Virtus Investment Partners, Inc. — Q2 2012 Form 10-Q
Business and period. Virtus is an investment manager serving retail and institutional clients through mutual funds, separately managed accounts, insurance funds and institutional products. This unaudited filing covers the quarter and six months ended June 30, 2012; comparisons are with the same 2011 periods unless noted. Financial amounts below are in millions except per-share data.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $66.8 | $48.9 | $129.2 | $93.0 |
| Operating income | $14.3 | $3.5 | $22.2 | $7.9 |
| Net income | $8.4 | $3.2 | $13.8 | $7.5 |
| Net income attributable to common stockholders | $8.4 | $2.0 | $13.8 | $5.0 |
| Diluted EPS | $1.04 | $0.30 | $1.71 | $0.73 |
| Operating margin | 21.3% | 7.1% | 17.2% | 8.5% |
| Net margin | 12.5% | 6.5% | 10.7% | 8.1% |
Second-quarter revenue rose 36.6%; investment management fees increased 42.6%, reflecting higher average fee-earning assets and higher average fee rates. Operating expenses rose 15.7% in the quarter, slower than revenue growth. The six-month effective tax rate was 40.0%, versus 8.5% in 2011, primarily reflecting the prior-year change in the assessment of deferred-tax-asset realizability.
- Assets and flows: AUM was $38.8 billion at June 30, up 16.5% year over year. Q2 net flows were $1.4 billion; first-half net flows were $3.3 billion. First-half market appreciation added $2.0 billion, while a structured-finance product liquidation reduced AUM by about $0.4 billion.
- Cash flow: First-half operating cash flow was $16.2 million, versus $0.1 million in 2011; investing cash outflow was $2.5 million and financing cash outflow was $10.2 million. Cash increased to $48.7 million from $45.3 million at year-end.
- Liquidity and debt: Working capital was $64.4 million, compared with $45.9 million at December 31, 2011. Long-term debt remained $15.0 million under a $30.0 million credit facility maturing in September 2013. The company reported compliance with all financial covenants and capacity to draw the undrawn facility amount.
Material changes and notable items
- All Series B preferred shares held by BMO converted into 1,349,300 common shares on January 6, 2012. The preferred shares were retired; preferred dividends and earnings allocations no longer apply after conversion. The higher common share count affects EPS comparisons.
- Growth was concentrated in retail: long-term open-end mutual fund AUM increased to $21.1 billion from $15.5 billion year over year, while institutional AUM declined to $4.2 billion from $5.6 billion. The filing attributes much of the inflow strength to long-term open-end funds.
- First-half distribution and administration expense included $3.9 million of closed-end fund structuring costs for the VGI launch. First-half employment expense also reflected the Newfleet team, higher incentive compensation and payroll-related taxes.
- The company paid $11.2 million in employee tax withholding associated with net share settlement of restricted stock units. It made no share repurchases in the first half of 2012.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said working capital and operating cash flows were expected to meet short-term capital requirements and identified growth investment, fund seeding, infrastructure, potential share purchases and acquisitions as uses of capital. Future cash needs depend on operating performance, AUM levels and economic conditions.
Key disclosed risks include market declines and volatility affecting fee-generating AUM, investment underperformance and client outflows, competition and fee pressure, reliance on distribution and other third parties, retention of key personnel, regulatory or legal developments, possible goodwill or intangible impairment, financing availability and debt covenant compliance. The company reported routine litigation, arbitration and regulatory matters; it did not expect them, individually or collectively, to materially adversely affect the financial statements, but noted outcomes are uncertain. A 10% change in marketable-securities fair value was estimated to change net income by $1.3 million and comprehensive income by $1.5 million; a hypothetical 300-basis-point interest-rate change would change interest expense by about $0.1 million for the reported three- and six-month periods.
Important facts for investors to verify
- Whether positive fund flows and higher fee rates continue, and how market movements affect AUM and fee revenue.
- The sustainability of expense growth and margins, including distribution costs, incentive compensation and fund-launch costs.
- The impact of the 40.0% first-half tax rate and management’s assumptions regarding deferred tax assets.
- Credit-facility maturity, remaining borrowing capacity and continued compliance with covenants.
- Developments in legal or regulatory matters and the effect of RSU withholding payments and equity issuance on cash and per-share results.