Virtus Investment Partners(VRTS) - 2022 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements This section presents Virtus Investment Partners' unaudited condensed consolidated financial statements for Q2 and H1 2022, covering balance sheets, income statements, and cash flows Condensed Consolidated Balance Sheets As of June 30, 2022, total assets were $3.54 billion, a decrease from $3.93 billion at December 31, 2021, primarily due to reductions in cash and CIP investments Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $250,530 | $378,921 | | Investments of CIP | $1,990,159 | $2,140,238 | | Goodwill | $347,423 | $338,406 | | Total assets | $3,543,915 | $3,934,181 | | Liabilities | | | | Accrued compensation and benefits | $105,106 | $187,449 | | Debt | $255,832 | $266,346 | | Notes payable of CIP | $1,904,444 | $2,033,617 | | Total liabilities | $2,613,063 | $2,958,589 | | Total equity | $791,705 | $836,627 | Condensed Consolidated Statements of Operations For Q2 2022, total revenues decreased to $225.3 million, operating income fell to $56.7 million, and net income attributable to Virtus significantly declined to $17.4 million Q2 and H1 2022 vs 2021 Operating Results (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $225,307 | $244,011 | $477,747 | $460,908 | | Operating Income | $56,670 | $86,411 | $122,222 | $148,553 | | Net Income Attributable to Virtus | $17,402 | $62,967 | $50,461 | $99,555 | | Earnings per Share—Diluted | $2.29 | $7.86 | $6.54 | $12.39 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased to $37.6 million for H1 2022, while cash used in investing and financing activities increased due to acquisitions and share repurchases Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,611 | $239,180 | | Net cash used in investing activities | ($24,442) | ($5,527) | | Net cash used in financing activities | ($240,177) | ($167,645) | | Net decrease in cash | ($227,314) | $66,008 | Notes to Condensed Consolidated Financial Statements The notes detail the Stone Harbor acquisition, goodwill increase, dividend and share repurchases, and the non-impact of consolidated investment products on net income - On January 1, 2022, the Company completed the acquisition of Stone Harbor Investment Partners, LLC for initial transaction consideration of $29.4 million, which included $8.8 million in goodwill and $10.8 million in definite-lived intangible assets[33] - Goodwill increased from $338.4 million at year-end 2021 to $347.4 million at June 30, 2022, primarily due to acquisitions[43] - The company declared a quarterly cash dividend of $1.50 per common share in May 2022 and repurchased $70.0 million of its common stock in the first six months of 2022[55][56] - The company consolidates various investment products (CIP), including Collateralized Loan Obligations (CLOs), but this consolidation has no impact on net income attributable to Virtus Investment Partners, Inc. The company's risk is limited to its beneficial interests in these products[80] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant decline in Q2 2022 financial performance, with diluted EPS falling and AUM decreasing 13.0% due to market performance and net outflows Overview and Financial Highlights The company highlights recent acquisitions of Stone Harbor and Westchester, noting a significant downturn in Q2 2022 with diluted EPS at $2.29 and total net outflows of $4.8 billion - The company completed its acquisition of Stone Harbor Investment Partners on January 1, 2022, adding $14.7 billion in AUM, and Westchester Capital Management on October 1, 2021, adding $5.1 billion in AUM[108][109] Q2 2022 Financial Highlights vs. Q2 2021 | Metric | Q2 2022 | Q2 2021 | Change | | :--- | :--- | :--- | :--- | | Net Income per Diluted Share | $2.29 | $7.86 | -70.9% | | Total Sales | $7.9B | $9.6B | -17.4% | | Net Flows | ($4.8B) | $1.5B | N/A | | Assets Under Management (EOP) | $155.4B | $178.6B | -13.0% | Assets Under Management (AUM) Total AUM decreased by 13.0% to $155.4 billion at June 30, 2022, driven by negative market performance and net outflows, particularly in Open-End Funds AUM by Product (in millions) | Product | June 30, 2022 | June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | | Open-End Funds | $59,479 | $76,593 | (22.3)% | | Closed-End Funds | $10,645 | $11,993 | (11.2)% | | Retail Separate Accounts | $35,248 | $40,578 | (13.1)% | | Institutional Accounts | $50,048 | $49,474 | 1.2% | | Total | $155,420 | $178,638 | (13.0)% | Asset Flows by Period (in millions) | Period | Inflows | Outflows | Net Flows | | :--- | :--- | :--- | :--- | | Q2 2022 | $7,884 | ($12,652) | ($4,768) | | Q2 2021 | $9,550 | ($8,096) | $1,454 | | H1 2022 | $17,319 | ($24,047) | ($6,728) | | H1 2021 | $20,323 | ($16,943) | $3,380 | AUM by Asset Class (in millions) | Asset Class | June 30, 2022 | June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | | Equity | $84,754 | $113,751 | (25.5)% | | Fixed income | $39,322 | $35,426 | 11.0% | | Multi-asset | $20,261 | $23,668 | (14.4)% | | Alternatives | $11,083 | $5,793 | 91.3% | | Total | $155,420 | $178,638 | (13.0)% | Results of Operations For Q2 2022, total revenues fell 7.7% due to lower AUM and sales, while operating expenses increased 7.0% from acquisitions, leading to a 34.4% decrease in operating income Revenue Breakdown (in thousands) | Revenue Source | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Investment management fees | $185,024 | $193,510 | (4.4)% | | Distribution and service fees | $17,159 | $23,450 | (26.8)% | | Administration and shareholder service fees | $21,982 | $25,877 | (15.1)% | | Total revenues | $225,307 | $244,011 | (7.7)% | Operating Expense Breakdown (in thousands) | Expense Category | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Employment expenses | $89,360 | $87,630 | 2.0% | | Distribution and other asset-based expenses | $28,583 | $36,021 | (20.6)% | | Other operating expenses | $31,559 | $21,946 | 43.8% | | Amortization expense | $14,624 | $10,363 | 41.1% | | Total operating expenses | $168,637 | $157,600 | 7.0% | - The increase in operating expenses for Q2 and H1 2022 was primarily due to the addition of Stone Harbor and Westchester, which increased employment, other operating, and amortization costs[134][137][141] Liquidity and Capital Resources Cash and cash equivalents decreased to $250.5 million at June 30, 2022, reflecting significant capital uses including incentive compensation, share repurchases, and the Stone Harbor acquisition Key Balance Sheet and Cash Flow Data (in thousands) | Metric | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $250,530 | $378,921 | | Debt | $255,832 | $266,346 | | Total equity | $791,705 | $836,627 | | Cash Flow (H1 2022 vs H1 2021) | H1 2022 | H1 2021 | | Operating activities | $37,611 | $239,180 | | Investing activities | ($24,442) | ($5,527) | | Financing activities | ($240,177) | ($167,645) | - Major uses of capital in H1 2022 included $151.6 million for annual incentive compensation, cash for the Stone Harbor acquisition, $70.0 million for share repurchases, and $33.0 million for contingent consideration payments[155][160][161] - At June 30, 2022, $262.9 million was outstanding under the Term Loan, and the company had no outstanding borrowings under its $175.0 million revolving credit facility[162] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk disclosures from its 2021 Annual Report, with primary exposures remaining interest rates and securities prices - There were no material changes to the information regarding market risk during the three and six months ended June 30, 2022, from what was disclosed in the Company's 2021 Annual Report on Form 10-K[165] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022[167] - There have been no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[168] Part II. OTHER INFORMATION Legal Proceedings The company incorporates legal matters by reference from Note 14, stating that current proceedings are not expected to materially affect its financial condition or results - The company incorporates its disclosure on legal proceedings by reference from Note 14 of the financial statements[169] - Based on current information, the company believes that the outcomes of its legal and regulatory proceedings are not likely, individually or in aggregate, to have a material adverse effect on its financial condition or results[73] Risk Factors The company reports that there have been no material changes to its risk factors from those previously disclosed in its 2021 Annual Report on Form 10-K - There have been no material changes to the Company's risk factors from those previously reported in the 2021 Annual Report on Form 10-K[170] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, the company repurchased 221,903 shares of common stock, with 932,094 shares remaining available under the repurchase program and no unregistered sales Share Repurchases for Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | — | $ — | | May 2022 | 121,857 | $177.94 | | June 2022 | 100,046 | $183.01 | | Total | 221,903 | N/A | - As of June 30, 2022, 932,094 shares remained available for repurchase under the company's share repurchase program[171] - There were no unregistered sales of equity securities during the quarter[174] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and interactive data files - The exhibits filed with the report include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and the Cover Page Interactive Data File (iXBRL)[175]