Virtus Investment Partners, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Virtus is an investment manager serving retail and institutional clients. Its revenue is primarily driven by fees based on assets under management (AUM). The unaudited interim results are not necessarily indicative of full-year results.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $252.4 million | $216.9 million | +16.4% |
| Operating income | $65.6 million | $62.1 million | +5.5% |
| Operating margin | 26.0% | 28.6% | Down 2.7 percentage points |
| Net income attributable to Virtus | $33.1 million | $36.6 million | −9.6% |
| Diluted EPS | $4.22 | $4.54 | −7.0% |
| Net cash from operating activities | −$81.8 million | $150.2 million | Decrease of $231.9 million |
Investment management fees rose 19.4% to $206.8 million, largely reflecting higher average AUM following acquisitions. Average AUM increased 23.2% to $190.1 billion. Expense growth outpaced revenue growth: operating expenses rose 20.8% to $186.9 million, including higher employment, other operating and amortization expenses. The higher 2022 tax rate (30.0% versus 22.5%) also weighed on earnings. Other expense increased, including losses on company investments and consolidated investment products (CIP).
Quarter-end AUM was $183.3 billion, up 8.6% year over year but down 2.1% from December 31, 2021. Q1 net flows were outflows of $2.0 billion, versus inflows of $2.5 billion a year earlier; negative market performance reduced AUM by $16.5 billion. Total sales were $9.4 billion, down 11.1% from $10.6 billion.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $225.2 million at March 31, down from $378.9 million at year-end. The balance sheet separately reports $110.0 million of CIP cash, which is distinct from the company’s cash.
- Investments were $116.8 million. Total equity was $824.2 million, compared with $836.6 million at December 31.
- Balance-sheet debt, net of issuance costs, was $266.0 million. The term loan had $273.6 million outstanding before $7.7 million of debt issuance costs; the $175 million revolving facility had no borrowings. The term loan matures in September 2028.
- Operating cash use was attributed primarily to lower sales of CIP investments and higher compensation and benefit payments. Investing cash use was $22.6 million, including the Stone Harbor acquisition; financing cash use was $145.8 million, including $33.0 million of contingent-consideration payments, $30.0 million of share repurchases and dividends.
- The company declared a quarterly dividend of $1.50 per share. It repurchased 125,452 shares for $30.0 million during the quarter.
Material changes, outlook and risks
- Virtus completed its acquisition of Stone Harbor on January 1, 2022. Initial consideration was $29.4 million; the acquired business’s Q1 revenue and operating income were not material. Westchester, acquired in October 2021, also contributed to the comparison. Management attributed much of the increase in average AUM and fees to these transactions.
- Management reported $14.5 billion of AUM added from Stone Harbor and Westchester since March 2021, while market performance and net outflows partly offset that contribution. Average fee earned across products declined 1.2 basis points year over year, partly because acquired assets had lower fee rates.
- No specific earnings, revenue or AUM guidance was provided in the supplied filing text. The company cautioned that forward-looking statements depend on uncertain assumptions, including AUM, flows, markets and operating cash flows.
- Key stated risks include market-driven AUM declines, net client withdrawals, competition, retaining personnel, distribution relationships, regulatory or legal matters, technology disruptions, investment losses, debt covenant or payment obligations, and realizing benefits from strategic transactions. The company said legal and regulatory matters were not expected to have a material adverse effect based on information then available, but noted outcomes remain uncertain.
- Consolidated CLOs held about $2.0 billion of investments and $2.2 billion of notes at par; these balances are largely investment-product obligations, not ordinary corporate debt. CLO bank-loan fair value was $52.4 million below unpaid principal, with no material collateral assets in default reported.
Important facts for investors to verify
- Whether AUM flows improve and how continued market movements affect fee revenue and client assets.
- Whether acquired businesses sustain expected assets, revenues and cost synergies, and how acquisition-related amortization and contingent consideration evolve.
- The drivers and durability of lower operating margins, including compensation, professional fees, amortization and the higher effective tax rate.
- Cash generation after seasonal incentive-compensation payments, acquisitions, dividends, repurchases and contingent-consideration obligations.
- Corporate debt terms and capacity, as well as the distinct risks and limited economic exposure associated with consolidated investment products.