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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-Q

(Mark One)
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM TO



Commission file number: 001-35826
 
Artisan Partners Asset Management Inc.
(Exact name of registrant as specified in its charter)

Delaware
45-0969585
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
875 E. Wisconsin Avenue, Suite 800
 
Milwaukee,
WI
53202
(Address of principal executive offices)
(Zip Code)
 
 
 
(414390-6100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A common stock, par value $0.01 per share
APAM
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of outstanding shares of the registrant’s Class A common stock, par value $0.01 per share, Class B common stock, par value $0.01 per share, and Class C common stock, par value $0.01 per share, as of July 26, 2019 were 56,138,806, 7,912,056 and 13,757,111, respectively.
 


Table of Contents

TABLE OF CONTENTS
 
 
Page
Part I
Financial Information
 
Item 1.
Unaudited Consolidated Financial Statements
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
Except where the context requires otherwise, in this report, references to the “Company”, “Artisan”, “we”, “us” or “our” refer to Artisan Partners Asset Management Inc. (“APAM”) and its direct and indirect subsidiaries, including Artisan Partners Holdings LP (“Artisan Partners Holdings” or “Holdings”). On March 12, 2013, APAM closed its initial public offering and related corporate reorganization. Prior to that date, APAM was a subsidiary of Artisan Partners Holdings.
Forward-Looking Statements
This report contains, and from time to time our management may make, forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements regarding future events and our future performance, as well as management’s current expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements within the meaning of these laws. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue”, the negative of these terms and other comparable terminology. Forward-looking statements are only predictions based on current expectations and projections about future events. Forward-looking statements are subject to a number of risks and uncertainties, and there are important factors that could cause actual results, level of activity, performance, actions or achievements to differ materially from the results, level of activity, performance, actions or achievements expressed or implied by the forward-looking statements. These factors include: the loss of key investment professionals or senior management, adverse market or economic conditions, poor performance of our investment strategies, change in the legislative and regulatory environment in which we operate, operational or technical errors or other damage to our reputation and other factors disclosed in the Company’s filings with the Securities and Exchange Commission, including those factors listed under the caption entitled “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 20, 2019, which is accessible on the SEC’s website at www.sec.gov. We undertake no obligation to publicly update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report, except as required by law.

i

Table of Contents

Forward-looking statements include, but are not limited to, statements about:
our anticipated future results of operations;
our potential operating performance and efficiency;
our expectations with respect to the performance of our investment strategies
our expectations with respect to future levels of assets under management, including the capacity of our strategies and client cash inflows and outflows;
our expectations with respect to industry trends and how those trends may impact our business;
our financing plans, cash needs and liquidity position;
our intention to pay dividends and our expectations about the amount of those dividends;
our expected levels of compensation of our employees, including equity compensation;
our expectations with respect to future expenses and the level of future expenses;
our expected tax rate, and our expectations with respect to deferred tax assets; and
our estimates of future amounts payable pursuant to our tax receivable agreements.

ii

Table of Contents

Part I — Financial Information
Item 1. Unaudited Consolidated Financial Statements
ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Condensed Consolidated Statements of Financial Condition
(U.S. dollars in thousands, except per share amount)
 
June 30,
2019
 
December 31,
2018
ASSETS
Cash and cash equivalents
$
152,622

 
$
160,463

Accounts receivable
87,208

 
67,691

Investment securities
21,778

 
18,109

Property and equipment, net
41,146

 
29,138

Deferred tax assets
425,184

 
429,128

Restricted cash
629

 
629

Prepaid expenses and other assets
13,964

 
13,674

Operating lease assets
91,458

 

Assets of consolidated investment products
 
 
 
Cash and cash equivalents
6,096

 
14,443

Accounts receivable and other
1,848

 
5,566

Investment assets, at fair value
86,795

 
66,173

Total assets
$
928,728

 
$
805,014

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS’ EQUITY
Accounts payable, accrued expenses, and other
$
20,402

 
$
27,221

Accrued incentive compensation
73,666

 
12,689

Borrowings
199,380

 
199,296

Operating lease liabilities
105,429

 

Amounts payable under tax receivable agreements
359,240

 
369,355

Liabilities of consolidated investment products
 
 
 
Accounts payable, accrued expenses, and other
16,970

 
4,712

Investment liabilities, at fair value
8,084

 
16,905

Total liabilities
783,171

 
630,178

Commitments and contingencies

 


Redeemable noncontrolling interests
38,304

 
34,349

Common stock
 
 
 
Class A common stock ($0.01 par value per share, 500,000,000 shares authorized, 56,145,554 and 54,071,188 shares outstanding at June 30, 2019 and December 31, 2018, respectively)
561

 
541

Class B common stock ($0.01 par value per share, 200,000,000 shares authorized, 7,912,056 and 8,645,249 shares outstanding at June 30, 2019 and December 31, 2018, respectively)
79

 
86

Class C common stock ($0.01 par value per share, 400,000,000 shares authorized, 13,757,111 and 14,226,435 shares outstanding at June 30, 2019 and December 31, 2018, respectively)
138

 
142

Additional paid-in capital
76,944

 
97,553

Retained earnings (deficit)
29,365

 
38,617

Accumulated other comprehensive income (loss)
(2,006
)
 
(1,895
)
Total Artisan Partners Asset Management Inc. stockholders’ equity
105,081

 
135,044

Noncontrolling interests - Artisan Partners Holdings
2,172

 
5,443

Total stockholders’ equity
107,253

 
140,487

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity
$
928,728

 
$
805,014

The accompanying notes are an integral part of the consolidated financial statements.

1

Table of Contents

ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Operations
(U.S. dollars in thousands, except per share amounts)
 
For the Three Months Ended June 30,

For the Six Months Ended June 30,
 
2019

2018

2019

2018
Revenues
 
 
 
 
 
 
 
Management fees
$
196,400

 
$
210,029

 
$
383,264

 
$
421,995

Performance fees
4,327

 
2,267

 
4,425

 
2,309

Total revenues
$
200,727

 
$
212,296

 
$
387,689

 
$
424,304

Operating Expenses
 
 
 
 
 
 
 
Compensation and benefits
101,486

 
106,744

 
200,768

 
211,968

Distribution, servicing and marketing
5,836

 
6,847

 
11,239

 
13,856

Occupancy
5,341

 
4,302

 
12,908

 
8,227

Communication and technology
10,269

 
8,966

 
19,697

 
17,626

General and administrative
6,937

 
6,560

 
14,487

 
13,764

Total operating expenses
129,869

 
133,419

 
259,099

 
265,441

Total operating income
70,858

 
78,877

 
128,590

 
158,863

Non-operating income (expense)
 
 
 
 
 
 
 
Interest expense
(2,827
)
 
(2,846
)
 
(5,602
)
 
(5,622
)
Net investment gain (loss) of consolidated investment products
2,043

 
2,941

 
4,389

 
9,226

Other investment gain (loss)
1,383

 
660

 
3,340

 
1,114

Total non-operating income (expense)
599

 
755

 
2,127

 
4,718

Income before income taxes
71,457

 
79,632

 
130,717

 
163,581

Provision for income taxes
11,484

 
11,987

 
20,926

 
24,272

Net income before noncontrolling interests
59,973

 
67,645

 
109,791

 
139,309

Less: Net income attributable to noncontrolling interests - Artisan Partners Holdings
19,795

 
23,307

 
37,104

 
49,359

Less: Net income attributable to noncontrolling interests - consolidated investment products
990

 
2,332

 
1,960

 
6,670

Net income attributable to Artisan Partners Asset Management Inc.
$
39,188

 
$
42,006

 
$
70,727

 
$
83,280

 
 
 
 
 
 
 
 
Basic and diluted earnings per share
$
0.66

 
$
0.72

 
$
1.15

 
$
1.48

Basic and diluted weighted average number of common shares outstanding
51,242,911

 
49,041,113

 
50,697,329

 
48,205,418

Dividends declared per Class A common share
$
0.55

 
$
0.60

 
$
2.14

 
$
1.99


The accompanying notes are an integral part of the consolidated financial statements.

2

Table of Contents


ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income before noncontrolling interests
$
59,973

 
$
67,645

 
$
109,791

 
$
139,309

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(460
)
 
(1,042
)
 
(82
)
 
(410
)
Total other comprehensive income (loss)
(460
)
 
(1,042
)
 
(82
)
 
(410
)
Comprehensive income
59,513

 
66,603

 
109,709

 
138,899

Comprehensive income attributable to noncontrolling interests - Artisan Partners Holdings
19,683

 
23,002

 
37,132

 
49,293

Comprehensive income attributable to noncontrolling interests - consolidated investment products
990

 
2,332

 
1,960

 
6,670

Comprehensive income attributable to Artisan Partners Asset Management Inc.
$
38,840

 
$
41,269

 
$
70,617

 
$
82,936


The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Changes in StockholdersEquity
(U.S. dollars in thousands)
Three months ended June 30, 2019
 
Class A Common stock
Class B Common stock
Class C Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests - Artisan Partners Holdings
Total stockholders’ equity
Redeemable non-controlling interest
Balance at April 1, 2019
$
556

$
80

$
142

$
69,471

$
21,191

$
(1,658
)
$
3,168

$
92,950

$
36,547

Net income




39,188


19,795

58,983

990

Other comprehensive income - foreign currency translation





(332
)
(128
)
(460
)

Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(1,737
)

(16
)
1,753



Amortization of equity-based compensation



8,739



3,334

12,073


Deferred tax assets, net of amounts payable under tax receivable agreements



479




479


Issuance of Class A common stock, net of issuance costs



(8
)



(8
)

Forfeitures and employee/partner terminations









Exchange of subsidiary equity
5

(1
)
(4
)






Capital contributions, net








767

Distributions






(25,733
)
(25,733
)

Dividends




(31,014
)

(17
)
(31,031
)

Balance at June 30, 2019
$
561

$
79

$
138

$
76,944

$
29,365

$
(2,006
)
$
2,172

$
107,253

$
38,304

Three months ended June 30, 2018
 
Class A Common stock
Class B Common stock
Class C Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests - Artisan Partners Holdings
Total stockholders’ equity
Redeemable non-controlling interest
Balance at April 1, 2018
$
535

$
97

$
138

$
89,001

$
4,040

$
(739
)
$
5,848

$
98,920

$
81,652

Net income




42,006


23,307

65,313

2,332

Other comprehensive income - foreign currency translation





(731
)
(311
)
(1,042
)

Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(2,708
)

(7
)
2,715



Amortization of equity-based compensation



10,670



4,499

15,169


Deferred tax assets, net of amounts payable under tax receivable agreements



898




898


Issuance of Class A common stock, net of issuance costs



(8
)



(8
)

Forfeitures and employee/partner terminations
5

(9
)
4







Capital Contributions, net








12,490

Distributions






(33,061
)
(33,061
)

Dividends



(15,062
)
(17,352
)

(18
)
(32,432
)

Balance at June 30, 2018
$
540

$
88

$
142

$
82,791

$
28,694

$
(1,477
)
$
2,979

$
113,757

$
96,474

The accompanying notes are an integral part of the consolidated financial statements.


4

Table of Contents

ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
(U.S. dollars in thousands)
Six months ended June 30, 2019
 
Class A Common stock
Class B Common stock
Class C Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests - Artisan Partners Holdings
Total stockholders’ equity
Redeemable non-controlling interest
Balance at January 1, 2019
$
541

$
86

$
142

$
97,553

$
38,617

$
(1,895
)
$
5,443

$
140,487

34,349

Net income




70,727


37,104

107,831

1,960

Other comprehensive income - foreign currency translation





(70
)
(12
)
(82
)

Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(1,828
)

(41
)
1,869



Amortization of equity-based compensation



17,729



6,693

24,422


Deferred tax assets, net of amounts payable under tax receivable agreements



2,158




2,158


Issuance of Class A common stock, net of issuance costs



(18
)



(18
)

Forfeitures and employee/partner terminations









Issuance of restricted stock awards
10



(10
)





Employee net share settlement
(1
)


(1,287
)


(536
)
(1,824
)

Exchange of subsidiary equity
11

(7
)
(4
)






Capital Contributions, net








1,995

Distributions






(48,324
)
(48,324
)

Dividends



(37,353
)
(79,979
)

(65
)
(117,397
)

Balance at June 30, 2019
$
561

$
79

$
138

$
76,944

$
29,365

$
(2,006
)
$
2,172

$
107,253

$
38,304

Six months ended June 30, 2018
 
Class A Common stock
Class B Common stock
Class C Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests - Artisan Partners Holdings
Total stockholders’ equity
Redeemable non-controlling interest
Balance at January 1, 2018
$
505

$
119

$
132

$
147,910

$
(37,870
)
$
(873
)
$
(1,858
)
$
108,065

62,581

Net income




83,280


49,359

132,639

6,670

Other comprehensive income - foreign currency translation





(302
)
(108
)
(410
)

Other comprehensive income - available for sale investments, net of tax




358

(260
)

98


Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(3,091
)

(42
)
3,133



Amortization of equity-based compensation



20,713



8,856

29,569


Deferred tax assets, net of amounts payable under tax receivable agreements



4,169




4,169


Issuance of Class A common stock, net of issuance costs
6



21,285




21,291


Forfeitures and employee/partner terminations
5

(20
)
15







Issuance of restricted stock awards
15



(15
)





Employee net share settlement
(1
)


(1,210
)


(594
)
(1,805
)

Exchange of subsidiary equity
10

(5
)
(5
)






Purchase of equity and subsidiary equity

(6
)

(21,472
)



(21,478
)

Capital Contributions, net








27,223

Distributions






(55,744
)
(55,744
)

Dividends



(85,498
)
(17,074
)

(65
)
(102,637
)

Balance at June 30, 2018
$
540

$
88

$
142

$
82,791

$
28,694

$
(1,477
)
$
2,979

$
113,757

$
96,474

The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
 
For the Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income before noncontrolling interests
$
109,791

 
$
139,309

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,967

 
2,502

Deferred income taxes
14,997

 
13,707

Asset impairment
2,107

 

Noncash lease expense
1,170

 
318

Net (gain) loss on unconsolidated seed investment securities
(2,723
)
 
(625
)
Loss on disposal of property and equipment
128

 
7

Amortization of debt issuance costs
229

 
229

Share-based compensation
24,422

 
29,569

Net investment (gain) loss of consolidated investment products
(4,389
)
 
(9,226
)
Purchase of investments by consolidated investment products
(71,089
)
 
(572,217
)
Proceeds from sale of investments by consolidated investment products
42,364

 
563,516

Change in assets and liabilities resulting in an increase (decrease) in cash:
 
 
 
Accounts receivable
(19,518
)
 
(126
)
Prepaid expenses and other assets
(637
)
 
(1,868
)
Accounts payable and accrued expenses
63,170

 
74,117

Net change in operating assets and liabilities of consolidated investment products
19,648

 
1,747

Net cash provided by operating activities
182,637

 
240,959

Cash flows from investing activities
 
 
 
Acquisition of property and equipment
(2,372
)
 
(602
)
Leasehold improvements
(11,894
)
 
(2,161
)
Net cash used in investing activities
(14,266
)
 
(2,763
)
Cash flows from financing activities
 
 
 
Partnership distributions
(48,324
)
 
(55,744
)
Dividends paid
(117,397
)
 
(102,637
)
Payment under the tax receivable agreements
(19,009
)
 
(27,251
)
Net proceeds from issuance of common stock

 
21,478

Payment of costs directly associated with the issuance of Class A common stock

 
(166
)
Purchase of equity and subsidiary equity

 
(21,478
)
Taxes paid related to employee net share settlement
(1,824
)
 
(1,805
)
Capital contributions to consolidated investment products, net
1,995

 
27,223

Net cash used in financing activities
(184,559
)
 
(160,380
)
Net increase (decrease) in cash and cash equivalents
(16,188
)
 
77,816

Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
175,535

 
159,796

End of period
$
159,347

 
$
237,612

 
 
 
 
Cash, cash equivalents and restricted cash as of the end of the period
 
 
 
Cash and cash equivalents
$
152,622

 
$
190,358

Restricted cash
629

 
629

Cash and cash equivalents of consolidated investment products
6,096

 
46,625

Cash, cash equivalents and restricted cash
$
159,347

 
$
237,612

 
 
 
 
Supplementary information
 
 


Noncash activity:
 
 
 
Establishment of deferred tax assets
$
11,054

 
$
23,511

Establishment of amounts payable under tax receivable agreements
8,894

 
19,342

Operating lease assets obtained in exchange for operating lease liabilities
3,606

 

The accompanying notes are an integral part of the consolidated financial statements.

6

Table of Contents

ARTISAN PARTNERS ASSET MANAGEMENT INC.
Notes to Unaudited Consolidated Financial Statements
(U.S. currencies in thousands, except share and per share amounts and as otherwise indicated)
Note 1. Nature of Business and Organization
Nature of Business
Artisan Partners Asset Management Inc. (“APAM”), through its subsidiaries, is an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. APAM and its subsidiaries are hereafter referred to collectively as “Artisan” or the “Company”.
Artisan’s autonomous investment teams manage a broad range of U.S., non-U.S. and global investment strategies that are diversified by asset class, market cap and investment style. Strategies are offered through multiple investment vehicles to accommodate a broad range of client mandates. Artisan offers its investment management services primarily to institutions and through intermediaries that operate with institutional-like decision-making processes and have long-term investment horizons.
Organization
On March 12, 2013, APAM completed its initial public offering (the “IPO”). APAM was formed for the purpose of becoming the general partner of Artisan Partners Holdings LP (“Artisan Partners Holdings” or “Holdings”) in connection with the IPO. Holdings is a holding company for the investment management business conducted under the name “Artisan Partners”. The reorganization (“IPO Reorganization”) established the necessary corporate structure to complete the IPO while at the same time preserving the ability of the firm to conduct operations through Holdings and its subsidiaries.
As the sole general partner, APAM controls the business and affairs of Holdings. As a result, APAM consolidates Holdings’ financial statements and records a noncontrolling interest for the equity interests in Holdings held by the limited partners of Holdings. At June 30, 2019, APAM held approximately 72% of the equity ownership interest in Holdings.
Holdings, together with its wholly owned subsidiary, Artisan Investments GP LLC (“AIGP”), controls a 100% interest in Artisan Partners Limited Partnership (“APLP”), a multi-product investment management firm that is the principal operating subsidiary of Artisan Partners Holdings. APLP is registered as an investment adviser with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. APLP provides investment advisory services to traditional separate accounts and pooled investment vehicles, including Artisan Partners Funds, Inc. (“Artisan Funds”), Artisan Partners Global Funds plc (“Artisan Global Funds”), and Artisan sponsored private funds (“Artisan Private Funds”). Artisan Funds are a series of open-end, diversified mutual funds registered under the Investment Company Act of 1940, as amended. Artisan Global Funds is a family of Ireland-domiciled UCITS.
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such consolidated financial statements have been included. Such interim results are not necessarily indicative of full year results.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and accordingly they do not include all of the information and footnotes required in the annual consolidated financial statements and accompanying footnotes.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. As a result, the interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in APAM’s latest annual report on Form 10-K.
The accompanying financial statements were prepared in accordance with U.S. GAAP and related rules and regulations of the SEC. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates or assumptions.
Principles of consolidation
Artisan’s policy is to consolidate all subsidiaries or other entities in which it has a controlling financial interest. The consolidation guidance requires an analysis to determine if an entity should be evaluated for consolidation using the voting interest entity (“VOE”) model or the variable interest entity (“VIE”) model. Under the VOE model, controlling financial interest is generally defined as a majority ownership of voting interests. Under the VIE model, controlling financial interest is defined as (i) the power to direct activities that most significantly impact the economic performance of the entity and (ii) the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. Artisan generally consolidates VIEs in which it meets the power criteria and holds an equity ownership interest of greater than 10%. The consolidated financial statements include the accounts of APAM and all subsidiaries or other entities in which APAM has a direct or indirect controlling financial interest. All material intercompany balances have been eliminated in consolidation.

7

Table of Contents

Artisan serves as the investment adviser to Artisan Funds, Artisan Global Funds and Artisan Private Funds. Artisan Funds and Artisan Global Funds are corporate entities the business and affairs of which are managed by their respective boards of directors. The shareholders of the funds retain voting rights, including rights to elect and reelect members of their respective boards of directors. Each series of Artisan Funds is a VOE and is separately evaluated for consolidation under the VOE model. The shareholders of Artisan Global Funds lack simple majority liquidation rights, and as a result, each sub-fund of Artisan Global Funds is evaluated for consolidation under the VIE model. Artisan Private Funds are also evaluated for consolidation under the VIE model because third-party equity holders of the funds generally lack the ability to divest Artisan of its control of the funds.
From time to time, the Company makes investments in Artisan Funds, Artisan Global Funds, and Artisan Private Funds. If the investment results in a controlling financial interest, APAM consolidates the fund, and the underlying activity of the entire fund is included in Artisan’s Unaudited Consolidated Financial Statements. As of June 30, 2019, Artisan had a controlling financial interest in three sub-funds of Artisan Global Funds and one Artisan Private Fund and, as a result, these funds are included in Artisan’s Unaudited Consolidated Financial Statements. Because these consolidated investment products meet the definition of investment companies under U.S. GAAP, Artisan has retained the specialized industry accounting principles for investment companies in the consolidated financial statements. See Note 6, “Variable Interest Entities and Consolidated Investment Products” for additional details.
Recent accounting pronouncements
Accounting standards adopted as of January 1, 2019
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces a lessee model that brings most leases on the balance sheet. The Company adopted the new standard on January 1, 2019, using the modified retrospective transition method that does not adjust comparative periods. The adoption had no impact on previously reported results, and did not result in a cumulative-effect adjustment to the opening balance of retained earnings. In accordance with the adoption of the new lease standard, the Company recorded operating lease assets and operating lease liabilities in the Unaudited Condensed Consolidated Statements of Financial Condition. The adoption of ASU 2016-02 had no impact on the Unaudited Consolidated Statements of Operations for the six months ended June 30, 2019, and did not impact operating, financing or investing cash flows in the Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2019.
Artisan elected to adopt the short-term lease exemption, which allows companies to exclude contracts that have an initial term of 12 months or less. Artisan also elected the package of practical expedients available for existing contracts which allowed the Company to carry forward historical assessments of (1) whether contracts are or contain leases, (2) lease classification, and (3) initial direct costs. Additionally, Artisan elected the practical expedient to account for lease and non-lease components as a single component. See Note 14, “Leases” for additional information.
Accounting standards not yet adopted
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs will be expensed over the term of the hosting arrangement. The Company currently expenses implementation costs in hosting arrangements as the costs are incurred. The new guidance will be effective on January 1, 2020. The Company is currently evaluating the impact of adoption on the consolidated financial statements, but expects certain types of costs will be capitalized that would have previously been expensed as incurred.
Note 3. Investment Securities
The disclosures below include details of Artisan’s investments, excluding money market funds and consolidated investment products. Investments held by consolidated investment products are described in Note 6, “Variable Interest Entities and Consolidated Investment Products”.
 
As of June 30, 2019
 
As of December 31, 2018
Investments in equity securities
$
7,111

 
$
5,857

Investments in equity securities accounted for under the equity method
14,667

 
12,252

Total investment securities
$
21,778

 
$
18,109



8

Table of Contents

Artisan’s investments in equity securities consist of investments in shares of Artisan Funds, Artisan Global Funds and Artisan Private Funds. The table below presents the net investment income activity related to the investment securities:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net gains (losses) recognized on investment securities
$
1,108

 
$
304

 
$
2,723

 
$
625

Less: Net realized gains (losses) recognized on investment securities sold during the period
$

 
$

 
$

 
$

Unrealized gains (losses) recognized on investment securities held as of the end of the period
$
1,108

 
$
304

 
$
2,723

 
$
625


Note 4. Fair Value Measurements
The table below presents information about Artisan’s assets and liabilities that are measured at fair value and the valuation techniques Artisan utilized to determine such fair value. The financial instruments held by consolidated investment products are excluded from the table below and are presented in Note 6, “Variable Interest Entities and Consolidated Investment Products”.
In accordance with ASC 820, fair value is defined as the price that Artisan would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1 – Observable inputs such as quoted (unadjusted) market prices in active markets for identical securities.
Level 2 – Other significant observable inputs (including but not limited to quoted prices for similar instruments, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including Artisan’s own assumptions in determining fair value).
The following provides the hierarchy of inputs used to derive fair value of Artisan’s assets and liabilities that are financial instruments as of June 30, 2019 and December 31, 2018:
 
Assets and Liabilities at Fair Value
 
Total
 
NAV Practical Expedient (No Fair Value Level)
 
Level 1
 
Level 2
 
Level 3
June 30, 2019
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
40,338

 
$

 
$
40,338

 
$

 
$

Equity securities
21,778

 
13,524

 
8,254

 

 

 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
57,790

 
$

 
$
57,790

 
$

 
$

Equity securities
18,109

 
12,252

 
5,857

 

 


Fair values determined based on Level 1 inputs utilize quoted market prices for identical assets. Level 1 assets generally consist of money market funds, open-end mutual funds and UCITS funds. Equity securities without a fair value level consist of the Company’s investment in one of the Artisan Private Funds, which is measured at the underlying fund’s net asset value (“NAV”), using the ASC 820 practical expedient. The NAV is provided by the fund and is derived from the fair values of the underlying investments as of the reporting date. Cash maintained in demand deposit accounts is excluded from the table above.

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Table of Contents

Note 5. Borrowings
Artisan’s borrowings consist of the following as of June 30, 2019 and December 31, 2018:
 
Maturity
 
Outstanding Balance
 
Interest Rate Per Annum
Revolving credit agreement
August 2022
 
$

 
NA

Senior notes
 
 
 
 
 
Series B
August 2019
 
50,000

 
5.32
%
Series C
August 2022
 
90,000

 
5.82
%
Series D
August 2025
 
60,000

 
4.29
%
Total borrowings
 
 
$
200,000

 
 

The fair value of borrowings was approximately $205.2 million as of June 30, 2019. Fair value was determined based on future cash flows, discounted to present value using current market interest rates. The inputs are categorized as Level 2 in the fair value hierarchy, as defined in Note 4, “Fair Value Measurements”.
On June 6, 2019, Holdings entered into a Note Purchase Agreement to issue $50 million of Series E senior notes in a private placement transaction on August 16, 2019, subject to the satisfaction of certain customary closing conditions. The Company will use the proceeds from the Series E senior notes to repay the $50 million of Series B senior notes that mature on August 16, 2019. The Series E senior notes will bear interest at a rate of 4.53% and will mature on August 16, 2027.
Interest expense incurred on the unsecured notes and revolving credit agreement was $2.6 million for the three months ended June 30, 2019 and 2018, and $5.3 million for the six months ended June 30, 2019 and 2018.
As of June 30, 2019, the aggregate maturities of debt obligations, based on their contractual terms, are as follows:
2019
$
50,000

2020

2021

2022
90,000

2023

Thereafter
60,000

Total
$
200,000


Note 6. Variable Interest Entities and Consolidated Investment Products
Artisan serves as the investment adviser for various types of investment products, consisting of both VIEs and VOEs. Artisan consolidates an investment product if it has a controlling financial interest in the entity. Any such entities are collectively referred to herein as consolidated investment products or CIPs.
As of June 30, 2019, Artisan is considered to have a controlling financial interest in three sub-funds of Artisan Global Funds and one Artisan Private Fund. As of June 30, 2019, the aggregate amount of Artisan’s direct equity investment in the consolidated investment products was $31.4 million.
Artisan’s maximum exposure to loss in connection with the assets and liabilities of CIPs is limited to its direct equity investment, while the potential benefit is limited to the management fee and incentive allocation received and the return on its equity investment. With the exception of Artisan’s direct equity investment, the assets of CIPs are not available to Artisan’s creditors, nor are they available to Artisan for general corporate purposes. In addition, third-party investors in the CIPs have no recourse to the general credit of the Company.
Management fees and incentive allocations earned from CIPs are eliminated from revenue upon consolidation. See Note 15, “Related Party Transactions” for additional information on management fees and incentive allocations earned from CIPs.
Third-party investors’ ownership interest in CIPs is presented as redeemable noncontrolling interest in the Unaudited Condensed Consolidated Statements of Financial Condition as third-party investors have the right to withdraw their capital, subject to certain conditions. Net income attributable to third-party investors is reported as net income attributable to noncontrolling interests - consolidated investment products in the Unaudited Consolidated Statements of Operations.

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Table of Contents

During the six months ended June 30, 2019, the Company determined that it no longer had a controlling financial interest in one sub-fund of Artisan Global Funds as a result of third party capital contributions. Upon loss of control, the VIE was deconsolidated and the related assets, liabilities, and equity of the fund were derecognized from the Company’s Unaudited Condensed Consolidated Statements of Financial Condition. There was no net impact to the Unaudited Consolidated Statements of Operations for the six months ended June 30, 2019. Artisan generally does not recognize a gain or loss upon deconsolidation of investment products because the assets and liabilities of CIPs are carried at fair value. Artisan’s $0.9 million direct equity investment was reclassified from investment assets of consolidated investment products to investment securities.
As of June 30, 2019, Artisan held direct equity investments of $14.7 million in VIEs for which the Company does not hold a controlling financial interest. These direct equity investments consisted of seed investments in one sub-fund of Artisan Global Funds and one Artisan Private Fund, both which are accounted for under the equity method of accounting because Artisan has significant influence over the funds.
Fair Value Measurements - Consolidated Investment Products
The carrying value of CIPs’ investments is also their fair value. Short and long positions on equity securities are valued based upon closing prices of the security on the exchange or market designated by the accounting agent or pricing vendor as the principal exchange. The closing price may represent last sale price, official closing price, a closing auction or other information depending on market convention. Short and long positions on fixed income instruments are valued at market value. Market values are generally evaluations based on the judgment of pricing vendors, which may consider, among other factors, the prices at which securities actually trade, broker-dealer quotations, pricing formulas, estimates of market values obtained from yield data relating to investments or securities with similar characteristics and/or discounted cash flow models that might be applicable.
The following tables present the fair value hierarchy levels of assets and liabilities held by CIPs measured at fair value as of June 30, 2019 and December 31, 2018:
 
Assets and Liabilities at Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2019
 
 
 
 
 
 

Assets
 
 
 
 
 
 
 
Money market funds
$
6,096

 
$
6,096

 
$

 
$

Equity securities - long position
6,929

 
6,929

 

 

Fixed income instruments - long position
79,199

 

 
79,199

 

Derivative assets
667

 

 
667

 

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Fixed income instruments - short position
7,984

 

 
7,984

 

Derivative liabilities
100

 
56

 
44

 


 
Assets and Liabilities at Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
December 31, 2018