Virtus Investment Partners, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Virtus provides investment management and related services to retail and institutional clients. Financial statements are unaudited.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue | $80.3 million | $103.8 million; down 22.7% |
| Operating income | $12.8 million | $24.5 million; down 48.0% |
| Operating margin | 15.9% | 23.6% (calculated from reported revenue and operating income) |
| Net income attributable to common stockholders | $12.4 million | $19.3 million; down 36.1% |
| Diluted EPS | $1.45 | $2.11 |
| Cash dividends declared per share | $0.45 | $0.45 |
| Operating cash flow | $(38.4) million | $(24.9) million |
| Cash and cash equivalents, March 31 | $50.4 million | $87.6 million at December 31, 2015 |
| Assets under management (AUM) | $45.7 billion | $54.8 billion at March 31, 2015; down 16.7% |
Average AUM was $45.7 billion, down 18.1% year over year; the average fee rate declined 1.8 basis points to 49.7 basis points. Total net flows were outflows of $2.6 billion, versus $2.2 billion of outflows in Q1 2015. Market performance added $1.1 billion to AUM in Q1 2016.
Operating expenses fell 14.8% to $67.5 million, but not enough to offset lower revenue. The prior-year quarter included a $5.2 million regulatory loss contingency, settled and paid in 2015. The effective tax rate rose to 38.9% from 35.5%.
Liquidity, debt and capital
- At March 31, Virtus reported $50.4 million of cash and $79.5 million of marketable securities. It had no borrowings under its $75 million corporate credit facility, which expires in September 2017; the company reported covenant compliance and capacity to draw the full facility.
- Virtus reported no debt outstanding that was a general obligation of the company. Separately, a consolidated special-purpose entity had $155.5 million outstanding under a facility secured by that entity’s assets. Virtus’s $40 million contribution is first-loss protection; recourse to Virtus is limited to its investment in the entity.
- Q1 cash uses included $15.0 million of share repurchases and $3.9 million of dividends paid. Net cash decreased $38.1 million to $59.3 million, including cash of consolidated investment products.
- Operating cash outflow increased year over year, primarily reflecting lower net income and investment-related activity, as well as seasonal compensation and working-capital payments. Virtus said liquidation of three open-end funds was expected to return approximately $114 million of seed capital in Q2 2016.
Material changes, outlook and risks
- Revenue weakness primarily reflected lower average AUM and lower average fees. Open-end fund AUM declined 24.9% year over year; fund investment-management fees fell 23.8%. Institutional AUM rose 3.2%.
- Of Q1 net outflows, $1.5 billion came from the Emerging Markets Opportunities Fund following an organizational change at its subadviser. Virtus reported continued outflows from that fund during April 2016.
- Management provided no specific full-year earnings, revenue or AUM guidance. It identified AUM declines, client withdrawals or mandate losses, market volatility, distribution relationships, regulatory matters, litigation and access to capital among business risks.
- Two putative securities class actions relating to funds formerly subadvised by F-Squared remained pending, with motions to dismiss pending. The company said it intended to defend them and did not consider a material loss probable and reasonably estimable. It cautioned that legal and regulatory outcomes remain uncertain.
- Consolidation changes, including ten additional sponsored products consolidated during the quarter and two deconsolidated, affected reported balance-sheet amounts. The company stated that consolidation or deconsolidation of investment products does not affect net income attributable to stockholders; fund-related assets and liabilities should not be read as wholly available to Virtus.
- Management reported disclosure controls were effective as of March 31, 2016, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent AUM and net-flow trends, especially continued redemptions from the Emerging Markets Opportunities Fund.
- Whether the expected $114 million seed-capital return occurred in Q2 and its effect on liquidity and investment levels.
- The extent to which lower revenue and fee rates persist, and whether expense reductions can offset further AUM pressure.
- The status and potential exposure from the F-Squared-related lawsuits and other regulatory matters.
- Distinguish Virtus’s corporate liquidity and debt from consolidated investment-product balances, including the SPE facility and its first-loss exposure.