Document
111false--12-31Q320182018-09-300001517302falseLarge Accelerated Filerfalse0.010.010.010.010.010.0150000000020000000040000000020000000005000000090000000600000000.05320.05820.042927000001130001440000045753322180892465810000 0001517302 2018-01-01 2018-09-30 0001517302 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonClassCMember 2018-10-26 0001517302 us-gaap:CommonClassAMember 2018-10-26 0001517302 us-gaap:CommonClassBMember 2018-10-26 0001517302 2017-12-31 0001517302 2018-09-30 0001517302 us-gaap:CommonClassCMember 2018-09-30 0001517302 us-gaap:CommonClassAMember 2017-12-31 0001517302 us-gaap:CommonClassCMember 2017-12-31 0001517302 us-gaap:CommonClassBMember 2018-09-30 0001517302 us-gaap:CommonClassAMember 2018-09-30 0001517302 us-gaap:CommonClassBMember 2017-12-31 0001517302 2018-07-01 2018-09-30 0001517302 2017-07-01 2017-09-30 0001517302 2017-01-01 2017-09-30 0001517302 us-gaap:AssetManagement1Member 2018-01-01 2018-09-30 0001517302 us-gaap:InvestmentPerformanceMember 2018-07-01 2018-09-30 0001517302 us-gaap:InvestmentPerformanceMember 2018-01-01 2018-09-30 0001517302 us-gaap:InvestmentPerformanceMember 2017-01-01 2017-09-30 0001517302 us-gaap:InvestmentPerformanceMember 2017-07-01 2017-09-30 0001517302 us-gaap:AssetManagement1Member 2018-07-01 2018-09-30 0001517302 us-gaap:AssetManagement1Member 2017-01-01 2017-09-30 0001517302 us-gaap:AssetManagement1Member 2017-07-01 2017-09-30 0001517302 us-gaap:NoncontrollingInterestMember 2017-09-30 0001517302 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2017-09-30 0001517302 us-gaap:CommonClassCMember us-gaap:CommonStockMember 2017-01-01 2017-09-30 0001517302 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2017-01-01 2017-09-30 0001517302 us-gaap:RetainedEarningsMember 2017-01-01 2017-09-30 0001517302 us-gaap:NoncontrollingInterestMember 2016-12-31 0001517302 us-gaap:NoncontrollingInterestMember 2017-01-01 2017-09-30 0001517302 us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-09-30 0001517302 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-12-31 0001517302 us-gaap:CommonClassCMember us-gaap:CommonStockMember 2016-12-31 0001517302 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-01-01 2017-09-30 0001517302 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2016-12-31 0001517302 us-gaap:RetainedEarningsMember 2017-09-30 0001517302 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2017-01-01 2017-09-30 0001517302 us-gaap:RetainedEarningsMember 2016-12-31 0001517302 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-09-30 0001517302 2017-09-30 0001517302 us-gaap:CommonClassCMember us-gaap:CommonStockMember 2017-09-30 0001517302 us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0001517302 2016-12-31 0001517302 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2017-09-30 0001517302 us-gaap:AdditionalPaidInCapitalMember 2017-09-30 0001517302 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2016-12-31 0001517302 us-gaap:NoncontrollingInterestMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-01-01 2018-09-30 0001517302 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonClassCMember us-gaap:CommonStockMember 2018-09-30 0001517302 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-09-30 0001517302 us-gaap:NoncontrollingInterestMember 2018-09-30 0001517302 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2017-12-31 0001517302 us-gaap:RetainedEarningsMember 2017-12-31 0001517302 us-gaap:CommonClassCMember us-gaap:CommonStockMember 2018-01-01 2018-09-30 0001517302 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-09-30 0001517302 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-01-01 2018-09-30 0001517302 us-gaap:NoncontrollingInterestMember 2017-12-31 0001517302 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2017-12-31 0001517302 us-gaap:RetainedEarningsMember 2018-01-01 2018-09-30 0001517302 us-gaap:RetainedEarningsMember 2018-09-30 0001517302 us-gaap:AdditionalPaidInCapitalMember 2018-09-30 0001517302 us-gaap:CommonClassCMember us-gaap:CommonStockMember 2017-12-31 0001517302 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0001517302 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-09-30 0001517302 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0001517302 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-09-30 0001517302 us-gaap:CapitalUnitsMember apam:FollowOnOfferingMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitsMember apam:FollowOnOfferingMember 2018-02-27 0001517302 us-gaap:CommonClassAMember 2018-01-01 2018-09-30 0001517302 apam:CapitalUnitsClassEMember 2018-04-02 2018-04-02 0001517302 apam:CapitalUnitsClassEMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitClassBMember 2018-04-02 2018-04-02 0001517302 us-gaap:CapitalUnitClassAMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitClassAMember 2018-05-09 2018-05-09 0001517302 2018-03-01 2018-03-01 0001517302 us-gaap:CapitalUnitClassBMember 2018-03-01 2018-03-01 0001517302 apam:CapitalUnitsClassEMember 2018-08-08 2018-08-08 0001517302 us-gaap:CapitalUnitClassBMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitClassBMember 2018-08-08 2018-08-08 0001517302 2018-08-08 2018-08-08 0001517302 us-gaap:CapitalUnitClassBMember 2018-05-09 2018-05-09 0001517302 us-gaap:CapitalUnitClassAMember 2018-03-01 2018-03-01 0001517302 us-gaap:CapitalUnitClassAMember 2018-08-08 2018-08-08 0001517302 apam:CapitalUnitsClassEMember 2018-05-09 2018-05-09 0001517302 2018-05-09 2018-05-09 0001517302 apam:CapitalUnitsClassEMember 2018-03-01 2018-03-01 0001517302 2018-04-02 2018-04-02 0001517302 us-gaap:CapitalUnitClassAMember 2018-04-02 2018-04-02 0001517302 us-gaap:AccountingStandardsUpdate201601Member us-gaap:RetainedEarningsMember 2018-01-01 2018-09-30 0001517302 us-gaap:AccountingStandardsUpdate201601Member us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-09-30 0001517302 us-gaap:AccountingStandardsUpdate201409Member us-gaap:SalesRevenueNetMember 2018-01-01 2018-09-30 0001517302 us-gaap:AccountingStandardsUpdate201409Member us-gaap:RetainedEarningsMember 2018-01-01 2018-09-30 0001517302 us-gaap:AccountingStandardsUpdate201409Member us-gaap:OperatingExpenseMember 2018-01-01 2018-09-30 0001517302 us-gaap:FairValueInputsLevel3Member 2018-09-30 0001517302 us-gaap:FairValueInputsLevel3Member 2017-12-31 0001517302 us-gaap:FairValueInputsLevel2Member 2018-09-30 0001517302 us-gaap:FairValueInputsLevel1Member 2017-12-31 0001517302 us-gaap:FairValueInputsLevel1Member 2018-09-30 0001517302 us-gaap:FairValueMeasuredAtNetAssetValuePerShareMember 2017-12-31 0001517302 us-gaap:FairValueMeasuredAtNetAssetValuePerShareMember 2018-09-30 0001517302 us-gaap:FairValueInputsLevel2Member 2017-12-31 0001517302 apam:SeriesBSeniorNotesMember us-gaap:SeniorNotesMember 2018-09-30 0001517302 apam:SeriesCSeniorNotesMember us-gaap:SeniorNotesMember 2018-09-30 0001517302 apam:SeriesDSeniorNotesMember us-gaap:SeniorNotesMember 2018-09-30 0001517302 us-gaap:RevolvingCreditFacilityMember 2018-09-30 0001517302 apam:SeriesBSeniorNotesMember us-gaap:SeniorNotesMember 2017-12-31 0001517302 apam:SeriesDSeniorNotesMember us-gaap:SeniorNotesMember 2017-12-31 0001517302 us-gaap:RevolvingCreditFacilityMember 2017-12-31 0001517302 apam:SeriesCSeniorNotesMember us-gaap:SeniorNotesMember 2017-12-31 0001517302 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2018-07-01 0001517302 us-gaap:FairValueMeasurementsRecurringMember 2018-09-30 0001517302 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-09-30 0001517302 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2018-09-30 0001517302 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-09-30 0001517302 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0001517302 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0001517302 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0001517302 us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0001517302 apam:DeferredTaxAssetsMember us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-09-30 0001517302 apam:DeferredTaxAssetsMember us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-09-30 0001517302 apam:LimitedPartnershipUnitsMember 2018-09-30 0001517302 us-gaap:RestrictedStockMember apam:LimitedPartnershipUnitsMember 2018-01-01 2018-09-30 0001517302 apam:LimitedPartnershipUnitsMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember apam:GeneralPartnershipUnitsMember 2018-01-01 2018-09-30 0001517302 apam:LimitedPartnershipUnitsMember apam:FollowOnOfferingMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitsMember 2018-01-01 2018-09-30 0001517302 apam:GeneralPartnershipUnitsMember apam:FollowOnOfferingMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitsMember 2017-12-31 0001517302 apam:GeneralPartnershipUnitsMember 2018-01-01 2018-09-30 0001517302 apam:LimitedPartnershipUnitsMember 2017-12-31 0001517302 us-gaap:CapitalUnitsMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember us-gaap:CapitalUnitsMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitsMember 2018-09-30 0001517302 us-gaap:CommonStockMember us-gaap:CommonClassAMember 2018-01-01 2018-09-30 0001517302 apam:GeneralPartnershipUnitsMember 2018-09-30 0001517302 apam:GeneralPartnershipUnitsMember 2017-12-31 0001517302 us-gaap:RestrictedStockMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonClassBMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonStockMember us-gaap:CommonClassCMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonClassCMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember us-gaap:CommonClassCMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonStockMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonStockMember us-gaap:CommonClassAMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonStockMember us-gaap:CommonClassBMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonStockMember us-gaap:CommonClassBMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember us-gaap:CommonClassBMember 2018-01-01 2018-09-30 0001517302 us-gaap:CommonStockMember us-gaap:CommonClassCMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember us-gaap:CommonClassAMember 2018-01-01 2018-09-30 0001517302 apam:SpecialAnnualDividendMember 2017-07-01 2017-09-30 0001517302 apam:SpecialAnnualDividendMember 2018-07-01 2018-09-30 0001517302 apam:SpecialAnnualDividendMember 2017-01-01 2017-09-30 0001517302 apam:QuarterlyCashDividendMember 2018-07-01 2018-09-30 0001517302 apam:QuarterlyCashDividendMember 2018-01-01 2018-09-30 0001517302 apam:QuarterlyCashDividendMember 2017-01-01 2017-09-30 0001517302 apam:SpecialAnnualDividendMember 2018-01-01 2018-09-30 0001517302 apam:QuarterlyCashDividendMember 2017-07-01 2017-09-30 0001517302 apam:ArtisanPartnersHoldingsLPMember 2018-01-01 2018-09-30 0001517302 apam:ArtisanPartnersHoldingsLPMember 2018-07-01 2018-09-30 0001517302 apam:ArtisanPartnersHoldingsLPMember 2017-07-01 2017-09-30 0001517302 apam:ArtisanPartnersHoldingsLPMember 2017-01-01 2017-09-30 0001517302 us-gaap:RestrictedStockUnitsRSUMember 2017-12-31 0001517302 us-gaap:RestrictedStockMember apam:GeneralPartnershipUnitsMember 2018-09-30 0001517302 us-gaap:RestrictedStockUnitsRSUMember 2018-09-30 0001517302 apam:SeparateAccountsMember us-gaap:AssetManagement1Member 2017-07-01 2017-09-30 0001517302 apam:ArtisanGlobalFundsMember us-gaap:AssetManagement1Member 2018-07-01 2018-09-30 0001517302 apam:SeparateAccountsMember us-gaap:AssetManagement1Member 2017-01-01 2017-09-30 0001517302 apam:ArtisanFundsMember us-gaap:AssetManagement1Member 2017-01-01 2017-09-30 0001517302 apam:SeparateAccountsMember us-gaap:AssetManagement1Member 2018-07-01 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember us-gaap:AssetManagement1Member 2017-01-01 2017-09-30 0001517302 apam:ArtisanGlobalFundsMember us-gaap:AssetManagement1Member 2018-01-01 2018-09-30 0001517302 apam:SeparateAccountsMember us-gaap:InvestmentPerformanceMember 2017-07-01 2017-09-30 0001517302 apam:ArtisanFundsMember us-gaap:AssetManagement1Member 2018-07-01 2018-09-30 0001517302 apam:SeparateAccountsMember us-gaap:InvestmentPerformanceMember 2017-01-01 2017-09-30 0001517302 apam:ArtisanFundsMember us-gaap:AssetManagement1Member 2018-01-01 2018-09-30 0001517302 apam:SeparateAccountsMember us-gaap:InvestmentPerformanceMember 2018-07-01 2018-09-30 0001517302 apam:SeparateAccountsMember us-gaap:InvestmentPerformanceMember 2018-01-01 2018-09-30 0001517302 apam:ArtisanFundsMember us-gaap:AssetManagement1Member 2017-07-01 2017-09-30 0001517302 apam:SeparateAccountsMember us-gaap:AssetManagement1Member 2018-01-01 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember us-gaap:AssetManagement1Member 2017-07-01 2017-09-30 0001517302 apam:ArtisanGlobalFundsMember 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember 2017-12-31 0001517302 apam:SeparateAccountsMember 2018-09-30 0001517302 apam:ArtisanFundsMember 2017-12-31 0001517302 apam:SeparateAccountsMember 2017-12-31 0001517302 apam:ArtisanFundsMember 2018-09-30 0001517302 apam:ClassBLiabilityAwardsMember 2018-01-01 2018-09-30 0001517302 apam:ArtisanFundsMember 2018-01-01 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember 2018-01-01 2018-09-30 0001517302 apam:PrivatelyOfferedFundsMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember 2018-01-01 0001517302 us-gaap:RestrictedStockUnitsRSUMember 2018-01-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember 2018-09-30 0001517302 us-gaap:RestrictedStockMember 2017-01-01 2017-09-30 0001517302 us-gaap:RestrictedStockMember 2017-07-01 2017-09-30 0001517302 us-gaap:RestrictedStockMember 2018-07-01 2018-09-30 0001517302 apam:FollowOnOfferingMember 2018-01-01 2018-09-30 0001517302 apam:CapitalUnitMember 2018-01-01 2018-09-30 0001517302 us-gaap:LondonInterbankOfferedRateLIBORMember 2018-01-01 2018-09-30 0001517302 2017-01-01 2017-12-31 0001517302 us-gaap:CapitalUnitsMember 2017-01-01 2017-09-30 0001517302 us-gaap:CapitalUnitsMember 2018-07-01 2018-09-30 0001517302 us-gaap:RestrictedStockMember 2017-07-01 2017-09-30 0001517302 us-gaap:RestrictedStockMember 2018-01-01 2018-09-30 0001517302 us-gaap:CapitalUnitsMember 2017-07-01 2017-09-30 0001517302 us-gaap:RestrictedStockMember 2017-01-01 2017-09-30 0001517302 us-gaap:RestrictedStockMember 2018-07-01 2018-09-30 0001517302 apam:ArtisanFundsMember 2018-07-01 2018-09-30 0001517302 apam:ArtisanFundsMember 2017-01-01 2017-09-30 0001517302 apam:ArtisanFundsMember 2017-07-01 2017-09-30 0001517302 srt:MaximumMember apam:ArtisanGlobalFundsMember 2018-01-01 2018-09-30 0001517302 apam:PrivatelyOfferedFundsMember 2017-01-01 2017-12-31 0001517302 srt:MaximumMember apam:ArtisanFundsMember 2018-01-01 2018-09-30 0001517302 srt:MinimumMember apam:ArtisanGlobalFundsMember 2018-01-01 2018-09-30 0001517302 srt:MinimumMember apam:ArtisanFundsMember 2018-01-01 2018-09-30 0001517302 srt:SubsidiariesMember apam:ArtisanGlobalFundsMember 2017-07-01 2017-09-30 0001517302 srt:ConsolidationEliminationsMember apam:ArtisanGlobalFundsMember 2017-07-01 2017-09-30 0001517302 srt:SubsidiariesMember apam:ArtisanGlobalFundsMember 2017-01-01 2017-09-30 0001517302 srt:ConsolidationEliminationsMember apam:ArtisanGlobalFundsMember 2018-01-01 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember 2017-01-01 2017-09-30 0001517302 srt:SubsidiariesMember apam:ArtisanGlobalFundsMember 2018-07-01 2018-09-30 0001517302 srt:SubsidiariesMember apam:ArtisanGlobalFundsMember 2018-01-01 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember 2018-07-01 2018-09-30 0001517302 apam:ArtisanGlobalFundsMember 2017-07-01 2017-09-30 0001517302 srt:ConsolidationEliminationsMember apam:ArtisanGlobalFundsMember 2017-01-01 2017-09-30 0001517302 srt:ConsolidationEliminationsMember apam:ArtisanGlobalFundsMember 2018-07-01 2018-09-30 0001517302 srt:ConsolidationEliminationsMember apam:PrivatelyOfferedFundsMember 2017-07-01 2017-09-30 0001517302 srt:SubsidiariesMember apam:PrivatelyOfferedFundsMember 2018-01-01 2018-09-30 0001517302 srt:SubsidiariesMember apam:PrivatelyOfferedFundsMember 2018-07-01 2018-09-30 0001517302 apam:PrivatelyOfferedFundsMember 2017-07-01 2017-09-30 0001517302 srt:SubsidiariesMember apam:PrivatelyOfferedFundsMember 2017-01-01 2017-09-30 0001517302 srt:SubsidiariesMember apam:PrivatelyOfferedFundsMember 2017-07-01 2017-09-30 0001517302 srt:ConsolidationEliminationsMember apam:PrivatelyOfferedFundsMember 2017-01-01 2017-09-30 0001517302 apam:PrivatelyOfferedFundsMember 2017-01-01 2017-09-30 0001517302 apam:PrivatelyOfferedFundsMember 2018-07-01 2018-09-30 0001517302 srt:ConsolidationEliminationsMember apam:PrivatelyOfferedFundsMember 2018-07-01 2018-09-30 0001517302 srt:ConsolidationEliminationsMember apam:PrivatelyOfferedFundsMember 2018-01-01 2018-09-30 0001517302 us-gaap:SubsequentEventMember 2018-10-25 2018-10-25 0001517302 apam:QuarterlyCashDividendMember us-gaap:CommonClassAMember us-gaap:SubsequentEventMember 2018-10-25 2018-10-25 iso4217:USD xbrli:shares iso4217:USD apam:vote xbrli:shares xbrli:pure apam:TRA
Table of Contents

 


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

Form 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
OR
o
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)
 
 

(414) 390-6100
(Registrant’s telephone number, including area code)

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 þ No o

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer þ
 
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
Emerging growth company o

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. o

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

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 October 26, 2018 were 54,019,493, 8,695,249 and 14,228,130, 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. These 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, 2017, filed with the SEC on February 21, 2018, 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 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)
 
September 30,
2018
 
December 31,
2017
ASSETS
Cash and cash equivalents
$
211,431

 
$
137,286

Accounts receivable
76,820

 
76,693

Investment securities
18,204

 
4,978

Property and equipment, net
25,562

 
21,025

Deferred tax assets
433,975

 
429,212

Restricted cash
629

 
629

Prepaid expenses and other assets
13,330

 
13,364

Assets of consolidated investment products
 
 
 
Cash and cash equivalents
15,543

 
21,881

Accounts receivable and other
15,760

 
16,768

Investment assets, at fair value
65,048

 
115,319

Total assets
$
876,302

 
$
837,155

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS’ EQUITY
Accounts payable, accrued expenses, and other
$
23,381

 
$
23,019

Accrued incentive compensation
82,456

 
2,911

Borrowings
199,255

 
199,129

Amounts payable under tax receivable agreements
368,986

 
385,413

Liabilities of consolidated investment products
 
 
 
Accounts payable, accrued expenses, and other
12,970

 
8,180

Investment liabilities, at fair value
21,685

 
47,857

Total liabilities
708,733

 
666,509

Commitments and contingencies

 


Redeemable noncontrolling interests
30,681

 
62,581

Common stock
 
 
 
Class A common stock ($0.01 par value per share, 500,000,000 shares authorized, 54,019,493 and 50,463,126 shares outstanding at September 30, 2018 and December 31, 2017, respectively)
540

 
505

Class B common stock ($0.01 par value per share, 200,000,000 shares authorized, 8,695,249 and 11,922,192 shares outstanding at September 30, 2018 and December 31, 2017, respectively)
87

 
119

Class C common stock ($0.01 par value per share, 400,000,000 shares authorized, 14,228,130 and 13,184,527 shares outstanding at September 30, 2018 and December 31, 2017, respectively)
142

 
132

Additional paid-in capital
90,609

 
147,910

Retained earnings (deficit)
38,678

 
(37,870
)
Accumulated other comprehensive income (loss)
(1,624
)
 
(873
)
Total Artisan Partners Asset Management Inc. stockholders’ equity
128,432

 
109,923

Noncontrolling interest - Artisan Partners Holdings
8,456

 
(1,858
)
Total stockholders’ equity
136,888

 
108,065

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity
$
876,302

 
$
837,155

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 September 30,

 For the Nine Months Ended September 30,
 
2018

2017

2018

2017
Revenues
 
 
 
 
 
 
 
Management fees
$
212,738

 
$
204,540

 
$
634,733

 
$
584,565

Performance fees
50

 
16

 
2,359

 
338

Total revenues
$
212,788

 
$
204,556

 
$
637,092

 
$
584,903

Operating Expenses
 
 
 
 
 
 
 
Compensation and benefits
 
 
 
 
 
 
 
Salaries, incentive compensation and benefits
102,741

 
98,525

 
314,709

 
288,200

Pre-offering related compensation - share-based awards

 

 

 
12,678

Total compensation and benefits
102,741

 
98,525

 
314,709

 
300,878

Distribution, servicing and marketing
6,566

 
7,603

 
20,422

 
22,269

Occupancy
5,337

 
3,579

 
13,564

 
10,745

Communication and technology
9,556

 
8,180

 
27,182

 
25,204

General and administrative
6,751

 
6,039

 
20,515

 
20,642

Total operating expenses
130,951

 
123,926

 
396,392

 
379,738

Total operating income
81,837

 
80,630

 
240,700

 
205,165

Non-operating income (expense)
 
 
 
 
 
 
 
Interest expense
(2,823
)
 
(2,870
)
 
(8,445
)
 
(8,671
)
Net investment gain (loss) of consolidated investment products
238

 
1,549

 
9,464

 
1,567

Net investment income
1,386

 
178

 
2,500

 
504

Net gain (loss) on the tax receivable agreements
251

 
501

 
251

 
501

Total non-operating income (expense)
(948
)
 
(642
)
 
3,770

 
(6,099
)
Income before income taxes
80,889

 
79,988

 
244,470

 
199,066

Provision for income taxes
14,172

 
21,479

 
38,444

 
49,169

Net income before noncontrolling interests
66,717

 
58,509

 
206,026

 
149,897

Less: Net income attributable to noncontrolling interests - Artisan Partners Holdings
24,021

 
27,234

 
73,380

 
72,191

Less: Net income attributable to noncontrolling interests - consolidated investment products
178

 
610

 
6,848

 
614

Net income attributable to Artisan Partners Asset Management Inc.
$
42,518

 
$
30,665

 
$
125,798

 
$
77,092

 
 
 
 
 
 
 
 
Basic and diluted earnings per share
$
0.77

 
$
0.61

 
$
2.27

 
$
1.48

Basic and diluted weighted average number of common shares outstanding
49,399,553

 
45,890,291

 
48,607,837

 
44,068,172

Dividends declared per Class A common share
$
0.60

 
$
0.60

 
$
2.59

 
$
2.16


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 September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income before noncontrolling interests
$
66,717

 
$
58,509

 
$
206,026

 
$
149,897

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities:
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities, net of tax of $0, $113, $0, and $144, respectively

 
345

 

 
521

Less: reclassification adjustment for gain (loss) included in net income

 

 

 
93

Net unrealized gain (loss) on investment securities

 
345

 

 
428

Foreign currency translation gain (loss)
(208
)
 
422

 
(618
)
 
1,151

Total other comprehensive income (loss)
(208
)
 
767

 
(618
)
 
1,579

Comprehensive income
66,509

 
59,276

 
205,408

 
151,476

Comprehensive income attributable to noncontrolling interests - Artisan Partners Holdings
23,961

 
27,540

 
73,254

 
73,046

Comprehensive income attributable to noncontrolling interests - consolidated investment products
178

 
610

 
6,848

 
614

Comprehensive income attributable to Artisan Partners Asset Management Inc.
$
42,370

 
$
31,126

 
$
125,306

 
$
77,816


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)
 
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 interest - 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




125,798


73,380

199,178

6,848

Other comprehensive income - foreign currency translation





(447
)
(171
)
(618
)

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



(3,758
)

(44
)
3,802



Amortization of equity-based compensation



29,701



12,625

42,326


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



4,199




4,199


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



21,284




21,290


Forfeitures and employee/partner terminations
5

(20
)
15







Issuance of restricted stock awards
15



(15
)





Employee net share settlement
(2
)


(1,742
)


(820
)
(2,564
)

Exchange of subsidiary equity
11

(6
)
(5
)






Purchase of equity and subsidiary equity

(6
)

(21,472
)



(21,478
)

Capital contributions, net








40,883

Impact of deconsolidation of CIPs








(79,631
)
Distributions






(78,418
)
(78,418
)

Dividends



(85,498
)
(49,608
)

(84
)
(135,190
)

Balance at September 30, 2018
$
540

$
87

$
142

$
90,609

$
38,678

$
(1,624
)
$
8,456

$
136,888

$
30,681


 
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 interest - Artisan Partners Holdings
Total stockholders’ equity
Redeemable non-controlling interest
Balance at January 1, 2017
$
421

$
151

$
171

$
119,221

$
13,395

$
(1,648
)
$
(13,997
)
$
117,714


Net income




77,092


72,191

149,283

614

Other comprehensive income - foreign currency translation





746

405

1,151


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





240

192

432


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



(5,624
)

(261
)
5,881

(4
)

Amortization of equity-based compensation



31,758



18,512

50,270


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



22,467




22,467


Issuance of Class A common stock, net of issuance costs
56



161,986




162,042


Forfeitures and employee/partner terminations









Issuance of restricted stock awards
13



(13
)





Employee net share settlement



(891
)


(586
)
(1,477
)

Exchange of subsidiary equity
10

(7
)
(3
)






Purchase of equity and subsidiary equity

(21
)
(35
)
(162,438
)



(162,494
)

Capital Contributions, net








14,655

Distributions






(81,869
)
(81,869
)

Dividends



(30,053
)
(70,587
)

(83
)
(100,723
)

Balance at September 30, 2017
$
500

$
123

$
133

$
136,413

$
19,900

$
(923
)
$
646

$
156,792

$
15,269

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 Cash Flows
(U.S. dollars in thousands)
 
 For the Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income before noncontrolling interests
$
206,026

 
$
149,897

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
4,257

 
3,859

Deferred income taxes
19,468

 
29,585

Unrealized net investment income
(1,592
)
 
(93
)
Net (gain) loss on the tax receivable agreements
(251
)
 
(501
)
Loss on disposal of property and equipment
11

 
20

Amortization of debt issuance costs
343

 
336

Share-based compensation
42,326

 
50,270

Net investment (gain) loss of consolidated investment products
(9,464
)
 
(1,567
)
Purchase of investments by consolidated investment products
(602,736
)
 
(51,546
)
Proceeds from sale of investments by consolidated investment products
579,599

 
28,596

Change in assets and liabilities resulting in an increase (decrease) in cash:
 
 
 
Accounts receivable
(126
)
 
(13,934
)
Prepaid expenses and other assets
(883
)
 
1,127

Accounts payable and accrued expenses
78,506

 
63,959

Class B liability awards

 
(506
)
Deferred lease obligations
1,522

 
1,731

Net change in operating assets and liabilities of consolidated investment products
11,241

 
7,509

Net cash provided by operating activities
328,247

 
268,742

Cash flows from investing activities
 
 
 
Acquisition of property and equipment
(1,598
)
 
(1,312
)
Leasehold improvements
(7,267
)
 
(3,037
)
Proceeds from sale of investment securities

 
6,382

Purchase of investment securities
(250
)
 
(5,250
)
Net cash used in investing activities
(9,115
)
 
(3,217
)

5

Table of Contents

ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Cash Flows, continued
(U.S. dollars in thousands)
 
 For the Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities
 
 
 
Partnership distributions
(78,418
)
 
(81,869
)
Dividends paid
(135,190
)
 
(100,723
)
Payment of debt issuance costs

 
(611
)
Proceeds from issuance of notes payable

 
60,000

Principal payments on notes payable

 
(60,000
)
Payment under the tax receivable agreements
(36,111
)
 
(30,234
)
Net proceeds from issuance of common stock
21,478

 
162,494

Payment of costs directly associated with the issuance of Class A common stock
(166
)
 
(294
)
Purchase of equity and subsidiary equity
(21,478
)
 
(162,494
)
Taxes paid related to employee net share settlement
(2,564
)
 
(1,477
)
Capital contributions to consolidated investment products, net
40,883

 
14,655

Net cash used in financing activities
(211,566
)
 
(200,553
)
Net increase (decrease) in cash and cash equivalents
107,566

 
64,972

Net cash impact of deconsolidation of CIPs
(39,759
)
 

Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
159,796

 
157,406

End of period
$
227,603

 
$
222,378

 
 
 
 
Cash, cash equivalents and restricted cash as of the end of the period
 
 
 
Cash and cash equivalents
$
211,431

 
$
202,636

Restricted cash
629

 
629

Cash and cash equivalents of consolidated investment products
15,543

 
19,113

Cash, cash equivalents and restricted cash
$
227,603

 
$
222,378

 
 
 
 
Supplementary information
 
 


Noncash activity:
 
 
 
Establishment of deferred tax assets
$
24,123

 
$
133,544

Establishment of amounts payable under tax receivable agreements
19,683

 
111,077


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 per share or per unit 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 September 30, 2018, APAM held approximately 70% 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 separate accounts, including privately offered funds, and pooled investment vehicles, including Artisan Partners Funds, Inc. (“Artisan Funds”) and Artisan Partners Global Funds plc (“Artisan Global 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.
2018 Follow-On Offering
On February 27, 2018, APAM completed a registered offering of 644,424 shares of Class A common stock (the “2018 Follow-On Offering”) and utilized all of the proceeds to purchase an aggregate of 644,424 common units of Artisan Partners Holdings at a price per unit of $33.33. The offering and subsequent purchase of units had the following impact on the consolidated financial statements:
APAM received 644,424 GP units of Holdings, which increased APAM’s ownership interest in Holdings. See Note 7, “Noncontrolling interest - Holdings” for the financial statement impact of changes in ownership.
APAM’s purchase of common units of Holdings with the proceeds resulted in an increase to deferred tax assets and amounts payable under the tax receivable agreements. See Note 11, “Income Taxes and Related Payments”.
Holdings Unit Exchanges
Limited partners of Artisan Partners Holdings are entitled to exchange partnership units (along with a corresponding number of shares of Class B or C common stock of APAM) for shares of Class A common stock from time to time (the “Holdings Common Unit Exchanges”). The following partnership units were exchanged for APAM Class A common stock during the nine months ended September 30, 2018:
 
Total Common Units Exchanged
Class A Common Units
Class B Common Units
Class E Common Units
Common units exchanged on March 1, 2018
958,288

499,222

449,066

10,000

Common units exchanged on April 2, 2018
452,628



452,628

Common units exchanged on May 9, 2018
62,000


57,000

5,000

Common units exchanged on August 8, 2018
66,000


50,000

16,000

Total Units Exchanged
1,538,916

499,222

556,066

483,628



7

Table of Contents

The corresponding shares of APAM Class B and Class C common stock were immediately canceled upon exchange. The Holdings Common Unit Exchanges increased APAM’s equity ownership interest in Holdings and resulted in an increase to deferred tax assets and amounts payable under the tax receivable agreements. See Note 11, “Income Taxes and Related Payments”.
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.
Artisan serves as the investment adviser to Artisan Funds, Artisan Global Funds and other investment products, including Artisan sponsored 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 sponsored privately offered 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 sponsored 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 Consolidated Financial Statements. As of September 30, 2018, Artisan has a controlling financial interest in three sub-funds of Artisan Global Funds and certain privately offered funds and, as a result, these funds are included in Artisan’s 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 its Consolidated Financial Statements. See Note 6, “Variable Interest Entities and Consolidated Investment Products” for additional details.

8

Table of Contents

Recent accounting pronouncements
Accounting standards adopted as of January 1, 2018
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The guidance also changes the accounting for certain costs to obtain or fulfill a contract. The Company adopted ASU 2014-09 as of January 1, 2018, utilizing the modified retrospective method. There was no cumulative effect adjustment of applying the new revenue standard and the comparative information has not been restated. There are no significant differences between the reported results under the revenue standard and what would have been reported under the previous revenue guidance, other than the disclosures included in Note 9, ”Revenue From Contracts with Customers”.
The application of ASU 2014-09 had no impact on the Consolidated Statement of Financial Condition as of September 30, 2018, as compared to the previous revenue recognition standard. The application of the new principal versus agent guidance resulted in presentation changes whereby certain costs are now reported on a gross basis, when the Company is acting as principal, and reported on a net basis, when the Company is acting as an agent. The new standard requires the entire amount of fee waivers and expense reimbursements to be presented net against revenue, which resulted in a $16 thousand decrease in management fee revenue and a corresponding $16 thousand decrease in general and administrative expenses within the Consolidated Statements of Operations for the nine months ended September 30, 2018. Applying ASU 2014-09 had no impact on operating income or net income, as compared to applying the previous revenue recognition standard. Artisan did not apply any of the practical expedients in ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income. The Company adopted ASU 2016-01 as of January 1, 2018, utilizing the modified retrospective method. Upon adoption, the Company made a cumulative-effect adjustment to the Company’s Consolidated Statements of Financial Condition, which resulted in a $0.4 million decrease to accumulated other comprehensive income (loss) and a corresponding $0.4 million increase to retained earnings (deficit). The application of ASU 2016-01 results in the recognition of the Company’s unrealized gains (losses) on investment securities through net income. The Company recognized $1.6 million of unrealized gains in net income for the nine months ended September 30, 2018.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, to clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. Restricted cash and restricted cash equivalents, including cash of consolidated investment products, is required to be included in cash and cash-equivalent balances in the statement of cash flows. The guidance is effective as of January 1, 2018, and requires retrospective application to all periods presented. The Consolidated Statements of Cash Flows includes a reconciliation to the line items on the Consolidated Statements of Financial Condition.
Accounting standards not yet adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces a lessee model that brings most leases on the balance sheet. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which provides an optional transition method related to implementing the new lease standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt the new standard on January 1, 2019, using the optional transition method. The Company is currently evaluating the impact of adoption on its Consolidated Financial Statements. The standard is expected to result in a significant increase in total assets and total liabilities, but will not have a significant impact on the Consolidated Statements of Operations.
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 arrangement 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 its consolidated financial statements.

9

Table of Contents

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”. The table below includes details of the Company’s investment securities:
 
September 30, 2018
 
December 31, 2017
Investments in equity securities
$
6,263

 
$
4,978

Investments in equity securities accounted for under the equity method
11,941

 

Total investment securities
$
18,204

 
$
4,978


Artisan’s investments in equity securities consist of investments in shares of Artisan Funds, Artisan Global Funds and Artisan sponsored private funds. As of January 1, 2018, the Company adopted ASU 2016-01, which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income.
The table below presents the Company’s gains and losses that relate to seed investments for the specified periods:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2018
Net gains (losses) recognized on investment securities
$
967

 
$
1,592

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
$
967

 
$
1,592


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).

10

Table of Contents

The following provides the hierarchy of inputs used to derive fair value of Artisan’s assets and liabilities that are financial instruments as of September 30, 2018 and December 31, 2017:
 
Assets and Liabilities at Fair Value
 
Total
 
NAV Practical Expedient (No Fair Value Level)
 
Level 1
 
Level 2
 
Level 3
September 30, 2018
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
87,364

 
$

 
$
87,364

 
$

 
$

Equity securities
18,204

 
11,941

 
6,263

 

 

 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
26,727

 
$

 
$
26,727

 
$

 
$

Equity securities
4,978

 

 
4,978

 

 


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 investments in sponsored private funds, which are measured at the underlying funds’ 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.
Note 5. Borrowings
Artisan’s borrowings consist of the following as of September 30, 2018 and December 31, 2017:
 
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 $201.8 million as of September 30, 2018. 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”.
Interest expense incurred on the unsecured notes and revolving credit agreement was $2.7 million for the three months ended September 30, 2018 and 2017, and $8.0 million and $8.2 million for the nine months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018, the aggregate maturities of debt obligations, based on their contractual terms, are as follows:
2018
$

2019
50,000

2020

2021

2022
90,000

Thereafter
60,000

Total
$
200,000



11

Table of Contents

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 September 30, 2018, Artisan is considered to have a controlling financial interest in three sub-funds of Artisan Global Funds and certain Artisan sponsored private funds related to one investment strategy for which it serves as investment manager. As of September 30, 2018, Artisan’s direct equity investment in the consolidated investment products was $31.0 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 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 Statement of Operations.
During the three months ended September 30, 2018, the Company determined that it no longer has a controlling financial interest in one private fund as a result of third party capital contributions to the fund. As a result, the VIE was deconsolidated and the following assets, liabilities and noncontrolling interest balances were removed from the Company’s Consolidated Statements of Financial Condition:
 
As of July 1, 2018
Assets of consolidated investment products
 
Cash and cash equivalents
$
39,759

Accounts receivable and other
1,340

Investment assets, at fair value
85,626

Less: Amounts reclassified to investment securities
(11,381
)
Total assets
$
115,344

 
 
Liabilities of consolidated investment products
 
Accounts payable, accrued expenses, and other
$
6,385

Investment liabilities, at fair value
29,328

Total liabilities
$
35,713

 
 
Redeemable noncontrolling interests
$
79,631

 
 
Total liabilities and equity
$
115,344


There was no net impact to the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2018 from the deconsolidation of the private fund. Artisan generally does not recognize a gain or loss upon deconsolidation of investment products as the assets and liabilities of CIPs are carried at fair value. Artisan’s direct equity investment was reclassified from investment assets of consolidated investment products to investment securities. The direct equity investment in the private fund was $11.9 million as of September 30, 2018, which is accounted for under the equity method of accounting since Artisan retains significant influence over the fund.

12

Table of Contents

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 September 30, 2018 and December 31, 2017:
 
Assets and Liabilities at Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
September 30, 2018
 
 
 
 
 
 

Assets
 
 
 
 
 
 
 
Money market funds
$
9,693

 
$
9,693

 
$

 
$

Equity securities - long position
7,435

 
7,435

 

 

Fixed income instruments - long position
57,137

 

 
56,312

 
825

Derivative assets
476

 

 
476

 

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Equity securities - short position
$
232

 
$
232

 
$

 
$

Fixed income instruments - short position
21,236

 

 
21,236

 

Derivative liabilities
217

 

 
217

 


 
Assets and Liabilities at Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
December 31, 2017
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Money market funds
$
21,881

 
$
21,881

 
$

 
$

Equity securities - long position
69,044

 
69,044

 

 

Fixed income instruments - long position
45,758

 

 
45,758

 

Derivative assets
343

 
303

 
40

 

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Equity securities - short position
$
29,199

 
$
29,199

 
$

 
$

Fixed income instruments - short position
18,513

 

 
18,513

 

Derivative liabilities
145

 
45

 
100

 

CIP balances included in the Company’s Consolidated Statements of Financial Condition were as follows:
 
September 30, 2018
 
December 31, 2017
Net CIP assets included in the table above
$
53,056

 
$
89,169

Net CIP assets not included in the table above
8,640

 
8,762

Net CIP assets
61,696

 
97,931

Less: redeemable noncontrolling interest
30,681

 
62,581

Artisan’s direct equity investment in CIPs
$
31,015

 
$
35,350



13

Table of Contents

Note 7. Noncontrolling interest - Holdings
Net income attributable to noncontrolling interests - Artisan Partners Holdings in the Unaudited Consolidated Statements of Operations represents the portion of earnings or loss attributable to the equity ownership interests in Holdings held by the limited partners of Holdings. As of September 30, 2018, APAM held approximately 70% of the equity ownership interests in Holdings.
In order to maintain the one-to-one correspondence of the number of Holdings partnership units and APAM common shares, Holdings will issue one general partner (“GP”) unit to APAM for each share of Class A common stock issued by APAM. For the nine months ended September 30, 2018, APAM’s equity ownership interest in Holdings has increased as a result of the following transactions:
 
Holdings GP Units
Limited Partnership Units
Total
APAM Ownership %
Balance at December 31, 2017
50,463,126

25,106,719

75,569,845

67
%
2018 Follow-On Offering
644,424

(644,424
)

1
%
Holdings Common Unit Exchanges
1,538,916

(1,538,916
)

2
%
Issuance of APAM Restricted Shares (1)
1,517,724


1,517,724

%
Restricted Share Award Net Share Settlement (1)
(77,442
)

(77,442
)
%
Forfeitures of Holdings GP Units from Employee Terminations (1)
(67,255
)

(67,255
)
%
Balance at September 30, 2018
54,019,493

22,923,379

76,942,872

70
%
(1)
The impact of the transaction on APAM’s ownership percentage was less than 1%.
Since APAM continues to have a controlling interest in Holdings, changes in ownership of Holdings are accounted for as equity transactions. Additional paid-in capital and noncontrolling interest - Artisan Partners Holdings in the Unaudited Condensed Consolidated Statements of Financial Condition are adjusted to reallocate Holdings’ historical equity to reflect the change in APAM’s ownership of Holdings.
The reallocation of equity had the following impact on the Unaudited Condensed Consolidated Statements of Financial Condition:
Statement of Financial Condition
 For the Nine Months Ended September 30,
2018
 
2017
Additional paid-in capital
$
(3,758
)
 
$
(5,624
)
Noncontrolling interest - Artisan Partners Holdings
3,802

 
5,881

Accumulated other comprehensive income (loss)
(44
)
 
(257
)
Net impact to financial condition

 


In addition to the reallocation of historical equity, the change in ownership resulted in an increase to deferred tax assets and additional paid-in capital of $0.7 million for the nine months ended September 30, 2018 and $2.9 million for the nine months ended September 30, 2017.

14

Table of Contents

Note 8. Stockholders’ Equity
APAM - Stockholders’ Equity
As of September 30, 2018 and December 31, 2017, APAM had the following authorized and outstanding equity:
 
 
 
Outstanding
 
 
 
 
 
Authorized
 
September 30, 2018
 
December 31, 2017
 
Voting Rights (1)
 
Economic Rights
Common shares
 
 
 
 
 
 
 
 
 
Class A, par value $0.01 per share
500,000,000

 
54,019,493

 
50,463,126

 
1 vote per share
 
Proportionate
Class B, par value $0.01 per share
200,000,000

 
8,695,249

 
11,922,192

 
1 vote per share(2)
 
None
Class C, par value $0.01 per share
400,000,000

 
14,228,130

 
13,184,527

 
1 vote per share
 
None
(1) The Company’s employees to whom Artisan has granted equity have entered into a stockholders agreement with respect to all shares of APAM common stock they have acquired from the Company and any shares they may acquire from the Company in the future, pursuant to which they granted an irrevocable voting proxy to a Stockholders Committee. As of September 30, 2018, Artisan’s employees held 4,575,332 restricted shares of Class A common stock subject to the agreement and all 8,695,249 outstanding shares of Class B common stock.
(2) On February 9, 2018, the Class B common shares changed from five votes per share to one vote per share.

APAM is dependent on cash generated by Holdings to fund any dividends. Generally, Holdings will make distributions to all of its partners, including APAM, based on the proportionate ownership each holds in Holdings. APAM will fund dividends to its stockholders from its proportionate share of those distributions after provision for its taxes and other obligations. APAM declared and paid the following dividends per share during the three and nine months ended September 30, 2018 and 2017:
Type of Dividend
 
Class of Stock
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
Quarterly
 
Class A Common
 
$
0.60


$
0.60


$
1.80


$
1.80

Special Annual
 
Class A Common
 
$


$


$
0.79


$
0.36


The following table summarizes APAM’s stock transactions for the nine months ended September 30, 2018:
 
Total Stock Outstanding
Class A Common Stock(1)
Class B Common Stock
Class C Common Stock
Balance at December 31, 2017
75,569,845

50,463,126

11,922,192

13,184,527

2018 Follow-On Offering

644,424

(644,424
)

Holdings Common Unit Exchanges

1,538,916

(556,066
)
(982,850
)
Restricted Share Award Grants
1,517,724

1,517,724



Restricted Share Award Net Share Settlement
(77,442
)
(77,442
)


Employee/Partner Terminations
(67,255
)
(67,255
)
(2,026,453
)
2,026,453

Balance at September 30, 2018
76,942,872

54,019,493

8,695,249

14,228,130

(1) There were 246,581 and 218,089 restricted stock units outstanding at September 30, 2018 and December 31, 2017, respectively. Restricted stock units are not reflected in the table because they are not considered outstanding or issued stock.

Each Class A, Class B, Class D and Class E common unit of Holdings (together with the corresponding share of Class B or Class C common stock) is exchangeable for one share of Class A common stock. The corresponding shares of Class B and Class C common stock are immediately canceled upon any such exchange.
Upon termination of employment with Artisan, an employee-partner’s Class B common units are exchanged for Class E common units and the corresponding shares of Class B common stock are canceled. APAM issues the former employee-partner a number of shares of Class C common stock equal to the former employee-partner’s number of Class E common units. Class E common units are exchangeable for Class A common stock subject to the same restrictions and limitations on exchange applicable to the other common units of Holdings.

15

Table of Contents

Artisan Partners Holdings - Partners’ Equity
Holdings makes distributions of its net income to the holders of its partnership units for income taxes as required under the terms of the partnership agreement and also makes additional distributions under the terms of the partnership agreement. The distributions are recorded in the financial statements on the declaration date, or on the payment date in lieu of a declaration date. Holdings’ partnership distributions for the three and nine months ended September 30, 2018 and 2017, were as follows:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Holdings Partnership Distributions to Limited Partners
 
$
22,674

 
$
27,101

 
$
78,418

 
$
81,869

Holdings Partnership Distributions to APAM
 
49,839

 
50,065

 
162,748

 
133,609

Total Holdings Partnership Distributions
 
$
72,513

 
$
77,166

 
$
241,166

 
$
215,478


The distributions are recorded as a reduction to consolidated stockholders’ equity, with the exception of distributions made to APAM, which are eliminated upon consolidation.
Note 9. Revenue From Contracts with Customers
Artisan’s revenue is derived from contracts with customers in the form of investment management fees, performance-based fees and incentive allocations.
Investment Management Fees
Investment management fees are generally computed as a percentage of assets under management and are recognized as revenue at the end of each distinct service period. Fees for providing investment advisory services are computed and billed in accordance with the underlying investment management agreements, which is generally on a monthly or quarterly basis. Investment management fees are presented net of cash rebates and fees waived pursuant to contractual expense limitations of certain funds or voluntary waivers.
Performance Fees
A number of investment management agreements provide for performance-based fees or incentive allocations, collectively “performance fees”. Performance fees, if earned, are recognized upon completion of the contractually determined measurement period, which is generally quarterly or annually. Performance fees are not subject to claw back as a result of performance declines subsequent to the most recent measurement date.
Revenue Recognition
Artisan accounts for asset management services as a single performance obligation that is satisfied over time, using a time-based measure of progress to recognize revenue. Customer consideration is variable due to the uncertainty of the value of assets under management during each distinct service period. At the end of each quarter, Artisan records revenue for the actual amount of investment management fees earned for that quarter because the uncertainty has been resolved.
Performance fees are subject to the uncertainty of market volatility, and as a result, the entire amount of the variable consideration related to performance fees is constrained until the end of each measurement period. At the end of the quarterly or annual measurement period, revenue is recorded for the actual amount of performance fees earned during that period because the uncertainty has been resolved. For performance fees with annual measurement periods, revenue recognized in the current quarter relates to performance obligations that were partially satisfied in prior periods.
Customer Rebates, Waivers and Expense Reimbursements
Artisan has contractually agreed to waive its investment management fees or reimburse for expenses incurred to the extent necessary to limit annualized ordinary operating expenses incurred by certain funds to not more than a fixed percentage of the funds’ average daily net assets. Artisan may also contractually agree to pay fee rebates to certain clients. Artisan accounts for all waivers, reimbursements, and rebates as a reduction of the transaction price (and, hence, of revenue) because the billing adjustments and payments represent consideration payable to customers, and Artisan does not receive any distinct goods or services from the customers in exchange.

16

Table of Contents

Disaggregated Revenue
The following table presents a disaggregation of revenue by type and vehicle for the three and nine months ended September 30, 2018 and 2017:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Management fees
 
 
 
 
 
 
 
   Artisan Funds
$
125,392

 
$
121,004

 
$
375,730

 
$
347,778

   Artisan Global Funds
9,090

 
7,672

 
26,554

 
22,187

   Separate accounts(1)
78,256

 
75,864

 
232,449

 
214,600

Performance fees
 
 
 
 
 
 
 
   Separate accounts(1)
50

 
16

 
2,359

 
338

Total revenues
$
212,788

 
$
204,556

 
$
637,092

 
$
584,903

(1) Separate account revenue consists of management fees and performance fees from vehicles other than Artisan Funds or Artisan Global Funds. Separate account revenue includes fees earned from traditional separate accounts and privately offered funds, as well as fees earned from Artisan-branded collective investment trusts and funds (both public and private) that Artisan sub-advises. All management fees and performance fees from consolidated investment products were eliminated upon consolidation and therefore are omitted from this table.

The following table presents the balances of receivables related to contracts with customers:

 
As of September 30, 2018
 
As of December 31, 2017
Customer
 
 
 
   Artisan Funds
$

 
$
4

   Artisan Global Funds
2,484

 
5,105

   Separate accounts
68,538

 
68,019

Total receivables from contracts with customers
$
71,022

 
$
73,128

Non-customer receivables
5,798

 
3,565

Accounts receivable
$
76,820

 
$
76,693


Artisan Funds and Artisan Global Funds are billed on the last day of each month. Artisan Funds makes payments on the same day the invoice is received and Artisan Global Funds generally makes payments in the month following receipt of the invoice. Separate account clients are generally billed on a monthly or quarterly basis, with payments due within 30 days of billing.
Artisan had no other contract assets or liabilities from contracts with customers as of September 30, 2018 or December 31, 2017.
Note 10. Compensation and Benefits
Total compensation and benefits consists of the following:
 
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Salaries, incentive compensation and benefits (1)
 
$
90,097


$
86,019

 
$
273,057


$
251,563

Restricted share-based award compensation expense
 
12,644


12,506

 
41,652


36,637

Total salaries, incentive compensation and benefits
 
102,741

 
98,525

 
314,709

 
288,200

Pre-offering related compensation - share-based awards
 

 

 

 
12,678

Total compensation and benefits
 
$
102,741

 
$
98,525

 
$
314,709

 
$
300,878

(1) Excluding restricted share-based award compensation expense


17

Table of Contents

Incentive compensation
Cash incentive compensation paid to members of Artisan’s investment teams and members of its distribution teams is generally based on formulas that are tied directly to revenues. These payments are made in the quarter following the quarter in which the incentive was earned with the exception of fourth quarter payments which are paid in the fourth quarter of the year. Cash incentive compensation paid to most other employees is discretionary and subjectively determined based on individual performance and Artisan’s overall results during the applicable year and is generally paid on an annual basis.
Restricted share-based awards
Artisan has registered 14,000,000 shares of Class A common stock for issuance under the 2013 Omnibus Incentive Compensation Plan (the “Plan”). Pursuant to the Plan, APAM has granted a combination of restricted stock awards and restricted stock units (collectively referred to as “restricted share-based awards”) of Class A common stock to employees. The restricted share-based awards generally vest on a pro rata basis over five years. Certain share-based awards will vest upon a combination of both (1) pro-rata annual time vesting and (2) qualifying retirement (as defined in the award agreements).
Unvested awards are subject to forfeiture upon termination of employment. Grantees receiving the awards are entitled to dividends on unvested and vested shares and units. 6,546,999 shares of Class A common stock were reserved and available for issuance under the Plan as of September 30, 2018.
During the nine months ended September 30, 2018, Artisan granted 1,517,724 restricted stock awards and 1,250 restricted stock units of Class A common stock to employees of the Company. Total compensation expense associated with the 2018 grants is expected to be approximately $59.4 million. Compensation expense related to the restricted share-based awards is recognized based on the estimated grant date fair value on a straight-line basis over the requisite service period of the award. The initial requisite service period is generally five years for restricted share-based awards.
The Company’s accounting policy is to record the impact of forfeitures when they occur. The following table summarizes the restricted share-based award activity for the nine months ended September 30, 2018:
 
 
Weighted-Average Grant Date Fair Value
 
Number of Awards
Unvested at January 1, 2018
 
$
38.79

 
4,013,986

Granted
 
39.32

 
1,518,974

Forfeited
 
36.09

 
(67,255
)
Vested
 
44.50

 
(787,248
)
Unvested at September 30, 2018
 
$
38.04

 
4,678,457


The unrecognized compensation expense for the unvested awards as of September 30, 2018 was $113.8 million with a weighted average recognition period of 3.5 years remaining.
During the nine months ended September 30, 2018, the Company withheld a total of 77,442 restricted shares as a result of net share settlements to satisfy employee tax withholding obligations. The Company paid $2.6 million in employee tax withholding obligations related to these settlements during the nine months ended September 30, 2018. These net share settlements had the effect of shares repurchased and retired by the Company, as they reduced the number of shares outstanding.
Pre-offering related compensation - share-based awards
Prior to the IPO, Holdings granted Class B share-based awards to certain employees. These awards vested over a period of five years and became fully vested on July 1, 2017.
Note 11. Income Taxes and Related Payments
APAM is subject to U.S. federal, state and local income taxation on APAM’s allocable portion of Holdings’ income. APAM’s effective income tax rate was lower than the U.S. federal statutory rate of 21% primarily due to a rate benefit attributable to the fact that, for the nine months ended September 30, 2018, approximately 33% of Artisan Partners Holdings’ full year projected taxable earnings were attributable to other partners and not subject to corporate-level taxes. The effective tax rate was also lower than the statutory rate due to dividends paid on unvested share-based awards, net of higher tax expense related to the vesting of restricted share-based awards.
The Tax Cuts and Jobs Act (“Tax Reform”) was enacted in December 2017. As a result of Tax Reform, the U.S. federal corporate tax rate decreased from 35% to 21%, which was the largest driver of lowering APAM’s effective tax rate from 24.7% for nine months ended September 30, 2017 to 15.7% for the nine months ended September 30, 2018.

18

Table of Contents

Components of the provision for income taxes consist of the following:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Current:
 
 
 
 
 
 
 
Federal
$
6,823

 
$
9,365

 
$
15,561

 
$
17,223

State and local
1,453

 
1,023

 
3,048

 
2,024

Foreign
135

 
110

 
367

 
337

Total
8,411

 
10,498

 
18,976

 
19,584

Deferred:
 
 
 
 
 
 
 
Federal
5,148

 
10,388

 
17,397

 
27,986

State and local
613

 
593

 
2,071

 
1,599

Total
5,761

 
10,981

 
19,468

 
29,585

Income tax expense
$
14,172

 
$
21,479

 
$
38,444

 
$
49,169


In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). The first TRA generally provides for the payment by APAM to a private equity fund (the “Pre-H&F Corp Merger Shareholder”) of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger of a wholly-owned subsidiary of the Pre-H&F Corp Merger Shareholder into APAM in March 2013, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.
The second TRA generally provides for the payment by APAM to current or former limited partners of Holdings of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their partnership units sold to APAM or exchanged (for shares of Class A common stock, convertible preferred stock or other consideration) and that are created as a result of such sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.
For purposes of the TRAs, cash savings of income taxes are calculated by comparing APAM’s actual income tax liability to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the TRAs, unless certain assumptions apply. The TRAs will continue in effect until all such tax benefits have been utilized or expired, unless APAM exercises its right to terminate the agreements or payments under the agreements are accelerated in the event that APAM materially breaches any of its material obligations under the agreements.
The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM’s payments under the TRAs constituting imputed interest or depreciable basis or amortizable basis.
Payments under the TRAs, if any, will be made pro rata among all TRA counterparties entitled to payments on an annual basis to the extent APAM has sufficient taxable income to utilize the increased depreciation and amortization charges and imputed interest deductions. Artisan expects to make one or more payments under the TRAs, to the extent they are required, prior to or within 125 days after APAM’s U.S. federal income tax return is filed for each fiscal year. Interest on the TRA payments will accrue at a rate equal to one-year LIBOR plus 100 basis points from the due date (without extension) of such tax return until such payments are made.
Amounts payable under tax receivable agreements are estimates which may be impacted by factors, including but not limited to, expected tax rates, projected taxable income, and projected ownership levels and are subject to change. Changes in the estimates of amounts payable under tax receivable agreements are recorded as non-operating income (loss) in the Consolidated Statements of Operations.

19

Table of Contents

The change in the Company’s deferred tax assets related to the tax benefits described above and the change in corresponding amounts payable under the TRAs for the nine months ended September 30, 2018 is summarized as follows:
 
Deferred Tax Asset - Amortizable basis
 
Amounts payable under tax receivable agreements
December 31, 2017
$
410,690

 
$
385,413

2018 Follow-On Offering
7,687

 
6,534

2018 Holdings Common Unit Exchanges
15,766

 
13,401

Amortization
(22,331
)
 

Payments under TRA

 
(36,111
)
Change in estimate
(10
)
 
(251
)
September 30, 2018
$
411,802

 
$
368,986


Net deferred tax assets comprise the following:
 
As of September 30, 2018
 
As of December 31, 2017
Deferred tax assets:
 
 
 
Amortizable basis (1)
$
411,802

 
$
410,690

Other (2)
22,173

 
18,522

Total deferred tax assets
433,975

 
429,212

Less: valuation allowance (3)

 

Net deferred tax assets
$
433,975

 
$
429,212

(1) Represents the unamortized step-up of tax basis and other tax attributes from the merger and partnership unit sales and exchanges described above. These future tax benefits are subject to the TRA agreements.
(2) Represents the net deferred tax assets associated with the merger described above and other miscellaneous deferred tax assets. These future tax benefits are not subject to the TRA agreements.
(3) Artisan assessed whether the deferred tax assets would be realizable and determined based on its history of taxable income that the benefits would more likely than not be realized. Accordingly, no valuation allowance is required.

Accounting standards establish a minimum threshold for recognizing, and a system for measuring, the benefits of income tax return positions in financial statements. There were no uncertain tax positions recorded as of September 30, 2018 and December 31, 2017.
In the normal course of business, Artisan is subject to examination by federal and certain state, local and foreign tax regulators. As of September 30, 2018, U.S. federal income tax returns for the years 2015 through 2017 are open and therefore subject to examination. State and local tax returns are generally subject to examination from 2014 to 2017. Foreign tax returns are generally subject to examination from 2014 to 2017.
Note 12. Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss), net of tax, in the accompanying Condensed Consolidated Statements of Financial Condition represents the portion of accumulated other comprehensive income attributable to APAM, and consists of the following:
 
As of September 30, 2018
 
As of December 31, 2017
Unrealized gain on investments, net of tax
$

 
$
259

Foreign currency translation gain (loss)
(1,624
)
 
(1,132
)
Accumulated Other Comprehensive Income (Loss)
$
(1,624
)
 
$
(873
)
Comprehensive income (loss) attributable to noncontrolling interests - Artisan Partners Holdings in the Consolidated Statements of Comprehensive Income (Loss) represents the portion of comprehensive income (loss) attributable to the equity ownership interests in Holdings held by the limited partners of Holdings.

20

Table of Contents

Note 13. Earnings Per Share
Basic earnings per share is computed under the two-class method by dividing income available to Class A common stockholders by the weighted average number of Class A common shares outstanding during the period. Unvested restricted share-based awards are excluded from the number of Class A common shares outstanding for the basic earnings per share calculation because the shares have not yet been earned by employees. Income available to Class A common stockholders is computed by reducing net income attributable to APAM by earnings (distributed and undistributed) allocated to participating securities, according to their respective rights to participate in those earnings. Unvested share-based awards are participating securities because the awards include non-forfeitable dividend rights during the vesting period. Class B and Class C common shares do not share in profits of APAM and therefore are not reflected in the calculations.
The computation of basic and diluted earnings per share under the two-class method for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
Basic and Diluted Earnings Per Share
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income attributable to APAM
$
42,518

 
$
30,665

 
$
125,798

 
$
77,092

Less: Allocation to participating securities
4,628

 
2,654

 
15,475

 
12,086

Net income available to common stockholders
$
37,890

 
$
28,011

 
$
110,323

 
$
65,006

Denominator:

 
 
 
 
 
 
Weighted average shares outstanding
49,399,553

 
45,890,291

 
48,607,837

 
44,068,172

Earnings per share
$
0.77

 
$
0.61

 
$
2.27

 
$
1.48


Allocation to participating securities in the table above primarily represents dividends paid to holders of unvested restricted share-based awards, which reduces net income available to common stockholders.
There were no dilutive securities outstanding during the three and nine months ended September 30, 2018 and 2017. The Holdings limited partnership units are anti-dilutive primarily due to the impact of public company expenses. Unvested restricted share-based awards are considered participating securities and are therefore anti-dilutive. The following table summarizes the weighted-average shares outstanding that are excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
Anti-Dilutive Weighted Average Shares Outstanding
2018
 
2017
 
2018
 
2017
Holdings limited partnership units
22,951,357

 
25,715,238

 
23,505,920

 
27,318,732

Unvested restricted share-based awards
4,847,786

 
4,189,441

 
4,859,526

 
4,200,142

Total
27,799,143

 
29,904,679

 
28,365,446

 
31,518,874


Note 14. Indemnifications
In the normal course of business, APAM enters into agreements that include indemnities in favor of third parties. Holdings has also agreed to indemnify APAM as its general partner, Artisan Investment Corporation (“AIC”) as its former general partner, the directors and officers of APAM, the directors and officers of AIC as its former general partner, the members of its former Advisory Committee, and its partners, directors, officers, employees and agents. Holdings’ subsidiaries may also have similar agreements to indemnify their respective general partner(s), directors, officers, directors and officers of their general partner(s), partners, members, employees, and agents. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against us that have not yet occurred. APAM maintains insurance policies that may provide coverage against certain claims under these indemnities.

21

Table of Contents

Note 15. Related Party Transactions
Several of the current executive officers of APAM and certain members of APAM’s board (or their affiliates) are limited partners of Holdings. As a result, certain transactions (such as TRA payments) between Artisan and the limited partners of Holdings are considered to be related party transactions with respect to these persons.
Affiliate transactions—Artisan Funds     
Artisan has an agreement to serve as the investment adviser to Artisan Funds, with which certain Artisan employees are affiliated. Under the terms of the agreement, which generally is reviewed and continued by the board of directors of Artisan Funds annually, a fee is paid to Artisan based on an annual percentage of the average daily net assets of each Artisan Fund ranging from 0.625% to 1.25%. Artisan generally collects revenues related to these services on the last business day of each month and records them in Management Fees in the Consolidated Statement of Operations. Artisan has contractually agreed to waive its management fees or reimburse for expenses incurred to the extent necessary to limit annualized ordinary operating expenses incurred by certain of the Artisan Funds to not more than a fixed percentage (ranging from 0.88% to 1.50%) of a fund’s average daily net assets. In addition, Artisan may voluntarily waive fees or reimburse any of the Artisan Funds for other expenses. The officers and a director of Artisan Funds who are affiliated with Artisan receive no compensation from the funds.
Fees for managing Artisan Funds and amounts waived or reimbursed by Artisan for fees and expenses (including management fees) are as follows:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
Artisan Funds
2018
 
2017
 
2018
 
2017
Investment management fees (Gross of fee waivers/expense reimbursements)
$
125,486

 
$
121,004

 
$
376,066

 
$
347,778

Fee waivers / expense reimbursements
$
94

 
$
150

 
$
336

 
$
462


Affiliate transactions—Artisan Global Funds
Artisan has an agreement to serve as the investment manager to Artisan Global Funds, with which certain Artisan employees are affiliated. Under the terms of these agreements, a fee is paid based on an annual percentage of the average daily net assets of each fund ranging from 0.75% to 1.75%. Artisan reimburses each sub-fund of Artisan Global Funds to the extent that sub-fund’s expenses, not including Artisan’s fee, exceed certain levels, which range from 0.10% to 0.20%. In addition, Artisan may voluntarily waive fees or reimburse any of the Artisan Global Funds for other expenses. The directors of Artisan Global Funds who are affiliated with Artisan receive no compensation from the funds.
Fees for managing Artisan Global Funds and amounts reimbursed to Artisan Global Funds by Artisan are as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Artisan Global Funds
2018
 
2017
 
2018
 
2017
Investment management fees (Gross of fee waivers/expense reimbursements)
$
9,109

 
$
7,672

 
$
26,600

 
$
22,187

Elimination of management fees from consolidated investment products(1)
(19
)
 

 
(45
)
 

Consolidated investment management fees (Gross of fee waivers / expense reimbursements)
9,090

 
7,672

 
26,555

 
22,187

 
 
 
 
 
 
 
 
Fee waivers / expense reimbursements
$
146

 
$
60

 
$
287

 
$
130

Elimination of fee waivers / expense reimbursements from consolidated investment products(1)
(146
)
 

 
(286
)
 

Consolidated fee waivers / expense reimbursements

 
60

 
1

 
130

(1) Investment management fees and expense waivers related to consolidated investment products were eliminated from revenue upon consolidation.


22

Table of Contents

Affiliate transactions—Artisan Sponsored Private Funds
Pursuant to written agreements, Artisan serves as the investment manager of certain Artisan sponsored private funds. Under the terms of these agreements, Artisan earns a management fee and is entitled to receive an allocation of profits. In 2017, Artisan made seed investments of $32.3 million in the private funds. Certain related parties, including employees, officers and members of the Company’s board invested an additional $34.6 million in the funds. These related party investors currently do not pay a management fee or incentive allocation. In addition, for a period of time following the formation of the private funds, Artisan has agreed to reimburse the funds to the extent that expenses, excluding Artisan’s management fee and transaction related costs, exceed 1.00% per annum of the net assets of the funds. Artisan may also voluntarily waive fees or reimburse the funds for other expenses.
Fees for managing the privately offered funds and amounts reimbursed to the privately offered funds by Artisan are as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Artisan sponsored private funds
2018
 
2017
 
2018
 
2017
Investment management fees (Gross of fee waivers/expense reimbursements)
$
210

 
$
3

 
$
441

 
$
3

Elimination of management fees from consolidated investment products(1)
(18
)
 
(3
)
 
(249
)
 
(3
)
Consolidated investment management fees (Gross of fee waivers / expense reimbursements)
192

 

 
192

 

 
 
 
 
 
 
 
 
Fee waivers / expense reimbursements
$
74

 
$
82

 
$
148

 
$
115

Elimination of fee waivers / expense reimbursements from consolidated investment products(1)
(74
)
 
(82
)
 
(148
)
 
(115
)
Consolidated fee waivers / expense reimbursements

 

 

 

(1) Investment management fees and expense waivers related to consolidated investment products were eliminated from revenue upon consolidation.

Note 16. Subsequent Events
Distributions and dividends
On October 25, 2018, APAM, acting as the general partner of Artisan Partners Holdings, declared a distribution by Artisan Partners Holdings of $23.4 million to holders of Artisan Partners Holdings partnership units, including APAM. On the same date, the board of directors of APAM declared a quarterly dividend of $0.60 per share of Class A common stock. The APAM dividend is payable on November 30, 2018, to shareholders of record as of November 16, 2018.

23

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Recent Highlights
We are an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. As of September 30, 2018, our eight autonomous investment teams managed a total of 17 investment strategies across multiple asset classes and investment styles. Over our firm’s history, we have created new investment strategies that can use a broad array of securities, instruments, and techniques (which we call degrees of freedom) to differentiate returns and manage risk.
We focus our distribution efforts on sophisticated investors and asset allocators, including institutions and intermediaries that operate with institutional-like decision-making processes. We offer our investment strategies to clients and investors through multiple investment vehicles, including separate accounts and different types of pooled vehicles. As of September 30, 2018, approximately 80% of our assets under management were managed for clients and investors domiciled in the U.S. and 20% of our assets under management were managed for clients and investors domiciled outside of the U.S.
As a high-value added investment manager we expect that long-term investment performance will be the primary driver of our long-term business and financial results. If we maintain and evolve existing investment strategies and launch new investment strategies that meet the needs of and generate attractive outcomes for sophisticated asset allocators, we are confident that we will continue to generate strong business and financial results.
Over shorter time periods, changes in our business and financial results are largely driven by market conditions and fluctuations in our assets under management that may not necessarily be the result of our long-term investment performance or the long-term demand for our strategies. For this reason, we expect that our business and financial results will be lumpy over time.
During the third quarter of 2018, our assets under management increased to $116.6 billion, an increase of $2.4 billion, or 2%, compared to $114.2 billion at June 30, 2018, as a result of $3.9 billion in market appreciation partially offset by $1.5 billion of net client cash outflows. Compared to September 30, 2017, assets under management increased $2.9 billion, or 3%, due to $7.8 billion in market appreciation, partially offset by $4.9 billion of net client cash outflows. Average assets under management for the September 2018 quarter was $116.2 billion, an increase of 4% from the average of $111.4 billion for the September 2017 quarter.
We strive to maintain a financial model that is transparent and predictable. We derive essentially all of our revenues from investment management fees, nearly all of which are based on a specified percentage of clients’ average assets under management. A majority of our expenses, including most of our compensation expense, vary directly with changes in our revenues. We invest thoughtfully to support our investment teams and future growth, while also paying out to shareholders and partners a majority of the cash that we generate from operations through distributions and dividends.
Revenues were $637.1 million for the nine months ended September 30, 2018, a 9% increase from revenues of $584.9 million for the nine months ended September 30, 2017. GAAP operating margin was 37.8% for the nine months ended September 30, 2018, compared to 35.1% for the nine months ended September 30, 2017. Adjusted operating margin was 37.8% for the nine months ended September 30, 2018, compared to 37.2% for the nine months ended September 30, 2017.
The Tax Cuts and Jobs Act (“Tax Reform”) was enacted in December 2017. As a result of Tax Reform, the U.S. federal corporate tax rate decreased from 35% to 21%, which was the largest driver of lowering APAM’s effective tax rate from 24.7% for nine months ended September 30, 2017, to 15.7% for the nine months ended September 30, 2018. The estimated adjusted effective tax rate decreased from 37% to 23.5%.
Business highlights for the third quarter of 2018 included:
Our assets under management as of September 30, 2018 were $116.6 billion and average assets under management for the third quarter were $116.2 billion.
Our investment teams continue to generate strong absolute and relative investment returns for clients and investors. Thirteen of our 15 investment strategies with a publicly available mutual fund have outperformed their broad-based benchmarks since inception, net of fees.
We declared and paid dividends of $0.60 per share of Class A common stock.
The following occurred since September 30, 2018:
Effective October 1, 2018, each of the four Associate Portfolio Managers on the Global Value team were promoted to Co-Portfolio Managers. Concurrently, the Artisan Global Value team evolved into two distinct and autonomous investment teams— the International Value team led by David Samra and the Global Value team led by Daniel O’Keefe.
In October 2018, Rezo Kanovich joined Artisan as a managing director and portfolio manager on the Global Equity team. Effective October 15, 2018, Mr. Kanovich became sole portfolio manager of the Non-U.S. Small-Cap Growth strategy, including Artisan International Small Cap Fund. Concurrent with this change the strategy and fund re-opened to new investors.

24

Table of Contents

Between September 30, 2018 and October 29, 2018, our AUM declined to approximately $104 billion, primarily due to a sharp decline in global equity markets. We have designed, and we operate, our firm and financial model with the expectation that markets will be volatile. As noted above, the majority of our expenses, including most of our investment team compensation, fluctuate automatically with changes in AUM and revenues. The variable expense model results in a more stable environment for our investment talent and helps us to remain focused on our long-term business objectives.
Organizational Structure
Organizational Structure
Our operations are conducted through Artisan Partners Holdings (“Holdings”) and its subsidiaries. On March 12, 2013, Artisan Partners Asset Management Inc. (“APAM”) and Artisan Partners Holdings LP completed a series of transactions (“the IPO Reorganization”) to reorganize their capital structures in connection with the initial public offering (“IPO”) of APAM’s Class A common stock. The IPO Reorganization and IPO were completed on March 12, 2013. The IPO Reorganization was designed to create a capital structure that preserves our ability to conduct our business through Holdings, while permitting us to raise additional capital and provide access to liquidity through a public company.
Our employees and other limited partners of Holdings held approximately 30% of the equity interests in Holdings as of September 30, 2018. As a result, our results reflect that significant noncontrolling interest.
We operate our business in a single segment.
2018 Follow-On Offering and Holdings Unit Exchanges
On February 27, 2018, APAM completed an offering of 644,424 shares of Class A common stock and utilized all of the proceeds to purchase an aggregate of 644,424 common units from certain limited partners of Holdings. In connection with the offering, APAM received 644,424 GP units of Holdings.
During the nine months ended September 30, 2018, certain limited partners of Holdings exchanged 1,538,916 common units (along with a corresponding number of shares of Class B or C common stock of APAM) for 1,538,916 shares of Class A common stock. In connection with the exchanges, APAM received 1,538,916 GP units of Holdings.
APAM’s equity ownership interest in Holdings increased from 67% at December 31, 2017 to 70% at September 30, 2018, as a result of these transactions and other equity transactions during the period.
Financial Overview
Economic Environment
Global equity and debt market conditions can materially affect our financial performance. The following table presents the total returns of relevant market indices for the three and nine months ended September 30, 2018 and 2017:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
S&P 500 total returns
7.7
 %
 
4.5
%
 
10.6
 %
 
14.2
%
MSCI All Country World total returns
4.3
 %
 
5.2
%
 
3.8
 %
 
17.3
%
MSCI EAFE total returns
1.4
 %
 
5.4
%
 
(1.4
)%
 
20.0
%
Russell Midcap® total returns
5.0
 %
 
3.5
%
 
7.5
 %
 
11.7
%
MSCI Emerging Markets Index
(1.1
)%
 
7.9
%
 
(7.7
)%
 
27.8
%
ICE BofA Merrill Lynch U.S. High Yield Master II Total Return Index
2.4
 %
 
2.0
%
 
2.5
 %
 
7.1
%

25

Table of Contents

Key Performance Indicators
When we review our business and financial performance we consider, among other things, the following:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited; dollars in millions)
Assets under management at period end
$
116,573

 
$
113,688

 
$
116,573

 
$
113,688

Average assets under management (1)
$
116,221

 
$
111,372

 
$
116,769

 
$
106,622

Net client cash flows
$
(1,545
)
 
$
(1,157
)
 
$
(2,487
)
 
$
(2,951
)
Total revenues
$
212.8

 
$
204.6

 
$
637.1

 
$
584.9

Weighted average fee (2)
72.7
 bps
 
72.9
 bps
 
73.0
 bps
 
73.3
 bps
Operating margin
38.5
%
 
39.4
%
 
37.8
%
 
35.1
%
Adjusted operating margin (3)
38.5
%
 
39.4
%
 
37.8
%
 
37.2
%
 
 
 
 
 
(1) We compute average assets under management by averaging day-end assets under management for the applicable period.
(2) We compute our weighted average fee by dividing annualized investment management fees and performance fees by average assets under management for the applicable period.
(3) Adjusted measures are non-GAAP measures and are explained and reconciled to the comparable GAAP measures in “Supplemental Non-GAAP Financial Information” below.
Management fees and assets under management within our consolidated investment products are excluded from the weighted average fee calculations and from total revenues, since any such revenues are eliminated upon consolidation. Assets under management within Artisan sponsored private funds are included in the reported firm-wide, separate account, and institutional assets under management figures reported below.
Assets Under Management and Investment Performance
Changes to our operating results from one period to another are primarily caused by changes in the amount of our assets under management. Changes in the relative composition of our assets under management among our investment strategies and vehicles and the effective fee rates on our products also impact our operating results.
The amount and composition of our assets under management are, and will continue to be, influenced by a variety of factors including, among others:

investment performance, including fluctuations in both the financial markets and foreign currency exchange rates and the quality of our investment decisions;
flows of client assets into and out of our various strategies and investment vehicles;
our decision to close strategies or limit the growth of assets in a strategy or a vehicle when we believe it is in the best interest of our clients; as well as our decision to re-open strategies, in part or entirely;
our ability to attract and retain qualified investment, management, and marketing and client service professionals;
industry trends towards products or strategies that we do not offer;
competitive conditions in the investment management and broader financial services sectors; and
investor sentiment and confidence.

26

Table of Contents

The table below sets forth changes in our total assets under management:
 
 For the Three Months Ended September 30,
 
Period-to-Period
 
2018
 
2017
 
$
 
%
 
(unaudited; in millions)
 
 
 
 
Beginning assets under management
$
114,190

 
$
109,405

 
$
4,785

 
4.4
 %
Gross client cash inflows
3,642

 
3,660

 
(18
)
 
(0.5
)%
Gross client cash outflows
(5,187
)
 
(4,817
)
 
(370
)
 
(7.7
)%
Net client cash flows
(1,545
)
 
(1,157
)
 
(388
)
 
(33.5
)%
Market appreciation (depreciation) (1)
3,928

 
5,440

 
(1,512
)
 
(27.8
)%
Net transfers (2)

 

 

 
 %
Ending assets under management
$
116,573

 
$
113,688

 
$
2,885

 
2.5
 %
Average assets under management
$
116,221

 
$
111,372

 
$
4,849

 
4.4
 %
(1) Includes the impact of translating the value of assets under management denominated in non-USD currencies into U.S. dollars. The impact was immaterial for the periods presented.
(2) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.
 
 
 
 
 
 
 
 
 
 For the Nine Months Ended September 30,
 
Period-to-Period
 
2018
 
2017
 
$
 
%
 
(unaudited; in millions)
 
 
 
 
Beginning assets under management
$
115,494

 
$
96,845

 
$
18,649

 
19.3
 %
Gross client cash inflows
13,755

 
13,028

 
727

 
5.6
 %
Gross client cash outflows
(16,242
)
 
(15,979
)
 
(263
)
 
(1.6
)%
Net client cash flows
(2,487
)
 
(2,951
)
 
464

 
15.7
 %
Market appreciation (depreciation) (1)
3,566

 
19,794

 
(16,228
)
 
(82.0
)%
Net transfers (2)

 

 

 
 %
Ending assets under management
$
116,573

 
$
113,688

 
$
2,885

 
2.5
 %
Average assets under management
$
116,769

 
$
106,622

 
$
10,147

 
9.5
 %
(1) Includes the impact of translating the value of assets under management denominated in non-USD currencies into U.S. dollars. The impact was immaterial for the periods presented.
(2) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.
Across the firm, we experienced total net outflows of $1.5 billion and $2.5 billion during the three and nine months ended September 30, 2018, respectively. Our U.S. Mid-Cap Growth, U.S. Mid-Cap Value, and Non-U.S. Growth strategies had net outflows of $604 million, $315 million and $920 million during the three months ended September 30, 2018, respectively, and net outflows of $2.5 billion, $985 million and $1.6 billion, during the nine months ended September 30, 2018, respectively. We anticipate that these trends will continue in the near term.
We monitor the availability of attractive investment opportunities relative to the amount of assets we manage in each of our investment strategies. When appropriate, we will close a strategy to new investors or otherwise take action to slow or restrict its growth, even though our aggregate assets under management may be negatively impacted in the short term. We may also re-open a strategy, widely or selectively, to fill available capacity or manage the diversification of our client base in that strategy. We believe that management of our investment capacity protects our ability to manage assets successfully, which protects the interests of our clients and, in the long term, protects our ability to retain client assets and maintain our profit margins.
As of the date of this filing, our Non-U.S. Growth, Non-U.S. Value, U.S. Mid-Cap Growth and U.S. Small-Cap Growth strategies are closed to most new investors and client relationships. Our Global Value and Global Opportunities strategies are open across pooled vehicles, but closed to most new separate account clients. We may selectively accept additional separate account clients in those strategies, but we are managing asset flows into those strategies with a bias towards assets from pooled vehicles.

27

Table of Contents

When we close or otherwise restrict the growth of a strategy, we typically continue to allow additional investments in the strategy by existing clients and certain related entities. We may also permit new investments by other eligible investors in our discretion. As a result, during a given period we may have net client cash inflows in a closed strategy. However, when a strategy is closed or its growth is restricted we expect there to be periods of net client cash outflows.
In November 2018 we expect the Artisan Funds will make their annual income and capital gains distributions. Based on our current estimates and assumptions, we expect this year’s distributions to result in approximately $850 million of net client cash outflows from investors who choose not to reinvest their dividends. In November 2017 those distributions resulted in approximately $510 million of net client cash outflows. In addition, the November 2018 distribution (estimates of which we expect Artisan Funds will disclose in advance of the record date) may cause increased mutual fund redemptions.
The table below sets forth the total assets under management for our investment teams and strategies as of September 30, 2018, the inception date for each investment composite, and the average annual total returns for each composite (gross of fees) and its respective broad-based benchmark (and style benchmark, if applicable) over a multi-horizon time period as of September 30, 2018. Returns for periods less than one year are not annualized.
We measure investment performance based upon the results of our “composites”, which represent the aggregate performance of all discretionary client accounts, including mutual funds, invested in the same strategy except those accounts with respect to which we believe client-imposed investment restrictions may have a material impact on portfolio construction and those accounts managed in a currency other than U.S. dollars. The results of these excluded accounts, which represented approximately 11% of our assets under management at September 30, 2018, are maintained in separate composites the results of which are not included below.

28

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
Average Annual
Value-Added(1)
Since Inception
(bps)
 
Inception
 
Strategy AUM
 
Average Annual Total Returns (gross) (%)
 
Investment Team and Strategy
Date
 
 (in $MM)
 
1 YR
3 YR
5 YR
10 YR
Inception
 
Growth Team
 
 
 
 
 
 
 
 
 
 
 
Global Opportunities Strategy
2/1/2007
 
$
17,241

 
13.56%
17.98%
12.81%
13.97%
11.04%
 
583
MSCI All Country World Index
 
 
 
 
9.77%
13.38%
8.66%
8.18%
5.21%
 
 
Global Discovery Strategy
9/1/2017
 
$
132

 
22.32%
—%
—%
—%
21.96%
 
1,102
MSCI All Country World Index
 
 
 
 
9.77%
—%
—%
—%
10.94%
 
 
U.S. Mid-Cap Growth Strategy
4/1/1997
 
$
12,324

 
22.75%
15.05%
11.29%
14.59%
15.43%
 
491
Russell Midcap® Index
 
 
 
 
13.98%
14.50%
11.65%
12.30%
10.52%
 
 
Russell Midcap® Growth Index
 
 
 
 
21.10%
16.63%
12.99%
13.45%
9.58%
 
 
U.S. Small-Cap Growth Strategy
4/1/1995
 
$
3,092

 
36.45%
22.33%
14.14%
15.91%
11.40%
 
165
Russell 2000® Index
 
 
 
 
15.24%
17.10%
11.07%
11.11%
9.75%
 
 
Russell 2000® Growth Index
 
 
 
 
21.06%
17.96%
12.13%
12.65%
8.39%
 
 
Global Equity Team
 
 
 
 
 
 
 
 
 
 
 
Global Equity Strategy
4/1/2010
 
$
1,543

 
18.36%
15.82%
11.33%
—%
13.40%
 
467
MSCI All Country World Index
 
 
 
 
9.77%
13.38%
8.66%
—%
8.73%
 
 
Non-U.S. Growth Strategy
1/1/1996
 
$
25,753

 
5.81%
9.73%
5.27%
7.96%
10.24%
 
536
MSCI EAFE Index
 
 
 
 
2.74%
9.23%
4.41%
5.38%
4.88%
 
 
Non-U.S. Small-Cap Growth Strategy
1/1/2002
 
$
606

 
10.46%
9.80%
6.42%
11.10%
13.40%
 
320
MSCI EAFE Small Cap Index
 
 
 
 
3.73%
12.38%
7.95%
9.67%
10.20%
 
 
U.S. Value Team
 
 
 
 
 
 
 
 
 
 
 
Value Equity Strategy
7/1/2005
 
$
2,628

 
10.62%
18.02%
10.42%
10.93%
8.84%
 
(50)
Russell 1000® Index
 
 
 
 
17.76%
17.05%
13.66%
12.08%
9.34%
 
 
Russell 1000® Value Index
 
 
 
 
9.45%
13.54%
10.71%
9.78%
7.63%
 
 
U.S. Mid-Cap Value Strategy
4/1/1999
 
$
5,736

 
9.72%
13.83%
8.19%
11.24%
13.22%
 
357
Russell Midcap® Index
 
 
 
 
13.98%
14.50%
11.65%
12.30%
9.65%
 
 
Russell Midcap® Value Index
 
 
 
 
8.81%
13.08%
10.71%
11.28%
9.96%
 
 
Global Value Team
 
 
 
 
 
 
 
 
 
 
 
Global Value Strategy
7/1/2007
 
$
20,249

 
5.53%
13.39%
9.63%
12.13%
8.88%
 
426
MSCI All Country World Index
 
 
 
 
9.77%
13.38%
8.66%
8.18%
4.62%
 
 
Non-U.S. Value Strategy
7/1/2002
 
$
21,189

 
(0.83)%
10.11%
6.72%
10.55%
12.13%
 
580
MSCI EAFE Index
 
 
 
 
2.74%
9.23%
4.41%
5.38%
6.33%
 
 
Emerging Markets Team
 
 
 
 
 
 
 
 
 
 
 
Emerging Markets Strategy
7/1/2006
 
$
193

 
(1.29)%
17.23%
6.07%
5.52%
5.66%
 
40
MSCI Emerging Markets Index
 
 
 
 
(0.81)%
12.35%
3.61%
5.40%
5.26%
 
 
Credit Team
 
 
 
 
 
 
 
 
 
 
 
High Income Strategy
4/1/2014
 
$
3,237

 
5.69%
9.76%
—%
—%
7.61%
 
293
ICE BofAML US High Yield Master II Total Return Index
 
 
 
 
2.94%
8.19%
—%
—%
4.68%
 
 
Developing World Team
 
 
 
 
 
 
 
 
 
 
 
Developing World Strategy
7/1/2015
 
$
2,282

 
(8.73)%
13.08%
—%
—%
6.00%
 
121
MSCI Emerging Markets Index
 
 
 
 
(0.81)%
12.35%
—%
—%
4.79%
 
 
Thematic Team
 
 
 
 
 
 
 
 
 
 
 
Thematic Strategy
5/1/2017
 
$
186

 
35.10%
—%
—%
—%
38.32%
 
2,083
S&P 500 Market Index (Total Return)
 
 
 
 
17.91%
—%
—%
—%
17.49%
 
 
Other Assets Under Management 2
 
 
$
182

 
 
 
 
 
 
 
 
Total Assets Under Management
 
 
$
116,573

 
 
 
 
 
 
 
 
(1) Value-added is the amount in basis points by which the average annual gross composite return of each of our strategies has outperformed the broad-based market index most commonly used by our clients to compare the performance of the relevant strategy. Value-added for periods less than one year is not annualized. The Artisan High Income Strategy may hold loans and other security types that may not be included in the ICE BofA Merrill Lynch U.S. High Yield Master II Total Return Index. At times, this causes material differences in relative performance. The Global Equity, Global Discovery, and Thematic strategies’ investments in initial public offerings (IPOs) made a material contribution to performance. IPO investments may contribute significantly to a small portfolio’s return, an effect that will generally decrease as assets grow. IPO investments may be unavailable in the future.
(2) Other Assets Under Management includes AUM managed by the Credit Team in the Credit Opportunities strategy and by the Thematic Team in the Thematic Long/Short strategy, respectively. Strategy specific information has been omitted.

29

Table of Contents

The tables below set forth changes in our assets under management by investment team:
 
 
 
By Investment Team
Three Months Ended
 
Growth
Global Equity
U.S. Value
Global Value
Emerging Markets
Credit
Developing World
Thematic
Total
September 30, 2018
 
 
(unaudited; in millions)
Beginning assets under management
 
$
31,089

$
28,064

$
8,308

$
40,767

$
197

$
3,072

$
2,506

$
187

$
114,190

Gross client cash inflows
 
1,289

464

317

1,056

6

285

107

118

3,642

Gross client cash outflows
 
(1,549
)
(1,451
)
(515
)
(1,338
)
(5
)
(134
)
(190
)
(5
)
(5,187
)
Net client cash flows
 
(260
)
(987
)
(198
)
(282
)
1

151

(83
)
113

(1,545
)
Market appreciation (depreciation)
 
1,960

825

254

953

(5
)
68

(141
)
14

3,928

Net transfers(1)
 









Ending assets under management
 
$
32,789

$
27,902

$
8,364

$
41,438

$
193

$
3,291

$
2,282

$
314

$
116,573

Average assets under management
 
$
32,098

$
28,190

$
8,475

$
41,451

$
195

$
3,174

$
2,390

$
249

$
116,221

September 30, 2017
 
 
 
 
 
 
 
 
 
 
Beginning assets under management
 
$
29,881

$
28,194

$
8,692

$
38,547

$
277

$
2,306

1,496

$
12

$
109,405

Gross client cash inflows
 
1,019

533

232

1,163

2

224

485

2

3,660

Gross client cash outflows
 
(1,310
)
(1,527
)
(552
)
(1,262
)
(2
)
(114
)
(49
)
(1
)
(4,817
)
Net client cash flows
 
(291
)
(994
)
(320
)
(99
)

110

436

1

(1,157
)
Market appreciation (depreciation)
 
1,055

1,633

303

2,231

25

57

134

2

5,440

Net transfers(1)
 









Ending assets under management
 
$
30,645

$
28,833

$
8,675

$
40,679

$
302

$
2,473

2,066

15

$
113,688

Average assets under management
 
$
30,236

$
28,541

$
8,660

$
39,425

$
293

$
2,394

1,809

$
14

$
111,372

(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.

30

Table of Contents

 
 
 
By Investment Team
Nine Months Ended
 
Growth
Global Equity
U.S. Value
Global Value
Emerging Markets
Credit
Developing World
Thematic
Total
September 30, 2018
 
 
(unaudited; in millions)
Beginning assets under management
 
$
30,628

$
29,235

$
8,765

$
41,687

$
282

$
2,554

$
2,253

$
90

$
115,494

Gross client cash inflows
 
3,873

2,554

852

4,305

23

1,205

733

210

13,755

Gross client cash outflows
 
(5,638
)
(4,326
)
(1,591
)
(3,628
)
(90
)
(580
)
(376
)
(13
)
(16,242
)
Net client cash flows
 
(1,765
)
(1,772
)
(739
)
677

(67
)
625

357

197

(2,487
)
Market appreciation (depreciation)
 
3,926

439

338

(926
)
(22
)
112

(328
)
27

3,566

Net transfers(1)
 









Ending assets under management
 
$
32,789

$
27,902

$
8,364

$
41,438

$
193

$
3,291

$
2,282

$
314

$
116,573

Average assets under management
 
$
31,732

$
28,885

$
8,460

$
41,932

$
255

$
2,874

$
2,456

$
175

$
116,769

September 30, 2017
 
 
 
 
 
 
 
 
 
 
Beginning assets under management
 
$
25,714

$
25,510

$
8,588

$
33,940

$
228

$
1,878

987

$

$
96,845

Gross client cash inflows
 
3,644

2,357

1,348

3,849

9

921

886

14

13,028

Gross client cash outflows
 
(4,177
)
(5,443
)
(1,941
)
(3,743
)
(5
)
(485
)
(184
)
(1
)
(15,979
)
Net client cash flows
 
(533
)
(3,086
)
(593
)
106

4

436

702

13

(2,951
)
Market appreciation (depreciation)
 
5,464

6,409

680

6,633

70

159

377

2

19,794

Net transfers(1)
 









Ending assets under management
 
$
30,645

$
28,833

$
8,675

$
40,679

$
302

$
2,473

2,066

15

$
113,688

Average assets under management(2)
 
$
28,809

$
27,701

$
8,732

$
37,425

$
269

$
2,216

1,462

$
13

$
106,622

(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.
(2) For the Thematic team, average assets under management is for the period between April 24, 2017, when the team’s first strategy began operations, and September 30, 2017.
The goal of our marketing, distribution and client services efforts is to establish and maintain a client base that is diversified by investment strategy, investment vehicle and distribution channel. As distribution channels have evolved to have more institutional-like decision making processes and longer-term investment horizons, we have expanded our distribution efforts into those areas.
The table below sets forth our assets under management by distribution channel:
 
As of September 30,
 2018(1)
 
As of September 30,
 2017(1)
 
$ in millions
 
% of total
 
$ in millions
 
% of total
 
(unaudited)
 
 
 
(unaudited)
 
 
Institutional
$
75,824

 
65.1
%
 
$
75,121

 
66.1
%
Intermediary
35,817

 
30.7
%
 
33,452

 
29.4
%
Retail
4,932

 
4.2
%
 
5,115

 
4.5
%
Ending Assets Under Management
$
116,573

 
100.0
%
 
$
113,688

 
100.0
%
(1) The allocation of assets under management by distribution channel involves the use of estimates and the exercise of judgment.
Our institutional channel includes assets under management sourced from defined contribution plan clients, which makes up approximately 13% of our total assets under management as of September 30, 2018.

31

Table of Contents

The following tables set forth the changes in our assets under management for Artisan Funds, Artisan Global Funds and separate accounts:
Three Months Ended
Artisan Funds & Artisan Global Funds
 
Separate Accounts
 
Total
September 30, 2018
(unaudited; in millions)
Beginning assets under management
$
57,409

 
$
56,781

 
$
114,190

Gross client cash inflows
2,453

 
1,189

 
3,642

Gross client cash outflows
(3,657
)
 
(1,530
)
 
(5,187
)
Net client cash flows
(1,204
)
 
(341
)
 
(1,545
)
Market appreciation (depreciation)
1,711

 
2,217

 
3,928

Net transfers (1)

 

 

Ending assets under management
$
57,916

 
$
58,657

 
$
116,573

Average assets under management
$
58,149

 
$
58,072

 
$
116,221

September 30, 2017
 
 
 
 
 
Beginning assets under management
$
54,588

 
$
54,817

 
$
109,405

Gross client cash inflows
2,948

 
712

 
3,660

Gross client cash outflows
(3,246
)
 
(1,571
)
 
(4,817
)
Net client cash flows
(298
)
 
(859
)
 
(1,157
)
Market appreciation (depreciation)
2,636

 
2,804

 
5,440

Net transfers (1)
(445
)
 
445

 

Ending assets under management
$
56,481

 
$
57,207

 
$
113,688

Average assets under management
$
55,358

 
$
56,014

 
$
111,372

(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.
Nine Months Ended
Artisan Funds & Artisan Global Funds
 
Separate Accounts
 
Total
September 30, 2018
(unaudited; in millions)
Beginning assets under management
$
57,349

 
$
58,145

 
$
115,494

Gross client cash inflows
10,076

 
3,679

 
13,755

Gross client cash outflows
(10,405
)
 
(5,837
)
 
(16,242
)
Net client cash flows
(329
)
 
(2,158
)
 
(2,487
)
Market appreciation (depreciation)
1,150

 
2,416

 
3,566

Net transfers (1)
(254
)
 
254

 

Ending assets under management
$
57,916

 
$
58,657

 
$
116,573

Average assets under management
$
58,480

 
$
58,289

 
$
116,769

September 30, 2017
 
 
 
 
 
Beginning assets under management
$
49,367

 
$
47,478

 
$
96,845

Gross client cash inflows
9,602

 
3,426

 
13,028

Gross client cash outflows
(11,663
)
 
(4,316
)
 
(15,979
)
Net client cash flows
(2,061
)
 
(890
)
 
(2,951
)
Market appreciation (depreciation)
9,703

 
10,091

 
19,794

Net transfers (1)
(528
)
 
528

 

Ending assets under management
$
56,481

 
$
57,207

 
$
113,688

Average assets under management
$
53,678

 
$
52,965

 
$
106,622

(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.

32

Table of Contents

Results of Operations
Three months ended September 30, 2018, Compared to Three months ended September 30, 2017
 
For the Three Months Ended September 30,
 
For the Period-to-Period
 
2018
 
2017
 
$
 
%
Statements of operations data:
(unaudited; in millions, except share data)
Revenues
$
212.8

 
$
204.6

 
$
8.2

 
4
 %
Operating Expenses
 
 
 
 
 
 
 
Total compensation and benefits
102.7

 
98.5

 
4.2

 
4
 %
Other operating expenses
28.3

 
25.4

 
2.9

 
11
 %
Total operating expenses
131.0

 
123.9

 
7.1

 
6
 %
Total operating income
81.8

 
80.7

 
1.1

 
1
 %
Non-operating income (expense)
 
 
 
 
 
 
 
Interest expense
(2.9
)
 
(2.9
)
 

 
 %
Other non-operating income
2.0

 
2.2

 
(0.2
)
 
(9
)%
Total non-operating income (expense)
(0.9
)
 
(0.7
)
 
(0.2
)
 
(29
)%
Income before income taxes
80.9

 
80.0

 
0.9

 
1
 %
Provision for income taxes
14.2

 
21.5

 
(7.3
)
 
(34
)%
Net income before noncontrolling interests
66.7

 
58.5

 
8.2

 
14
 %
Less: Noncontrolling interests - Artisan Partners Holdings
24.0

 
27.2

 
(3.2
)
 
(12
)%
Less: Noncontrolling interests - consolidated investment products
0.2

 
0.6

 
(0.4
)
 
(67
)%
Net income attributable to Artisan Partners Asset Management Inc.
$
42.5

 
$
30.7

 
$
11.8

 
38
 %
Share Data
 
 
 
 
 
 
 
Net income available to Class A common stock per basic and diluted share
$
0.77

 
$
0.61

 
 
 
 
Weighted average basic and diluted shares of Class A common stock outstanding
49,399,553

 
45,890,291

 
 
 
 
Revenues
Essentially all of our revenues consist of investment management fees earned from managing clients’ assets. Our investment management fees fluctuate based on a number of factors, including the total value of our assets under management, the composition of assets under management among investment vehicles and our investment strategies, changes in the investment management fee rates on our products, the extent to which we enter into fee arrangements that differ from our standard fee schedules, which can be affected by custom and the competitive landscape in the relevant market, and, for the accounts on which we earn performance-based fees, the investment performance of those accounts relative to their designated benchmarks.
The increase in revenues of $8.2 million, or 4%, for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was driven primarily by a $4.8 billion, or 4%, increase in our average assets under management. The weighted average investment management fee was 72.7 basis points for the three months ended September 30, 2018 compared to 72.9 basis points for the three months ended September 30, 2017.
The following table sets forth the weighted average fee and composition of revenue and assets under management by investment vehicle:
 
Separate Accounts
 
Artisan Funds and Artisan Global Funds
 For the Three Months Ended September 30,
2018
 
2017
 
2018
 
2017
 
(unaudited; dollars in millions)
Investment management fees
$
78.3

 
$
75.9

 
$
134.5

 
$
128.7

Weighted average fee
53.5 basis points

 
53.8 basis points

 
91.8 basis points

 
92.2 basis points

Percentage of ending AUM
50
%
 
50
%
 
50
%
 
50
%

33

Table of Contents

Separate account assets under management consist of the assets we manage in or through vehicles other than Artisan Funds or Artisan Global Funds, including assets we manage in traditional separate accounts, as well as assets we manage in Artisan-branded collective investment trusts, in funds (both public and private) that we sub-advise, and in our own privately offered funds.
Operating Expenses
The increase in total operating expenses of $7.1 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was primarily a result of higher compensation expense due to increased revenues, increases in salary and benefit costs, an increase in occupancy expense related to the investment team relocation and increased technology costs.
In October 2018, we invested in the talent and long-term growth potential of the Global Equity team. We onboarded an experienced and recognized leader to assume portfolio management responsibilities of the Non-U.S. Small-Cap Growth strategy, as well as two experienced analysts with whom the portfolio manager previously worked. We expect these investments will result in incremental expense of approximately $5 million in the fourth quarter of 2018. In future quarters, we expect the incremental expense to be approximately $1.2 million, net of the investment team revenue share generated by the Non-U.S. Small-Cap Growth strategy. As the Non-U.S. Small-Cap Growth strategy grows, the incremental net expense will decline.    
Compensation and Benefits
 
 For the Three Months Ended September 30,
 
Period-to-Period
 
2018
 
2017
 
$
 
%
 
(unaudited; in millions)
 
 
Salaries, incentive compensation and benefits (1)
$
90.0

 
$
86.0

 
$
4.0

 
5
%
Restricted share-based award compensation expense
12.7

 
12.5

 
0.2

 
2
%
Total compensation and benefits
$
102.7

 
$
98.5

 
$
4.2

 
4
%
(1) Excluding restricted share-based award compensation expense
 
 
 
 
 
 
 
The increase in salaries, incentive compensation, and benefits was driven primarily by a $2.4 million increase in incentive compensation paid to our investment and marketing professionals as a result of the increase in revenue.
Restricted share-based award compensation expense increased $0.2 million. The increase in expense resulting from the 2018 grant was almost entirely offset by the impact of the Company’s 2013 equity grants becoming fully amortized during the three months ended September 30, 2018. Restricted share-based award compensation expense is expected to be approximately $11 million in the December 2018 quarter.
Total salaries, incentive compensation and benefits was 48% of our revenues for the three months ended September 30, 2018, and 2017.
Other operating expenses
Other operating expenses increased $2.9 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily due to increased occupancy and technology expenses. During the three months ended September 2018, we incurred approximately $1.5 million of incremental occupancy expense related to office relocations of several investment teams. The increased expense includes overlapping rent during the construction of the new facilities, accelerated depreciation expense, and accelerated expense for the remaining lease costs to be incurred for an exited location. Occupancy expense is expected to be approximately $5 million in the December 2018 quarter.
Non-Operating Income (Expense)
Non-operating income (expense) for the three months ended September 30, 2018 includes $0.3 million of income related to investment gains of consolidated investment products, compared to $1.6 million of such income for the three months ended September 30, 2017. Non-operating income (expense) for the three months ended September 30, 2018 also includes $1.4 million of income related to investment gains on unconsolidated investment products, compared to $0.1 million for the three months ended September 30, 2017.

34

Table of Contents

Provision for Income Taxes
The provision for income taxes primarily represents APAM’s U.S. federal, state and local income taxes on its allocable portion of Holdings’ income, as well as foreign income taxes payable by Holdings’ subsidiaries. APAM’s effective income tax rate for the three months ended September 30, 2018 was 17.5%. The decrease in effective income tax rate from 26.9% for the three months ended September 30, 2017 was primarily due to Tax Reform, which reduced the U.S. federal corporate tax rate from 35% to 21%. The 2018 effective tax rate was also lower than 2017 due to pre-IPO share-based compensation expenses incurred in 2017 that were not deductible for tax purposes. Pre-IPO share-based compensation expenses and the related impact to the effective tax rate no longer exist after the awards were fully vested on July 1, 2017.
Several factors contribute to the effective tax rate, including a rate benefit attributable to the fact that approximately 33% and 38% of Holdings’ full year projected taxable earnings were not subject to corporate-level taxes for the three months ended September 30, 2018 and 2017, respectively. Thus, income before income taxes includes amounts that are attributable to noncontrolling interests and not taxable to APAM and its subsidiaries, which reduces the effective tax rate. As APAM’s equity ownership in Holdings increases, the effective tax rate will likewise increase as more income will be subject to corporate-level taxes. The effective tax rate was negatively impacted in both periods due to higher tax expense related to the vesting of restricted share-based awards, net of dividends paid on unvested share-based awards.
Earnings Per Share
Weighted average basic and diluted shares of Class A common stock outstanding were higher for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, as a result of the 2018 Follow-On Offering, Holdings Common Unit Exchanges, and equity award grants. See Note 13, “Earnings Per Share” in the Notes to the Unaudited Consolidated Financial Statements for further discussion of earnings per share.

Nine months ended September 30, 2018, Compared to Nine months ended September 30, 2017
 
For the Nine Months Ended September 30,
 
Period-to-Period
 
2018
 
2017
 
$
 
%
Statements of operations data:
(unaudited; in millions, except share data)
Revenues
$
637.1

 
$
584.9

 
$
52.2

 
9
 %
Operating Expenses
 
 
 
 
 
 
 
Total compensation and benefits
314.7

 
300.9

 
13.8

 
5
 %
Other operating expenses
81.7

 
78.8

 
2.9

 
4
 %
Total operating expenses
396.4

 
379.7

 
16.7

 
4
 %
Total operating income
240.7

 
205.2

 
35.5

 
17
 %
Non-operating income (expense)
 
 
 
 
 
 
 
Interest expense
(8.5
)
 
(8.7
)
 
0.2

 
2
 %
Other non-operating income
12.3

 
2.6

 
9.7

 
373
 %
Total non-operating income (expense)
3.8

 
(6.1
)
 
9.9

 
162
 %
Income before income taxes
244.5

 
199.1

 
45.4

 
23
 %
Provision for income taxes
38.5

 
49.2

 
(10.7
)
 
(22
)%
Net income before noncontrolling interests
206.0

 
149.9

 
56.1

 
37
 %
Less: Noncontrolling interests - Artisan Partners Holdings
73.3

 
72.2

 
1.1

 
2
 %
Less: Noncontrolling interests - consolidated investment products
6.9

 
0.6

 
6.3

 
1,050
 %
Net income attributable to Artisan Partners Asset Management Inc.
$
125.8

 
$
77.1

 
$
48.7

 
63
 %
Share Data
 
 
 
 
 
 
 
Basic and diluted earnings per share - Class A common shares
$
2.27

 
$
1.48

 
 
 
 
Weighted average shares of Class A common stock outstanding
48,607,837

 
44,068,172

 
 
 
 

35

Table of Contents

Revenues
The increase in revenues of $52.2 million, or 9%, for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was driven primarily by a $10.1 billion, or 10%, increase in our average assets under management. The weighted average investment management fee was 73.0 basis points for the nine months ended September 30, 2018 compared to 73.3 basis points for the nine months ended September 30, 2017. The fee rate decreased due to the negative impact of the shift in the mix of our assets under management between investment vehicles and lower fee rates earned on certain separate accounts, partially offset by the positive impact of higher performance fees recognized in the current year. Performance fee revenue was $2.4 million and $0.3 million for the nine months ended September 30, 2018 and 2017, respectively.
The following table sets forth the weighted average fee (which reflects the additional services we provide to pooled vehicles) and composition of revenue and assets under management by investment vehicle:
 
Separate Accounts
 
Artisan Funds and Artisan Global Funds
 For the Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
 
(unaudited; dollars in millions)
Investment management fees
$
234.8

 
$
214.9

 
$
402.3

 
$
370.0

Weighted average fee
53.9 basis points

 
54.2 basis points

 
92.0 basis points

 
92.1 basis points

Percentage of ending AUM
50
%
 
50
%
 
50
%
 
50
%
Operating Expenses
The increase in total operating expenses of $16.7 million for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was primarily a result of higher incentive compensation expense due to increased revenues, a $5.1 million increase in equity-based compensation expense related to additional post-IPO equity grants, increases in salary and benefit costs and an increase in occupancy expenses. These increases were partially offset by the completed amortization of pre-offering related equity compensation expense in 2017.
Compensation and Benefits
 
 For the Nine Months Ended September 30,
 
Period-to-Period
 
2018
 
2017
 
$
 
%
 
(unaudited; in millions)
 
 
Salaries, incentive compensation and benefits (1)
$
273.0

 
$
251.6

 
$
21.4

 
9
 %
Restricted share-based award compensation expense
41.7

 
36.6

 
5.1

 
14
 %
Total salaries, incentive compensation and benefits
314.7

 
288.2

 
26.5

 
9
 %
Pre-offering related compensation - share-based awards

 
12.7

 
(12.7
)
 
(100
)%
Total compensation and benefits
$
314.7

 
$
300.9

 
$
13.8

 
5
 %
(1) Excluding share-based compensation
 
 
 
 
 
 
 
The increase in salaries, incentive compensation, and benefits was driven primarily by a $15.7 million increase in incentive compensation paid to our investment and marketing professionals as a result of higher investment management fee revenue. The remaining increase is primarily due to salary increases and costs associated with an increase in the number of employees.
Restricted share-based award compensation expense increased $5.1 million primarily as a result of restricted share-based awards granted in January 2017 and February 2018.
Pre-offering related compensation expense, which consists of the amortization expense on pre-offering Class B awards decreased $12.7 million, as the remaining awards became fully vested during 2017. As of July 1, 2017, all Class B awards were fully vested.
Total salaries, incentive compensation and benefits was 49% of our revenues for the nine months ended September 30, 2018, and 2017.

36

Table of Contents

Other operating expenses
Other operating expenses increased $2.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to increased occupancy expense, as described above.
Non-Operating Income (Expense)
Non-operating income (expense) for the nine months ended September 30, 2018 includes $9.5 million of income related to investment gains of consolidated investment products compared to $1.6 million of such income for the nine months ended September 30, 2017. Non-operating income (expense) for the nine months ended September 30, 2018 also includes $2.5 million of income related to investment gains on unconsolidated investment products, compared to $0.5 million for the nine months ended September 30, 2017.
Provision for Income Taxes
The provision for income taxes primarily represents APAM’s U.S. federal, state and local income taxes on its allocable portion of Holdings’ income, as well as foreign income taxes payable by Holdings’ subsidiaries. APAM’s effective income tax rate for the nine months ended September 30, 2018 was 15.7%. The decrease in effective income tax rate from 24.7% for the nine months ended September 30, 2017 was primarily due to Tax Reform, which reduced the U.S. federal corporate tax rate from 35% to 21%. The 2018 effective tax rate was also lower than 2017 due to pre-IPO share-based compensation expenses incurred in 2017 that were not deductible for tax purposes. Pre-IPO share-based compensation expenses and the related impact to the effective tax rate no longer exist after the awards were fully vested on July 1, 2017.
Several factors contribute to the effective tax rate, including a rate benefit attributable to the fact that approximately 33% and 38% of Holdings’ full year projected taxable earnings were not subject to corporate-level taxes for the nine months ended September 30, 2018 and 2017, respectively. Thus, income before income taxes includes amounts that are attributable to noncontrolling interests and not taxable to APAM and its subsidiaries, which reduces the effective tax rate. As APAM’s equity ownership in Holdings increases, the effective tax rate will likewise increase as more income will be subject to corporate-level taxes. The effective tax rate in both periods was also lower than the statutory rate due to dividends paid on unvested share-based awards.
Earnings Per Share
Weighted average basic and diluted shares of Class A common stock outstanding were higher for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, as a result of stock offerings, unit exchanges, and equity award grants. See Note 13, “Earnings Per Share” in the Notes to the Unaudited Consolidated Financial Statements for further discussion of earnings per share.

37

Table of Contents

Supplemental Non-GAAP Financial Information
Our management uses non-GAAP measures (referred to as “adjusted” measures) of net income and operating income to evaluate the profitability and efficiency of the underlying operations of our business and as a factor when considering net income available for distributions and dividends. These adjusted measures remove the impact of (1) pre-offering related compensation, (2) net gain (loss) on the tax receivable agreements (if any), and (3) net investment gain (loss) of investment products. These adjustments also remove the non-operational complexities of our structure by adding back non-controlling interests and assuming all income of Artisan Partners Holdings is allocated to APAM. Management believes these non-GAAP measures provide more meaningful information to analyze our profitability and efficiency between periods and over time. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to manage the company.
Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures used by other companies, even if similar terms are used to identify such measures. Our non-GAAP measures are as follows:
Adjusted net income represents net income excluding the impact of (1) pre-offering related compensation, (2) net gain (loss) on the tax receivable agreements (if any), and (3) net investment gain (loss) of investment products. Adjusted net income also reflects income taxes assuming the vesting of all unvested Class A share-based awards and as if all outstanding limited partnership units of Artisan Partners Holdings had been exchanged for Class A common stock of APAM on a one-for-one basis. Assuming full vesting and exchange, all income of Artisan Partners Holdings is treated as if it were allocated to APAM, and the adjusted provision for income taxes represents an estimate of income tax expense at an effective rate reflecting assumed federal, state, and local income taxes. The estimated adjusted effective tax rate was 23.5% and 37.0% for the 2018 and 2017 periods, respectively.
Adjusted net income per adjusted share is calculated by dividing adjusted net income by adjusted shares. The number of adjusted shares is derived by assuming the vesting of all unvested Class A share-based awards and the exchange of all outstanding limited partnership units of Artisan Partners Holdings for Class A common stock of APAM on a one-for-one basis.
Adjusted operating income represents the operating income of the consolidated company excluding pre-offering related compensation.
Adjusted operating margin is calculated by dividing adjusted operating income by total revenues.
Adjusted EBITDA represents adjusted net income before interest expense, income taxes, depreciation and amortization expense.
Pre-offering related compensation includes the amortization of unvested Class B common units of Artisan Partners Holdings that were granted before and were unvested at our IPO, which closed on March 12, 2013. As of July 1, 2017, all Class B common units of Artisan Partners Holdings were fully vested and expensed.
Net gain (loss) on the tax receivable agreements represents the income (expense) associated with the change in estimate of amounts payable under the tax receivable agreements entered into in connection with APAM’s initial public offering and related reorganization.
Net investment gain (loss) of investment products represents the non-operating income (loss) related to the Company’s seed investments, in both consolidated investment products and unconsolidated investment products. Excluding these non-operating market gains or losses on seed investments provides greater transparency to evaluate the profitability and efficiency of the underlying operations of the business.

38

Table of Contents

The following table sets forth, for the periods indicated, a reconciliation from GAAP financial measures to non-GAAP measures:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited; in millions, except per share data)
Reconciliation of non-GAAP financial measures:
 
 
 
 
 
 
 
Net income attributable to Artisan Partners Asset Management Inc. (GAAP)
$
42.5

 
$
30.7

 
$
125.8

 
$
77.1

Add back: Net income attributable to noncontrolling interests - Artisan Partners Holdings
24.0

 
27.2

 
73.3

 
72.2

Add back: Provision for income taxes
14.2

 
21.5

 
38.5

 
49.2

Add back: Pre-offering related compensation - share-based awards

 

 

 
12.7

Add back: Net (gain) loss on the tax receivable agreements
(0.3
)
 
(0.5
)
 
(0.3
)
 
(0.5
)
Add back: Net investment (gain) loss of investment products attributable to APAM
(1.0
)
 
(0.9
)
 
(3.8
)
 
(0.9
)
Less: Adjusted provision for income taxes
18.6

 
28.9

 
54.8

 
77.6

Adjusted net income (Non-GAAP)
$
60.8

 
$
49.1

 
$
178.7

 
$
132.2

 
 
 
 
 
 
 
 
Average shares outstanding
 
 
 
 
 
 
 
Class A common shares
49.4

 
45.9

 
48.6

 
44.1

Assumed vesting or exchange of:
 
 
 
 
 
 
 
Unvested Class A restricted share-based awards
4.8

 
4.2

 
4.9

 
4.2

Artisan Partners Holdings units outstanding (noncontrolling interest)
23.0

 
25.7

 
23.5

 
27.3

Adjusted shares
77.2

 
75.8

 
77.0

 
75.6

 
 
 
 
 
 
 
 
Basic and diluted earnings per share (GAAP)
$
0.77

 
$
0.61

 
$
2.27

 
$
1.48

Adjusted net income per adjusted share (Non-GAAP)
$
0.79

 
$
0.65

 
$
2.32

 
$
1.75

 
 
 
 
 
 
 
 
Operating income (GAAP)
$
81.8

 
$
80.7

 
$
240.7

 
$
205.2

Add back: Pre-offering related compensation - share-based awards

 

 

 
12.7

Adjusted operating income (Non-GAAP)
$
81.8

 
$
80.7

 
$
240.7

 
$
217.9

 
 
 
 
 
 
 
 
Operating margin (GAAP)
38.5
%
 
39.4
%
 
37.8
%
 
35.1
%
Adjusted operating margin (Non-GAAP)
38.5
%
 
39.4
%
 
37.8
%
 
37.2
%
 
 
 
 
 
 
 
 
Net income attributable to Artisan Partners Asset Management Inc. (GAAP)
$
42.5

 
$
30.7

 
$
125.8

 
$
77.1

Add back: Net income attributable to noncontrolling interests - Artisan Partners Holdings
24.0

 
27.2

 
73.3

 
72.2

Add back: Pre-offering related compensation - share-based awards

 

 

 
12.7

Add back: Net (gain) loss on the tax receivable agreements
(0.3
)
 
(0.5
)
 
(0.3
)
 
(0.5
)
Add back: Net investment (gain) loss of investment products attributable to APAM
(1.0
)
 
(0.9
)
 
(3.8
)
 
(0.9
)
Add back: Interest expense
2.9

 
2.9

 
8.5

 
8.7

Add back: Provision for income taxes
14.2

 
21.5

 
38.5

 
49.2

Add back: Depreciation and amortization
1.8

 
1.3

 
4.3

 
3.8

Adjusted EBITDA (Non-GAAP)
$
84.1

 
$
82.2

 
$
246.3

 
$
222.3


39

Table of Contents

Liquidity and Capital Resources
Our working capital needs, including accrued incentive compensation payments, have been and are expected to be met primarily through cash generated by our operations. The assets and liabilities of consolidated investment products attributable to third-party investors do not impact our liquidity and capital resources. We have no right to the benefits from, nor do we bear the risks associated with, the assets and liabilities of consolidated investment products, beyond our direct equity investment and any investment management fees and incentive allocations earned. Accordingly, assets and liabilities of consolidated investment products attributable to third party investors are excluded from the amounts and discussions below. The following table shows our liquidity position as of September 30, 2018, and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
(unaudited; in millions)
Cash and cash equivalents
$
211.4

 
$
137.3

Accounts receivable
$
76.8

 
$
76.7

Seed investments(1)
$
49.2

 
$
40.3

Undrawn commitment on revolving credit facility
$
100.0

 
$
100.0

(1) Seed investments includes investment securities in unconsolidated sponsored investment entities, as well as Artisan’s direct equity investments in consolidated investment products.
We manage our cash balances in order to fund our day-to-day operations. Accounts receivable primarily represent investment management fees that have been earned, but not yet received from our clients. We perform a review of our receivables on a monthly basis to assess collectability. As of September 30, 2018, none of our receivables were considered uncollectable.
In August 2012, we issued $200.0 million in unsecured notes and entered into a $100.0 million five-year revolving credit facility. The notes were comprised of three series, Series A, Series B, and Series C, each with a balloon payment at maturity. The fixed interest rate on each series of unsecured notes is subject to a 100 basis point increase in the event Holdings receives a below-investment grade rating and any such increase will continue to apply until an investment grade rating is received.
In August 2017, we issued $60 million of Series D notes and used the proceeds to repay the $60 million Series A notes that matured on August 16, 2017. We also amended and extended the $100 million revolving credit facility for an additional five-year period. The $100.0 million revolving credit facility was unused as of and for the nine months ended September 30, 2018.
These borrowings contain various restrictive covenants. Our failure to comply with any of the covenants could result in an event of default under the agreements, giving our lenders the ability to accelerate repayment of our obligations. We were in compliance with all debt covenants as of September 30, 2018.
Distributions and Dividends
Artisan Partners Holdings’ distributions, including distributions to APAM for the three and nine months ended September 30, 2018 and 2017, were as follows:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(unaudited, in millions)
Holdings Partnership Distributions to Limited Partners
 
$
22.6

 
$
27.1

 
$
78.4

 
$
81.9

Holdings Partnership Distributions to APAM
 
$
49.9

 
$
50.1

 
$
162.8

 
$
133.6

Total Holdings Partnership Distributions
 
$
72.5

 
$
77.2

 
$
241.2

 
$
215.5

On October 25, 2018, we, acting as the general partner of Artisan Partners Holdings, declared a distribution of $23.4 million, payable by Artisan Partners Holdings to holders of its partnership units, including us.
APAM declared and paid the following dividends per share during the three and nine months ended September 30, 2018 and 2017:
Type of Dividend
 
Class of Stock
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
Quarterly
 
Class A Common
 
$
0.60

 
$
0.60

 
$
1.80

 
$
1.80

Special Annual
 
Class A Common
 
$

 
$

 
$
0.79

 
$
0.36


40

Table of Contents

On October 25, 2018, our board declared a quarterly dividend of $0.60 per share of Class A common stock payable on November 30, 2018 to shareholders of record as of November 16, 2018.
Subject to board approval each quarter, we currently expect to pay a quarterly dividend during 2018. After the end of the year, our board will consider paying a special dividend that will take into consideration our annual adjusted earnings, business conditions and the amount of cash we want to retain at that time. Although we expect to pay dividends according to our dividend policy, we may not pay dividends according to our policy or at all. In the first quarter of 2019, we plan to begin a variable quarterly dividend which will be approximately 80% of the cash generated in the prior quarter. We expect cash generation will approximately equal adjusted net income plus equity-based compensation expense and other non-cash items.
Tax Receivable Agreements (“TRAs”)
In addition to funding our normal operations, we will be required to fund amounts payable under the TRAs that we entered into in connection with the IPO, which resulted in the recognition of a $369.0 million liability as of September 30, 2018. The liability generally represents 85% of the tax benefits APAM expects to realize as a result of the merger of an entity into APAM as part of the IPO Reorganization, our purchase of partnership units from limited partners of Holdings and the exchange of partnership units (for shares of Class A common stock or other consideration). The estimated liability assumes no material changes in the relevant tax law and that APAM earns sufficient taxable income to realize all tax benefits subject to the TRAs. An increase or decrease in future tax rates will increase or decrease, respectively, the expected tax benefits APAM would realize and the amounts payable under the TRAs. Changes in the estimate of expected tax benefits APAM would realize and the amounts payable under the TRAs as a result of change in tax rates would be recorded in net income.
The liability will increase upon future purchases or exchanges of limited partnership units with the increase representing amounts payable under the TRAs equal to 85% of the estimated future tax benefits, if any, resulting from such purchases or exchanges. We intend to fund the payment of amounts due under the TRAs out of the reduced tax payments that APAM realizes in respect of the tax attributes to which the TRAs relate.
The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM’s payments under the TRAs constituting imputed interest or depreciable basis or amortizable basis. In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the TRAs. In such cases, we intend to fund those payments with cash on hand, although we may have to borrow funds depending on the amount and timing of the payments. During the nine months ended September 30, 2018, we made payments of $36.1 million related to the TRAs. We do not intend to make any additional TRA payments in 2018. In 2019, we expect to make payments of approximately $25 million related to the TRAs. The decrease in projected 2019 TRA payments compared to 2018 is primarily due to the decrease in the U.S. federal corporate tax rate as a result of Tax Reform.
Cash Flows
 
 For the Nine Months Ended September 30,
 
2018
 
2017
 
(unaudited; in millions)
Cash, cash equivalents and restricted cash as of January 1
$
159.8

 
$
157.4

Net cash provided by operating activities
328.2

 
268.7

Net cash used in investing activities
(9.1
)
 
(3.2
)
Net cash used in financing activities
(211.5
)
 
(200.5
)
Net impact of deconsolidation of consolidated investment products
(39.8
)
 

Cash, cash equivalents and restricted cash as of September 30
$
227.6

 
$
222.4

Net cash provided by operating activities increased $59.5 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to increased revenues and operating income resulting from an increase in average assets under management. For the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, our operating income, excluding share-based and pre-offering related compensation expenses, increased $27.9 million. Timing differences in working capital accounts also caused operating cash flows to increase by $26.1 million between the comparative periods, primarily due to the timing of executive bonus payments.

41

Table of Contents

Investing activities consist primarily of acquiring and selling property and equipment, leasehold improvements and the purchase and sale of available-for-sale securities. Net cash used in investment activities increased $5.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, due to a $4.5 million increase in the acquisition of property and equipment and leasehold improvements related to the relocation of several investment teams during 2018.
Financing activities consist primarily of partnership distributions to non-controlling interests, dividend payments to holders of our Class A common stock, proceeds from the issuance of Class A common stock in follow-on offerings, payments to purchase Holdings partnership units, and payments of amounts owed under the tax receivable agreements. Net cash used by financing activities increased $11.0 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to a $34.5 million increase in dividends paid to holders of our Class A common stock, and a $5.9 million increase in payments of amounts owed under the TRAs, partially offset by a $26.2 million increase in contributions from non-controlling interests in our consolidated investment products, and a $3.5 million decrease in distributions to limited partners.
During the nine months ended September 30, 2018, the Company determined that it no longer has a controlling financial interest in an investment product that was previously consolidated. The deconsolidation of the investment product resulted in a $39.8 million decrease in cash and cash equivalents.
Certain Contractual Obligations
As of September 30, 2018, there have been no material changes to our contractual obligations outside the ordinary course of business from those listed in the “Certain Contractual Obligations” table and related notes to the table in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 21, 2018, except for the changes in the TRA liability during the year.
As previously discussed in this report, the TRA liability decreased from $385.4 million at December 31, 2017 to $369.0 million at September 30, 2018 as a result of current year TRA payments. Amounts payable under the TRAs will increase upon exchanges of Holdings units for our Class A common stock or sales of Holdings units to us, with the increase representing 85% of the estimated future tax benefits, if any, resulting from such exchanges or sales and decrease when payments are made. The actual amount and timing of payments associated with our existing payable under the TRAs or future exchanges or sales, and associated tax benefits, will vary depending upon a number of factors as described under “Liquidity and Capital Resources.” As a result, the timing of payments by period is currently unknown. During the nine months ended September 30, 2018, we made payments of $36.1 million related to the TRAs. We do not intend to make any additional TRA payments in 2018.
Off-Balance Sheet Arrangements
As of September 30, 2018, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity or capital resources.
Critical Accounting Policies and Estimates
There have been no updates to our critical accounting policies from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2017, except for the impact of adopting the new revenue recognition standard.

Revenue Recognition

Investment management fees are generally computed as a percentage of assets under management and are recognized as revenue at the end of each distinct service period. Fees for providing investment management services are computed and billed in accordance with the underlying investment management agreements, which is generally on a monthly or quarterly basis. Investment management fees are presented net of cash rebates and fees waived pursuant to contractual expense limitations of the funds or voluntary waivers.

A number of investment management agreements provide for performance-based fees or incentive allocations, collectively “performance fees”. Performance fees, if earned, are recognized upon completion of the contractually determined measurement period, which is generally quarterly or annually. Performance fees generally are not subject to claw back as a result of performance declines subsequent to the most recent measurement date.

Artisan accounts for asset management services as a single performance obligation that is satisfied over time, using a time-based measure of progress to recognize revenue. Customer consideration is variable due to the uncertainty of the value of assets under management during each distinct service period. At the end of each quarter, Artisan records revenue for the actual amount of investment management fees for that quarter because the uncertainty has been resolved.


42

Table of Contents

Performance fees are subject to the uncertainty of market volatility, and as a result, the entire amount of the variable consideration related to performance fees is constrained until the end of each measurement period. At the end of the quarterly or annual measurement period, revenue is recorded for the actual amount of performance fees earned during that period because the uncertainty has been resolved.

The investment management fees that we receive are calculated based on the values of the securities held in the accounts that we manage for our clients. For our U.S.-registered mutual fund and UCITS clients, including Artisan Funds and Artisan Global Funds, and for our own sponsored private funds, our fees are based on the values of the funds’ assets as determined for purposes of calculating their net asset values. Securities held by Artisan Funds and Artisan Global Funds are generally valued at closing market prices, or if closing market prices are not readily available or are not considered reliable, at a fair value determined under procedures established by the fund’s board (fair value pricing). Values of securities determined using fair value pricing are likely to be different than they would be if only closing market prices were used.

For separate account clients, our fees may be based, at the client’s option, on the values of the securities in the portfolios we manage as determined by the client (or its custodian or other service provider) or by us in accordance with valuation procedures we have adopted. The valuation procedures we have adopted generally use closing market prices in the markets in which the securities trade, without adjustment for subsequent events except in unusual circumstances. We believe that our fees based on valuations determined under our procedures are not materially different from the fees we receive that are based on valuations determined by clients, their custodians or other service providers.

With the exception of the assets managed by our Credit team (which represented approximately 2.8% of our assets under management at September 30, 2018), the portfolios of Artisan Funds and Artisan Global Funds, as well as the portfolios we manage for our separate account clients, are invested principally in publicly-traded equity securities for which public market values are readily available, with a portion of each portfolio held in cash or cash-like instruments.
New or Revised Accounting Standards
See Part I, Item 1, Unaudited Consolidated Financial Statements - Note 2, “Summary of Significant Accounting Policies.”
Item 3. Qualitative and Quantitative Disclosures Regarding Market Risk
There have been no material changes in our Quantitative and Qualitative Disclosures Regarding Market Risk from those previously reported in our Form 10-K for the year ended December 31, 2017.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at September 30, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2018, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

43

Table of Contents

Part II — Other Information
Item 1. Legal Proceedings
In the normal course of business, we may be subject to various legal and administrative proceedings. Currently, there are no legal or administrative proceedings that management believes may have a material effect on our consolidated financial position, cash flows or results of operations.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our latest annual report on Form 10-K, which is accessible on the SEC’s website at www.sec.gov.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
As described in Note 8, “Stockholders’ Equity”, to the Unaudited Consolidated Financial Statements included in Part I of this report, upon termination of employment with Artisan, an employee-partner’s Class B common units are exchanged for Class E common units and the corresponding shares of APAM Class B common stock are canceled. APAM issues the former employee-partner a number of shares of APAM Class C common stock equal to the former employee-partner’s number of Class E common units. Class E common units are exchangeable for Class A common stock subject to the same restrictions and limitations on exchange applicable to the other common units of Holdings. There were no such issuances during the three months ended September 30, 2018.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No.
 
Description
31.1
 
31.2
 
32.1
 
32.2
 
101
 
The following Extensible Business Reporting Language (XBRL) documents are collectively included herewith as Exhibit 101: (i) the Unaudited Condensed Consolidated Statements of Financial Condition as of September 30, 2018 and December 31, 2017; (ii) the Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017; (iii) the Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017; (iv) the Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2018 and 2017; (v) the Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (vi) the Notes to Unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2018 and 2017.

44

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Artisan Partners Asset Management Inc.
Dated: October 31, 2018
By:
/s/ Eric R. Colson
Eric R. Colson
President, Chief Executive Officer and Chairman of the Board
(principal executive officer)
 
/s/ Charles J. Daley, Jr.
Charles J. Daley, Jr.
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)



45