Virtus Investment Partners, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Figures are unaudited; dollar amounts are U.S. dollars. Virtus provides investment management and related services, with revenue primarily tied to assets under management (AUM).
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $132.9M | $140.5M | $277.5M | $271.2M |
| Operating income | $26.6M | $30.1M | $51.2M | $51.1M |
| Net income attributable to common stockholders | $11.3M | $24.8M | $7.0M | $44.5M |
| Diluted EPS | $1.43 | $3.26 | $0.88 | $5.87 |
- Q2 operating margin was approximately 20.0%, down from 21.4% a year earlier, based on reported operating income and revenue.
- Q2 revenue fell 5.4% year over year, primarily due to lower average AUM in open-end funds. Investment management fees declined 3.5%; distribution and service fees fell 16.3%.
- First-half revenue rose 2.3%, but common-stockholder net income fell 84.3%. Results included a higher effective tax rate and substantially weaker investment/CIP results.
- Q2 other expense, net, was $0.4M versus $12.5M of other income a year earlier. First-half other expense was $16.0M versus $14.4M of income. CIP loan valuation changes were a major factor.
AUM, cash flow, debt and liquidity
- Period-end AUM was $108.5B, up 3.3% from June 2019 and down 0.4% from year-end 2019. Second-quarter long-term net flows were positive $2.5B; first-half long-term net flows were positive $1.3B. First-half market performance reduced long-term AUM by $1.3B, following a $15.2B second-quarter recovery after a $16.6B first-quarter decline.
- Retail separate accounts and institutional accounts grew year over year; ETFs, closed-end funds and open-end funds had lower ending AUM. Average Q2 long-term AUM was $96.9B versus $100.5B a year earlier.
- Cash and cash equivalents were $168.3M, down from $221.8M at December 31, 2019; company investments were $61.3M. Debt on the balance sheet was $234.8M, net of issuance costs. Term-loan principal outstanding was $240.7M; the $100M revolving facility was undrawn. The term loan matures June 2024.
- Virtus repaid $45M of term-loan principal in the first half, including retiring $10M principal for $8.9M under the agreement. It reported a $0.7M gain on debt extinguishment.
- Operating cash flow was negative $449.7M for the first half, compared with negative $143.7M a year earlier. Management attributed the change primarily to increased net investment purchases by consolidated investment products (CIP), not ordinary corporate operating requirements. Financing cash flow was positive $370.6M, substantially reflecting CIP borrowing activity. Cash, cash equivalents and restricted cash totaled $252.1M at period-end, including CIP cash and pledged cash.
Material developments, outlook and risks
- COVID-19 caused substantial market volatility and uncertainty. Management said the company’s liquidity and capital resources had not been materially affected through June 30, 2020, but noted further AUM and investment-value volatility could affect revenue and earnings. No numerical earnings or AUM guidance was provided.
- The first-half estimated effective tax rate was 50.9%, compared with 20.5% in 2019, primarily because unrealized losses on certain investments required a valuation allowance.
- Six consolidated CLOs held approximately $2.2B of investments at June 30; their bank-loan fair value was $219.3M below unpaid principal, with no material collateral assets in default. The CLO notes are recourse to CLO assets, and Virtus says its exposure is limited to its beneficial interests and accrued management fees.
- On July 4, 2020, Virtus agreed to advise, distribute and/or administer certain Allianz Global Investors U.S. assets. The transaction remained subject to board and shareholder approvals and was expected to close near year-end 2020.
- Virtus converted its mandatory convertible preferred stock into common stock in February 2020. It declared a $0.67-per-share common dividend payable in August and repurchased $17.5M of common shares during the first half.
- Risks highlighted include continuing COVID-19 disruption, market-driven AUM declines, remote-work and cybersecurity challenges, dependence on service providers, financing access, regulatory/legal matters and investment losses. The filing says legal matters are not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- Whether positive flows and second-quarter market recovery persist, especially across product types, and how AUM mix affects fee revenue.
- How CLO asset values, leverage, refinancing activity and related noncontrolling interests affect reported earnings and cash-flow interpretation.
- Whether the unusually high first-half tax rate and investment-related valuation allowance continue to affect future results.
- Progress, approvals, expected economics and closing conditions for the AllianzGI arrangement.
- Debt repayment, available liquidity and capital returns, distinguishing corporate cash and debt from assets and financing of consolidated investment products.