Artisan Partners Asset Management Inc. — Q2 2019 Form 10-Q
Business context and period. Artisan is an active investment manager operating through autonomous investment teams. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are to the corresponding 2018 periods unless stated otherwise. APAM owned approximately 72% of Artisan Partners Holdings at quarter-end.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $200.7 million | $212.3 million | $387.7 million | $424.3 million |
| Operating income | $70.9 million | $78.9 million | $128.6 million | $158.9 million |
| Operating margin | 35.3% | 37.2% | 33.2% | 37.4% |
| Net income attributable to APAM | $39.2 million | $42.0 million | $70.7 million | $83.3 million |
| GAAP diluted EPS | $0.66 | $0.72 | $1.15 | $1.48 |
| Adjusted net income per adjusted share (non-GAAP) | $0.67 | $0.76 | $1.22 | $1.53 |
- Assets under management (AUM): $113.8 billion at June 30, up $6.0 billion, or 6%, during Q2. Market appreciation added $6.5 billion, partly offset by $0.5 billion of net outflows. Q2 average AUM was $110.2 billion, down 5% year over year; first-half average AUM was $107.6 billion, down 8%.
- Fees: Q2 performance fees were $4.3 million versus $2.3 million; first-half fees were $4.4 million versus $2.3 million. Weighted average fee was 73.1 basis points in Q2 and 72.7 basis points for the first half, slightly below the comparable periods.
- Cash flow and liquidity: First-half net cash provided by operating activities was $182.6 million, down from $241.0 million. Cash and cash equivalents were $152.6 million at June 30, with $159.3 million including restricted cash and cash held by consolidated investment products. The $100 million revolving facility was undrawn.
- Debt and obligations: Borrowings were approximately $200 million, including $50 million of Series B notes maturing in August 2019. A planned $50 million Series E issuance at 4.53% was intended to refinance those notes, subject to customary closing conditions. Tax receivable agreement (TRA) liabilities were $359.2 million; operating lease liabilities were $105.4 million.
- Distributions: APAM paid a $0.55-per-share quarterly dividend in Q2. After quarter-end, the board declared a $0.60-per-share dividend and Holdings declared a $34.0 million distribution. The company said its expected quarterly dividend was approximately 80% of quarterly cash generation, subject to board approval.
Material changes and management commentary
- First-half revenue fell 9%, primarily reflecting an 8% decline in average AUM; Q2 revenue fell 5%, primarily reflecting lower average AUM. APAM-attributable net income declined 15% for the first half.
- First-half operating expenses decreased 2%, as lower compensation and distribution costs more than offset higher occupancy and technology costs. The lower revenue base contributed to margin compression.
- Management reported $2.0 billion of Q2 net inflows to the seven newest strategies, offset by $2.5 billion of outflows from other strategies. It expected outflows to continue near term in Non-U.S. Growth, U.S. Mid-Cap Growth and U.S. Mid-Cap Value. Management identified investment performance as the principal long-term driver of AUM growth and noted that results can be volatile with markets and flows.
- Operating cash flow declined partly because of lower operating income and working-capital timing, including executive bonus payments and customer receivable collections. Investment outlays increased with office relocations.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue forecast. Dividend expectations are conditional, not guaranteed; special dividends depend on annual cash generation, business conditions and desired cash retention.
- Key stated risks include adverse markets or economic conditions, poor investment performance, loss of key investment professionals or senior management, client outflows, regulatory change, and operational or technical errors and reputational damage. Strategy capacity limits and competitive or investor trends may also affect AUM.
- The company recorded a $2.1 million impairment related to abandoning leased office space during the first half, including $1.5 million for a lease asset and $0.6 million for property. Lease accounting adoption added operating lease assets and liabilities to the balance sheet, with no reported impact on earnings or cash flows.
- Management reported compliance with debt covenants, effective disclosure controls, no material off-balance-sheet arrangements, and no legal or administrative proceedings believed to have a material effect. TRA payments may vary and, in certain circumstances, could be accelerated or exceed realized tax benefits.
Investor verification priorities
- Track AUM and net flows by strategy, especially the strategies management expected to continue experiencing outflows, and assess whether new-strategy inflows persist.
- Verify subsequent completion of the Series E refinancing and monitor debt maturities, covenant compliance and liquidity.
- Assess operating-margin trends, compensation and occupancy costs, and the effect of lower average AUM and fee mix on revenue.
- Review cash generation against dividends and distributions, including the board’s future decisions on variable and special dividends.
- Monitor TRA payment estimates and timing, and the assumptions about taxable income and future tax benefits.