Virtus Investment Partners, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited results compared with Q1 2011; balance-sheet figures compared with December 31, 2011. Virtus provides investment management and related services to retail and institutional clients.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $62.4 million | $44.1 million; up 41.4% |
| Investment management fees | $41.8 million | $28.8 million; up 45.1% |
| Operating income | $8.0 million; 12.7% revenue margin | $4.4 million; 10.1% margin |
| Net income | $5.5 million | $4.3 million |
| Net income attributable to common stockholders | $5.4 million; diluted EPS $0.68 | $3.0 million; diluted EPS $0.43 |
| Cash flow from operations | $(9.4) million | $(6.8) million |
| Cash and cash equivalents | $32.8 million | $45.3 million at Dec. 31, 2011 |
| Marketable securities | $16.3 million | $15.0 million at Dec. 31, 2011 |
| Working capital | $55.8 million | $45.9 million at Dec. 31, 2011 |
| Long-term debt | $15.0 million | Unchanged from Dec. 31, 2011 |
Operating expenses rose 37.2% to $54.4 million, less than revenue growth. Operating cash outflow reflected incentive compensation payments and the timing of operating expenses; the company paid $24.8 million in Q1 2012 incentives. Investing and financing activities used $1.6 million and $1.5 million, respectively. Cash declined by $12.4 million during the quarter.
Business trends and changes versus prior periods
- Total assets under management (AUM) were $38.0 billion at March 31, up 10.0% from year-end 2011 and 19.2% from March 31, 2011. Q1 average AUM was $36.3 billion, up 18.2% year over year.
- Quarterly net flows were $1.9 billion and market appreciation was $2.2 billion. Total sales were $3.5 billion, up 34.7%; long-term open-end fund sales were $2.9 billion versus $2.2 billion a year earlier.
- Growth was concentrated in mutual funds: mutual fund AUM rose to $27.8 billion from $20.7 billion year over year. Institutional AUM declined to $4.6 billion from $5.6 billion.
- Higher average AUM and fee rates drove management-fee growth. Management cited a greater share of higher-fee equity assets and the 2011 internalization of the Newfleet Multi-Sector team as factors in higher average fees.
- Distribution and administration expenses increased 70.8%, including $3.9 million of VGI closed-end fund structuring costs, higher trail commissions, and increased deferred commission amortization. Employment expense rose 34.5%, including costs for the Newfleet team and higher variable compensation.
- Income tax expense was $3.6 million versus $0.3 million, with estimated effective tax rates of 40.0% and 6.2%. The comparison reflects the 2011 valuation allowance and its release in Q4 2011; the company now recognizes taxes on substantially all operating income at applicable statutory rates.
Capital, outlook, risks and unusual items
- On January 6, 2012, BMO’s 35,217 Series B preferred shares converted into 1,349,300 common shares. Preferred shares were retired; no preferred dividend was paid in Q1 2012. This increased common shares outstanding and changed EPS allocation.
- The $30 million credit facility had $15 million drawn and $15 million of remaining capacity at March 31. It matures in September 2013; the stated rate was 2.625%, and the company reported compliance with all financial covenants.
- Management said working capital and operating cash flows should be more than adequate for short-term capital requirements. It identified growth investment, fund seeding, infrastructure, potential share repurchases and acquisitions as possible uses of capital. No specific earnings or revenue guidance was provided.
- A subsequent April 20 RSU vesting resulted in $9.1 million of employee tax withholding paid by the company and 114,345 shares withheld through net settlement.
- Key risks include market declines and volatility, weak investment performance and resulting outflows, dependence on distribution intermediaries and third parties, competition and fee pressure, retention of key personnel, regulatory or legal developments, financing availability, goodwill or intangible impairment, and debt-covenant compliance.
- The company reported routine litigation, arbitration and regulatory examinations or investigations; management did not believe their outcomes were likely to materially adversely affect consolidated financial statements, but noted uncertainty and potential period-specific effects.
- Market-risk sensitivity: a 10% change in marketable securities’ fair value would change quarterly net income by approximately $1.4 million and comprehensive income by $1.6 million. A hypothetical 300-basis-point interest-rate change would affect quarterly interest expense by approximately $0.1 million.
Important facts for investors to verify
- Whether positive net flows and sales persist, and how much AUM growth depends on market appreciation rather than flows.
- Whether the higher revenue and operating margin can be sustained as fund-launch and distribution costs evolve.
- The effects of the preferred-stock conversion, equity awards and RSU tax settlements on share count, EPS and cash.
- Cash generation after seasonal incentive payments, remaining credit-facility availability, and the September 2013 maturity and covenant terms.
- Future effective tax rates following the prior-year valuation allowance release, and developments in legal or regulatory matters.