Artisan Partners Asset Management Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. Artisan is an active investment manager operating through 10 autonomous investment teams and managing 25 strategies. Its revenue is primarily management fees based on client assets under management (AUM).
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $234.3m | $316.6m | $767.3m | $912.2m |
| Operating income | $78.7m | $143.1m | $274.1m | $402.7m |
| Operating margin | 33.6% | 45.2% | 35.7% | 44.1% |
| Net income attributable to APAM | $44.2m | $86.4m | $153.9m | $251.9m |
| Basic and diluted EPS | $0.65 | $1.30 | $2.17 | $3.84 |
| Adjusted operating margin (non-GAAP) | 32.9% | 45.2% | 35.1% | 44.2% |
| Adjusted EPS (non-GAAP) | $0.70 | $1.33 | $2.47 | $3.74 |
Q3 weighted average management fee was 70.0 basis points, versus 70.7 basis points a year earlier. Performance fees were $0.1m in Q3 and $0.4m in the first nine months, compared with $11.2m for the first nine months of 2021.
AUM and flows. Period-end AUM was $120.6bn, down 30.5% from $173.6bn a year earlier. Q3 AUM fell $9.9bn from June 30: negative investment returns and other of $8.8bn and net client outflows of $1.1bn. Nine-month net client outflows were $4.6bn, while investment returns and other reduced AUM by $49.4bn. Average AUM declined 25% year over year in Q3 to $132.9bn and 14% for the nine-month period to $146.2bn.
Cash flow, balance sheet and debt. Operating cash flow was $306.6m for the first nine months, down from $404.2m; investing cash outflow was $60.5m and financing cash outflow was $259.3m. At September 30, cash and cash equivalents were $168.1m, and the $100m revolving credit facility was undrawn. Total borrowings were $200m gross ($199.0m net of issuance costs). The company refinanced $90m of notes maturing in August 2022 with 3.10% Series F notes and extended its $100m revolving facility through August 2027. It reported compliance with debt covenants.
Balance-sheet total assets were $1.343bn and total liabilities were $958.9m. The $398.2m tax receivable agreement (TRA) liability is a significant obligation. The reported cash-flow figures include consolidated investment products; the filing’s liquidity discussion excludes assets and liabilities attributable to third-party investors in those products.
Material changes versus the prior comparable period
- Q3 revenue fell 26% and nine-month revenue fell 16%, primarily reflecting lower average AUM. Q3 operating income declined 45%; nine-month operating income declined 32%.
- APAM-attributable net income declined 49% in Q3 and 39% for the nine-month period. In addition to lower operating income, non-operating results weakened: nine-month net investment losses included $14.6m from consolidated investment products and $23.7m of other net investment losses.
- Operating expenses declined 10% in Q3 and 3% for the nine-month period, as lower incentive compensation and distribution costs were partly offset by higher occupancy, travel, technology and fixed compensation costs.
- Cash and cash equivalents declined from $189.2m at year-end 2021 to $168.1m at September 30, 2022. Gross debt remained $200m; the debt mix changed following the refinancing.
Outlook, management commentary and risks
- Management says financial results can be volatile because AUM and fee revenue respond to markets, investment performance and client flows. It cited market volatility, inflation, rising interest rates, the war in Ukraine and wider economic uncertainty.
- Management expects Artisan Funds’ annual income and capital-gains distributions to result in approximately $300m of investor outflows in Q4 2022 from holders who do not reinvest; this is an estimate, not a guarantee.
- The board declared a $0.56-per-share Class A quarterly dividend, payable November 30, 2022. The company described a policy expectation of distributing approximately 80% of quarterly cash generation, subject to board approval; dividends are not assured. A $12.5m Holdings distribution was also declared.
- Management expected approximately $36.2m of TRA payments in 2023 and said it did not intend to make additional TRA payments in 2022. TRA estimates and payment timing depend on taxable income, tax rates, unit exchanges and other factors; certain circumstances can accelerate payments or make them exceed realized tax benefits.
- Several strategies were closed or capacity-managed for most new investors. Management said restrictions may affect near-term AUM and can be followed by periods of outflows. It also reported launching the Emerging Markets Local Opportunities strategy in July 2022.
- Other risks include investment underperformance, loss of key personnel, adverse market conditions, client outflows, regulatory changes and operational or reputational events. Management reported no legal or administrative proceedings it believed would have a material adverse effect. Disclosure controls were deemed effective; a new general ledger and reporting system was implemented during the quarter.
There was no specific numerical earnings or AUM guidance in the filing. Adjusted measures are non-GAAP and exclude specified investment, TRA and compensation valuation effects; they should be considered alongside, not instead of, GAAP results.
Important facts for investors to verify
- Whether subsequent AUM trends reflect further market losses, client outflows or changes in investment performance, and how those changes affect fee revenue and margins.
- The actual Q4 fund distributions and resulting non-reinvested outflows compared with management’s approximately $300m estimate.
- Cash generation, dividend declarations and board decisions under the variable dividend policy, including cash reserved for future franchise capital awards and growth investment.
- TRA payment estimates and timing, including the projected 2023 payment and the assumptions supporting the $398.2m recorded liability.
- Debt terms, covenant compliance and liquidity, while distinguishing corporate cash and obligations from consolidated investment-product balances.
- Non-GAAP adjustments and investment valuation effects, including franchise capital award hedging and losses recorded on investment holdings.