Virtus Investment Partners, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. Virtus is an investment manager whose revenues are primarily asset-based fees. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $244.0 | $132.9 | $460.9 | $277.5 |
| Operating income | $86.4 | $26.6 | $148.6 | $51.2 |
| Net income attributable to Virtus | $63.0 | $11.3 | $99.6 | $7.0 |
| Diluted earnings per share | $7.86 | $1.43 | $12.39 | $0.88 |
| Operating margin | 35.4% | 20.0% | 32.2% | 18.5% |
- Q2 revenue rose 83.6%; investment management fees increased 75.0%. Management attributed growth mainly to higher average assets from market performance, positive flows, and the AllianzGI partnership.
- Q2 operating expenses increased 48.3% to $157.6 million, including higher employment, distribution and asset-based expenses, and amortization. Profit-based compensation contributed to higher employment costs.
- At June 30, assets under management were $178.6 billion, up 64.7% year over year and 35.1% from year-end 2020. Q2 net flows were $1.3 billion, down from $2.8 billion a year earlier; first-half net flows were $3.8 billion versus $1.4 billion.
- Six-month operating cash flow was $239.2 million, compared with cash used of $449.7 million in 2020. The swing primarily reflected higher net sales of investments by consolidated investment products (CIP); it should not be read as solely recurring operating cash generation.
- Cash and cash equivalents were $275.4 million, and investments were $81.8 million. Virtus had $193.8 million of principal outstanding under its term loan and no revolver borrowings; the $100 million revolving facility was available. Balance-sheet debt was $190.2 million net of debt issuance costs.
- Cash dividends paid in the first half were $13.7 million; common share repurchases totaled $12.5 million. The quarterly dividend declared was $0.82 per share. Total equity was $789.8 million.
Material changes and notable items
- The AllianzGI strategic partnership was finalized February 1, 2021. Virtus took on advisory, distribution and/or administration responsibilities for $29.5 billion of assets and reported an additional $3.8 billion of other fee-earning assets associated with the partnership. A $137.7 million liability was recorded for estimated future revenue-participation payments over seven years; acquired assets included $120.4 million of definite-lived intangibles and $25.0 million of goodwill.
- Virtus agreed to acquire Westchester Capital Management for an expected $135 million at closing, with a possible additional retention payment of up to $20 million. Closing was expected in the second half of 2021, subject to conditions and approvals. It also agreed to acquire Stone Harbor Investment Partners, with closing expected near year-end 2021, subject to conditions and approvals.
- Interest expense on Virtus debt fell year over year, reflecting lower average debt and interest rates. CIP interest income and expense also changed materially; CIP balances primarily relate to investment products and should be distinguished from Virtus corporate debt and earnings.
- The six-month effective tax rate was 22.6%, compared with 50.9% in 2020, primarily because prior-year valuation allowances on unrealized investment losses did not recur.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings, revenue, AUM or flow guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management noted continuing uncertainty from COVID-19 and market conditions. Key stated risks include AUM declines and net outflows, loss or renegotiation of advisory relationships, acquisition execution and benefits, competition, retention of key personnel, technology disruptions, investment losses, regulatory or legal matters, debt covenants and payments, and potential goodwill or intangible-asset impairment.
- Virtus reported that legal and regulatory matters were not expected, based on information then available, to have a material adverse effect; outcomes remain uncertain and an adverse development could affect particular periods. No material changes to previously reported risk factors or contractual obligations were identified.
- Virtus’s exposure to consolidated CLOs is described as limited to its beneficial interests and accrued management fees; CLO notes are payable from the related CLO assets. The filing reports $2.1 billion of CIP notes payable, not equivalent to corporate recourse debt. CLO loan fair value was $35.5 million below unpaid principal, with no material collateral assets in default.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2021, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether AUM growth and positive flows persist, particularly given the Q2 decline in net flows versus the prior year.
- Acquisition closing status, integration costs and benefits for Westchester and Stone Harbor, and the economics of the AllianzGI revenue-participation liability.
- How much of reported cash flow and earnings growth is attributable to recurring fee operations versus CIP investment and financing activity, market gains, and noncontrolling interests.
- Corporate debt repayment capacity, availability and expiry of the revolving facility, and the distinction between corporate debt and nonrecourse CIP obligations.
- Market, regulatory, legal, COVID-related and acquisition risks, as well as the assumptions supporting the carrying values of goodwill, intangibles and contingent consideration.