31.
- Management intended to extend the unused $100 million revolving credit facility and refinance $60 million of notes maturing in August 2017, subject to lender negotiations and market conditions; otherwise, it expected to use excess cash to repay the notes. The company reported compliance with debt covenants at March 31.
- Management expected approximately $30 million of TRA payments in 2017; $22.8 million was paid on April 17. TRA payments may be accelerated in specified circumstances and could exceed realized tax benefits. Timing and amounts depend on taxable income, tax rates, exchanges and other factors.
- Management anticipated continued outflows in certain closed or restricted strategies, including Non-U.S. Growth and U.S. Mid-Cap Growth, while identifying potential growth capacity in Global Opportunities, Global Equity and High Income. It also cited possible industry fee pressure and dependence on investment performance, client flows and retention of key professionals.
- Other stated risks include adverse markets or economic conditions, regulatory changes, operational or technical errors and reputational harm. The filing reported no legal or administrative proceedings believed to have a material effect, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether AUM growth can persist and net client flows improve, particularly in strategies with material outflows.
- How fee mix and fee pressure affect revenue, and whether compensation, technology and other expenses weigh on margins.
- The refinancing or repayment plan for the $60 million August 2017 debt maturity and the status of the revolving facility.
- TRA payment timing, potential acceleration, and the assumptions supporting the $685.4 million liability and related deferred tax assets.
- Dividend decisions and cash available after operating needs, debt obligations, distributions and TRA payments.