Virtus Investment Partners, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Virtus provides investment management and related services to retail and institutional clients. Results are compared with Q1 2014 unless otherwise noted. Dollar figures below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $103.8 | $107.9; down 3.7% |
| Operating income | $24.5 | $32.6; down 24.8% |
| Operating margin | 23.6% | 30.2% |
| Net income | $19.7 | $21.8; down 9.4% |
| Net income attributable to common stockholders | $19.3 | $21.9; down 11.8% |
| Diluted EPS | $2.11 | $2.34 |
| Cash flow from operations | $(24.9) | $(33.2) |
| Cash and cash equivalents at quarter-end | $166.0 | $202.8 at Dec. 31, 2014 |
| Debt | No borrowings | $75.0 credit facility available |
Operating margin declined as revenue fell and operating expenses rose 5.4% to $79.3 million, including a $5.2 million F-Squared-related loss contingency. Lower distribution and administration expenses partly offset higher costs. The effective tax rate was 35.5%, versus 39.2% in Q1 2014. The filing reports $14.0 million of share repurchases and $4.1 million of dividends paid during the quarter; the declared $0.45-per-share quarterly dividend was payable in May.
At March 31, total assets were $680.4 million and total liabilities were $80.3 million. These totals include consolidated sponsored investment products; management states the Company’s exposure to those products is generally limited to its investments and fees. Virtus reported $43.7 million of marketable securities. The $75.0 million credit facility may be increased to $125.0 million subject to lender approval; the Company reported compliance with covenants.
Assets under management and material changes
- Quarter-end AUM was $54.8 billion, down 3.4% from December 31, 2014. Net outflows of $2.2 billion were partly offset by $0.3 billion of market appreciation.
- Q1 net outflows were primarily driven by $2.9 billion of outflows from the five AlphaSector funds; excluding those funds, net inflows were $0.7 billion. The funds represented $6.7 billion of AUM at quarter-end, and the Company said outflows continued in Q2.
- Year-over-year AUM was down 5.6% including money-market assets, or 3.3% excluding them. The comparison is affected by liquidation of the Company’s money-market funds in October 2014.
- Total sales were $3.7 billion versus $4.2 billion a year earlier. Average AUM was $55.7 billion, down 2.5% year over year. Average fee rate rose 0.6 basis points, primarily reflecting product mix and a closed-end fund launch, partly offset by lower fee rates in long-term open-end funds.
- On April 10, 2015, Virtus invested approximately $4.8 million for a majority interest in ETF Issuer Solutions. On May 11, it gave notice to terminate F-Squared as subadviser to five former AlphaSector funds, renamed Virtus Trend funds.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or AUM guidance. Management describes results as dependent on AUM, market performance, client flows and fee levels; it cautions that quarterly results are not necessarily indicative of full-year results.
- The SEC was investigating whether Virtus violated securities laws in connection with historical performance information associated with former subadviser F-Squared. Virtus recorded a $5.2 million loss contingency and related potential tax benefit. It said a greater loss was reasonably possible, but it could not estimate the additional amount or assure a resolution.
- A putative securities class action filed in February 2015 alleges misleading disclosures concerning F-Squared-related funds. A second putative class action was filed in May 2015 by a former fund shareholder. Virtus disputes the claims and intends to defend them; it said no material loss was probable and reasonably estimable for the first action.
- Key disclosed risks include market declines reducing AUM and fee revenue, client withdrawals, loss of advisory agreements or distribution relationships, competition, regulatory and legal matters, and reliance on personnel and third-party service providers. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Virtus reported market sensitivity: a 10% change in the fair value of marketable securities would change quarterly net income attributable to common stockholders by $16.2 million; a 1% interest-rate change could change the fair value of fixed-income investments by $3.7 million.
Important facts for investors to verify
- Subsequent developments, potential settlement amount and other exposure related to the SEC/F-Squared matter, including whether the recorded accrual changes.
- AlphaSector/Virtus Trend fund outflows, the subadviser transition, and resulting effects on AUM and fee revenue.
- Whether operating expenses normalize after the contingency and systems-transition costs, and whether operating cash flow improves.
- How reported AUM and financial balances are affected by the liquidation of money-market funds and consolidation of sponsored investment products.
- Progress and financial impact of the ETF Issuer Solutions investment, and developments in both shareholder lawsuits.