Artisan Partners Asset Management Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Artisan is an active investment manager serving institutional and intermediary clients through autonomous investment teams. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021; balance-sheet figures are compared with December 31, 2021. APAM held approximately 85% of Artisan Partners Holdings at quarter-end.
Key financial and operating metrics
| Metric | Q1 2022 | Comparable period / prior date |
|---|---|---|
| Revenue | $281.6 million | $290.7 million, Q1 2021; down 3% |
| Operating income / margin | $107.0 million / 38.0% | $121.8 million / 41.9%, Q1 2021 |
| Net income attributable to APAM | $65.4 million | $77.3 million, Q1 2021 |
| GAAP diluted EPS | $0.90 | $1.19, Q1 2021 |
| Adjusted EPS (non-GAAP) | $0.98 | $1.13, Q1 2021 |
| Operating cash flow | $191.5 million | $192.8 million, Q1 2021 |
| Cash and cash equivalents | $187.5 million | $189.2 million at December 31, 2021 |
| Debt | $200.0 million outstanding | Unchanged in aggregate from year-end |
| AUM at quarter-end | $159.6 billion | $174.8 billion at December 31, 2021; $162.9 billion at March 31, 2021 |
Average AUM was $162.2 billion, down less than 1% year over year and 8% from Q4 2021. The quarter-end AUM decline from year-end reflected $15.8 billion of negative investment returns, partly offset by $0.7 billion of net client inflows. Net cash from operations was broadly flat year over year; net investing cash use was $56.4 million and net financing cash use was $132.2 million, including $117.6 million of dividends paid. Cash, cash equivalents and restricted cash totaled $203.7 million, including cash held by consolidated investment products.
At March 31, the company reported a $100 million undrawn revolving facility, $425.9 million payable under tax receivable agreements (TRAs), and $112.9 million of operating lease liabilities. These obligations differ in nature and should not be treated as funded debt.
Material changes versus Q1 2021
- Revenue fell $9.1 million, primarily because performance fees declined to $0.2 million from $6.7 million. Management fees were $281.4 million versus $284.0 million; the weighted average management fee rate was 70.4 basis points versus 70.8 basis points.
- Operating expenses rose $5.7 million to $174.6 million, mainly from higher travel, occupancy and technology costs. Compensation and benefits were nearly unchanged at $139.9 million.
- Operating margin declined 3.9 percentage points. Non-operating results moved from $4.4 million of income to $5.8 million of expense, including $4.8 million of other investment losses and lower gains from consolidated investment products.
- Operating cash flow decreased slightly. Financing cash use increased, chiefly reflecting higher dividends and lower contributions from noncontrolling investors in consolidated investment products.
Outlook, management commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance. It expects business results to remain lumpy as AUM, market levels, client flows and strategy mix change. Most revenue is tied to AUM; management said most expenses, including much compensation, vary with revenue.
- The board declared a $0.76 per-share quarterly dividend on April 26, payable May 31. Management described a policy expectation, subject to quarterly board approval, of distributing approximately 80% of quarterly cash generated; this is not a guarantee. Q1 dividends declared were $1.75 per share, including a $0.72 special annual dividend.
- Management expected approximately $33.5 million of 2022 TRA payments; $25.1 million was paid on April 18. TRA payments generally represent 85% of specified tax savings and may vary with taxable income, tax rates and unit exchanges; in certain cases payments may be accelerated or exceed realized benefits.
- The $90 million Series C notes mature August 16, 2022. Artisan planned to issue $90 million of Series F notes at 3.10%, subject to customary closing conditions, to refinance them. The company reported compliance with debt covenants at quarter-end.
- Market declines, including those associated with the Russia-Ukraine conflict, reduced AUM. Management said direct exposure to Russian securities was minimal and the direct business impact immaterial, but warned that broader market volatility can affect AUM, revenue and earnings. COVID-19 continued to affect work arrangements and travel; management said operating costs could return toward pre-pandemic levels as travel resumes.
- Artisan launched two strategies in March and launched a further EMsights strategy in April 2022. Fifteen of 23 strategies had net inflows in Q1; flows varied substantially by strategy. Several strategies were closed or capacity-managed.
- Q1 included a $4.8 million other investment loss, primarily losses on seed and franchise-capital investments. Management’s non-GAAP measures exclude specified investment and compensation valuation effects and assume full exchange of Holdings units; they are not substitutes for GAAP results.
- Management reported no legal or administrative proceeding it believed would have a material adverse effect and stated disclosure controls were effective.
Important facts for investors to verify
- Subsequent AUM, investment performance and client flows by strategy, especially after the sharp Q1 market-driven decline.
- Completion and terms of the planned Series F refinancing before the Series C maturity, and ongoing covenant compliance.
- Actual cash generation, dividend declarations and the company’s ability to sustain its stated distribution policy while funding investment and growth needs.
- TRA payment timing and amount, the assumptions underlying the $425.9 million liability, and whether tax benefits are realized as expected.
- The drivers of lower margins and the extent to which higher travel, occupancy, technology and incentive costs persist.
- Non-GAAP reconciliations and the distinction between company liquidity and assets or cash held by consolidated investment products.