Virtus Investment Partners, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Virtus provides investment management and related services to retail and institutional clients; revenue depends primarily on assets under management (AUM) and asset-based fees.
Financial and operating performance
- Q2 revenue: $96.1 million, up 43.9% year over year. Investment management fees rose 43.7% to $64.5 million. For the first half, revenue was $182.3 million, up 41.1%.
- Profit: Q2 operating income was $26.9 million, up 88.6%; operating margin was approximately 28.0%, versus 21.3% a year earlier. Net income was $14.8 million, compared with $8.4 million. Reported net income attributable to common stockholders was $15.4 million, or $1.97 basic and $1.91 diluted per share, versus $8.4 million and $1.08/$1.04. First-half net income attributable to common stockholders was $29.3 million, or $3.75 basic and $3.64 diluted per share.
- Expenses and other items: Q2 total operating expenses increased 31.8% to $69.3 million, mainly reflecting higher compensation and distribution costs. Other expense was $3.4 million, primarily from unrealized losses on investments held by consolidated sponsored funds.
- AUM and flows: Period-end AUM was $52.7 billion, up 35.6% from June 2012 and 15.8% from December 2012. Q2 net flows were $2.5 billion, partly offset by $0.9 billion of market depreciation; first-half net flows were $6.2 billion, with $1.3 billion of market appreciation. Long-term open-end mutual fund sales were $5.1 billion in Q2, up 82.1% year over year.
- Cash flow: First-half operating cash flow was $22.2 million, versus $16.2 million. Investing activities used $5.5 million and financing activities used $9.3 million. Cash and cash equivalents ended June at $70.9 million, up from $63.4 million at year-end.
- Liquidity and debt: Working capital was $146.7 million, versus $102.4 million at December 31, 2012. Long-term debt was $15.0 million, unchanged. The $75 million revolving facility matures in September 2017; the company reported covenant compliance and available borrowing capacity.
Changes, outlook and risks
- Management attributed revenue growth mainly to higher average AUM, driven by strong mutual-fund inflows, prior market appreciation, and the Rampart acquisition. Higher AUM also increased distribution costs and variable compensation.
- The company acquired a 24% noncontrolling interest in Kleinwort Benson Investors International for $3.4 million in April 2013. It also consolidated one additional sponsored mutual fund and deconsolidated three; management said consolidation did not affect net income attributable to stockholders.
- The board extended the share-repurchase authorization in May 2013. During the first half, Virtus repurchased 80,000 shares for approximately $15.0 million; 375,000 shares remained authorized at June 30.
- No specific earnings or revenue guidance was provided. Management said working capital and operating cash flows should meet short-term capital needs, and identified growth investment, fund seeding, acquisitions, repurchases, infrastructure, and debt payments as expected uses of capital.
- Key stated risks include AUM declines from markets, performance or redemptions; reliance on distribution relationships and key personnel; fee pressure and competition; regulatory or legal matters; technology-service interruptions; and impairment of goodwill or intangibles. The filing said legal and regulatory matters were not expected to have a material adverse effect, while noting outcomes are uncertain. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether strong sales and net flows continue, particularly given the concentration of open-end fund sales in the Emerging Markets Opportunities Fund; new investments in that fund had been limited during Q1.
- How market moves, redemptions, and product mix affect fee-earning AUM and margins; Q2 market depreciation partially offset flows.
- The nature and persistence of unrealized losses in consolidated sponsored investment products and the effects of fund consolidation or deconsolidation.
- Cash-flow quality, including the $16.9 million deferred-tax-asset utilization reflected in first-half operating cash flow, and the continued availability of revolving-credit capacity.
- The reported reconciliation of net income to net income attributable to common stockholders: Q2 common-attributable income exceeds consolidated net income because of the filing’s reported noncontrolling-interest allocation; confirm the presentation in the financial statements.