Virtus Investment Partners, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Virtus is an investment manager whose revenues are primarily asset-based fees. Financial comparisons below are year over year unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Revenue | $225.3 million | $244.0 million | Down 7.7% |
| Operating income | $56.7 million | $86.4 million | Down 34.4% |
| Operating margin | 25.1% | 35.4% | Down 10.3 percentage points |
| Net income attributable to Virtus | $17.4 million | $63.0 million | Down 72.4% |
| Diluted EPS | $2.29 | $7.86 | Down 70.9% |
For the first six months, revenue increased 3.7% to $477.7 million, while operating income declined 17.7% to $122.2 million, net income attributable to Virtus fell 49.3% to $50.5 million, and diluted EPS fell 47.2% to $6.54. The six-month effective tax rate was 38.4%, versus 22.6% a year earlier; Virtus attributed the increase primarily to valuation allowances on tax effects of unrealized investment losses.
Assets, flows, liquidity, and debt
- Assets under management (AUM) were $155.4 billion at June 30, down 13.0% from a year earlier and 17.0% from year-end 2021. From year-end, $39.3 billion of negative market performance and $6.7 billion of net outflows were partly offset by $14.7 billion added through Stone Harbor.
- Q2 total sales were $7.9 billion, down 17.4%; net flows were negative $4.8 billion, compared with positive $1.5 billion in Q2 2021. First-half net flows were negative $6.7 billion, versus positive $4.0 billion.
- Cash and cash equivalents were $250.5 million at quarter-end, down from $378.9 million at December 31, 2021. Six-month operating cash flow was $37.6 million, versus $239.2 million a year earlier. Management cited reduced sales of investments by consolidated investment products (CIP) and higher compensation and benefit payments.
- Virtus reported $255.8 million of debt on its balance sheet; $262.9 million was outstanding on the term loan before $7.1 million of debt issuance costs. It repaid $11.4 million during the first half. The $175 million revolving facility had no borrowings at June 30; the term loan matures in September 2028 and the revolver in September 2026.
- First-half investing cash outflow was $24.4 million, including the Stone Harbor acquisition. Financing cash outflow was $240.2 million, including $70.0 million of share repurchases, $24.2 million of dividends paid, $33.0 million of contingent-consideration payments, and debt repayment.
Material changes and notable items
- Q2 revenue and operating income declined as lower average AUM and net outflows weighed on results. Investment management fees fell 4.4% in Q2, while distribution and service fees fell 26.8% and administration and shareholder service fees fell 15.1%.
- Operating expenses rose 7.0% in Q2. Higher other operating expenses and amortization—partly related to acquisitions—more than offset lower distribution-related expenses. First-half amortization expense increased 47.7% to $29.3 million.
- Net investment results were adverse: Q2 realized and unrealized losses were $10.5 million on Virtus investments and $21.7 million on CIP. For the first half, CIP losses were $35.0 million, primarily reflecting lower leveraged-loan values, partly offset by changes in the value of CLO notes payable.
- Stone Harbor was acquired on January 1, 2022, for $29.4 million of initial consideration, including $28.2 million cash and $1.2 million contingent consideration. Its reported Q2 and first-half revenue and operating income were not material. Virtus also cited Westchester, acquired in October 2021, as a contributor to higher expenses and amortization.
- The company declared a $1.50-per-share quarterly dividend in May. It repurchased 347,355 shares for $70.0 million during the first half and had 932,094 shares authorized for future repurchase at June 30.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management’s forward-looking statements depend on AUM, net flows, markets, operating cash flow, and access to borrowing, and are subject to substantial uncertainty. Principal disclosed risks include market declines and AUM reductions, client withdrawals or contract terminations, competition, acquisition integration, personnel retention, regulatory or legal matters, technology interruptions, investment losses, and the ability to meet debt obligations and maintain dividends.
Virtus reported $139.1 million of redeemable noncontrolling interests and $133.6 million of contingent consideration on its balance sheet. It recorded a $2.9 million Q2 expense from remeasurement of contingent consideration, attributed primarily to higher future revenue projections and time value of money. Management said existing legal and regulatory matters were not expected to have a material adverse effect based on information then available, but noted outcomes are inherently uncertain. CIP included $1.9 billion of notes payable and substantial investment assets; the filing states Virtus’s exposure to consolidated investment products is limited to its beneficial interests and fees, rather than the products’ full gross assets and liabilities.
At June 30, Virtus said its broker-dealer’s net capital was significantly above the required minimum. Disclosure controls were assessed as effective, and the company reported no material changes to previously disclosed risk factors or internal control over financial reporting.
Important facts for investors to verify
- Whether AUM declines and negative flows continue, especially in open-end funds, and how those trends affect fee revenue.
- How market performance, fee mix, and acquisition-related costs affect margins and earnings in subsequent quarters.
- The drivers of reduced operating cash flow and the company’s cash needs for compensation, buybacks, dividends, debt service, and contingent payments.
- The assumptions and potential future payments underlying contingent consideration, and the distinction between Virtus’s own debt and consolidated CIP obligations.
- Whether the elevated effective tax rate persists; management said interim results are not necessarily indicative of full-year results.