UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2014
OR
For the transition period from to
Commission File Number: 001-10994
VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
100 Pearl St., Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares outstanding of the registrant’s common stock was 9,120,254 as of July 23, 2014.
INDEX
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2014 and December 31, 2013
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2014 and 2013
Condensed Consolidated Statements of Changes in Equity (Unaudited) for the Six Months Ended June 30, 2014 and 2013
Notes to Condensed Consolidated Financial Statements (Unaudited)
“We,” “us,” “our,” the “Company” and “Virtus” as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.
PART I – FINANCIAL INFORMATION
Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
Assets:
Cash and cash equivalents
Cash of consolidated sponsored investment products
Cash pledged or on deposit of consolidated sponsored investment products
Investments
Investments of consolidated sponsored investment products
Accounts receivable, net
Furniture, equipment, and leasehold improvements, net
Intangible assets, net
Goodwill
Deferred taxes, net
Other assets
Other assets of consolidated sponsored investment products
Total assets
Liabilities and Equity
Liabilities:
Accrued compensation and benefits
Accounts payable and accrued liabilities
Dividends payable
Other liabilities
Other liabilities of consolidated sponsored investment products
Total liabilities
Commitments and Contingencies (Note 10)
Redeemable noncontrolling interests
Equity:
Equity attributable to stockholders:
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 9,535,913 shares issued and 9,119,000 shares outstanding at June 30, 2014 and 9,455,521 shares issued and 9,105,521 shares outstanding at December 31, 2013
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Treasury stock, at cost, 416,913 shares at June 30, 2014 and 350,000 shares at December 31, 2013
Total equity attributable to stockholders
Noncontrolling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Operations
Revenues
Investment management fees
Distribution and service fees
Administration and transfer agent fees
Other income and fees
Total revenues
Operating Expenses
Employment expenses
Distribution and administration expenses
Other operating expenses
Other operating expenses of consolidated sponsored investment products
Restructuring and severance
Depreciation and other amortization
Amortization expense
Total operating expenses
Operating Income
Other Income (Expense)
Realized and unrealized gain (loss) on investments, net
Realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net
Other income (expense), net
Total other income (expense), net
Interest Income (Expense)
Interest expense
Interest and dividend income
Interest and dividend income of investments of consolidated sponsored investment products
Total interest income, net
Income Before Income Taxes
Income tax expense
Net Income
Net Income Attributable to Common Stockholders
Earnings per share—Basic
Earnings per share—Diluted
Cash dividends declared per share
Weighted Average Shares Outstanding—Basic (in thousands)
Weighted Average Shares Outstanding—Diluted (in thousands)
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Condensed Consolidated Statements of Comprehensive Income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $8 and $11 for the three months ended June 30, 2014 and 2013, respectively and $(7) and $11 for the six months ended June 30, 2014 and 2013, respectively
Unrealized gain (loss) on available-for-sale securities, net of tax of $(75) and $57 for the three months ended June 30, 2014 and 2013, respectively and $(115) and $178 for the six months ended June 30, 2014 and 2013, respectively
Other comprehensive income (loss)
Comprehensive income
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income attributable to common stockholders
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Condensed Consolidated Statements of Cash Flows
Six Months Ended
June 30,
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation expense, intangible asset and other amortization
Stock-based compensation
Excess tax benefits from stock-based compensation
Amortization of deferred commissions
Payments of deferred commissions
Equity in (earnings) losses of equity method investments
Realized and unrealized gains on trading securities
Realized and unrealized (gains) losses on investments of consolidated sponsored investment products
Sale of trading securities, net
Purchase of investments by consolidated sponsored investment products, net
Sale of securities sold short by consolidated sponsored investment products, net
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable, net and other assets
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
Net cash (used in) provided by operating activities
Cash Flows from Investing Activities:
Capital expenditures
Acquisition of equity method investee
Change in cash and cash equivalents of consolidated sponsored investment products due to deconsolidation
Purchase of available-for-sale securities
Net cash used in investing activities
Cash Flows from Financing Activities:
Contingent consideration paid for acquired investment management contracts
Repurchase of common shares
Proceeds from exercise of stock options
Taxes paid related to settlement of employee share transactions
Contributions of noncontrolling interests, net
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and Cash Equivalents, end of period
Non-Cash Financing Activities:
Satisfaction of accrued compensation through the issuance of RSU’s
Decrease to noncontrolling interest due to deconsolidation of sponsored investment products, net
Dividend payable
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Condensed Consolidated Statements of Changes in Equity
Balances at December 31, 2012
Net income (loss)
Net unrealized gain on securities available-for-sale
Foreign currency translation adjustment
Activity of noncontrolling interests, net
Issuance of common stock related to employee stock transactions
Taxes paid on stock-based compensation
Balances at June 30, 2013
Balances at December 31, 2013
Cash dividends declared
Balances at June 30, 2014
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Notes to Condensed Consolidated Financial Statements
1. Organization and Business
Virtus Investment Partners, Inc. (the “Company,” “we,” “us,” “our” or “Virtus”), a Delaware corporation, operates in the investment management industry through its wholly-owned subsidiaries.
The Company provides investment management and related services to individuals and institutions throughout the United States of America. The Company’s retail investment management services are provided to individuals through products consisting of open-end mutual funds, closed-end funds, variable insurance funds and separately managed accounts. Separately managed accounts are offered through intermediary programs that are sponsored and distributed by unaffiliated broker-dealers and individual direct managed account investment services that are provided by the Company. Institutional investment management services are provided primarily to corporations, multi-employer retirement funds, employee retirement systems, foundations and endowments.
2. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for fair statement of the Company’s financial condition and results of operations. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and sponsored investment products in which it has a controlling financial interest. The Company is generally considered to have a controlling financial interest when it owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the subsidiary. (See Note 11 for additional information related to the consolidation of sponsored investment products.) Intercompany accounts and transactions have been eliminated. The Company also evaluates any variable interest entities (“VIEs”) in which the Company has a variable interest for consolidation. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support, or (b) where as a group, the holders of equity investment at risk do not possess: (i) the power to direct the activities that most significantly impact the entity’s performance; (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity; or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf the equity holders. If an entity has either of these characteristics, it is considered a VIE and required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report on Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). The Company’s significant accounting policies, which have been consistently applied, are summarized in the 2013 Annual Report on Form 10-K.
Effective December 31, 2013, the Company changed the presentation of its Consolidated Balance Sheets from a classified basis, which distinguishes between current and long-term assets and liabilities, to an unclassified basis, which has no such distinction. There were no changes to the Condensed Consolidated Balance Sheets that impacted the Condensed Consolidated Statements of Operations. Amounts in the prior year’s Condensed Consolidated Statements of Cash Flows have been recast to conform to the current year’s presentation.
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3. Intangible Assets, Net
Intangible assets, net are summarized as follows:
Definite-lived intangible assets:
Investment contracts
Accumulated amortization
Definite-lived intangible assets, net
Indefinite-lived intangible assets
Total intangible assets, net
Activity in intangible assets, net is as follows:
Balance, beginning of period
Amortization
Balance, end of period
4. Investments
Investments consist primarily of investments in our sponsored mutual funds. The Company’s investments, excluding the assets of consolidated sponsored investment products discussed in Note 11, at June 30, 2014 and December 31, 2013 are as follows:
Marketable securities
Equity method investments
Nonqualified retirement plan assets
Total investments
Marketable Securities
The Company’s marketable securities consist of both trading and available-for-sale securities. The composition of the Company’s marketable securities is summarized as follows:
June 30, 2014
Trading:
Sponsored funds
Equity securities
Available-for-sale:
Total marketable securities
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December 31, 2013
For the three months ended June 30, 2014 and 2013, the Company recognized realized gains of $3.6 million and $0.2 million, respectively, and $4.5 million and $0.3 million for the six months ended June 30, 2014, respectively, on trading securities.
5. Fair Value Measurements
The Company’s assets and liabilities measured at fair value, excluding the assets and liabilities of consolidated sponsored investment products discussed in Note 11, on a recurring basis as of June 30, 2014 and December 31, 2013 by fair value hierarchy level were as follows:
Assets
Cash equivalents
Marketable securities trading:
Marketable securities available for sale:
Other investments:
Total assets measured at fair value
The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value.
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Sponsored funds represent investments in open-end mutual funds, variable insurance funds and closed-end funds for which the Company acts as the investment manager. The fair value of open-end mutual funds and variable insurance funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds is determined based on the official closing price of the exchange they are traded on and are categorized as Level 1.
Equity securities include securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Nonqualified retirement plan assetsrepresent mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments. Marketable securities are reflected in the condensed consolidated financial statements at fair value based upon publicly quoted market prices.
Transfers into and out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable or unobservable or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a net asset value, or if the book value of certain equity method investments no longer represents fair value. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2014 or 2013.
6. Treasury Stock and Dividends
During the six months ended June 30, 2014 and 2013, the Company repurchased 66,913 and 80,000 common shares, respectively, at a weighted average price of $186.77 and $187.03 per share, respectively, plus transaction costs for a total cost of approximately $12.5 million and $15.0 million, respectively. The Company has repurchased a total of 416,913 shares of common stock at a weighted average price of $119.74 per share plus transaction costs for a total cost of $49.9 million under its share repurchase program. At June 30, 2014, there were 283,087 shares of common stock available to repurchase under the Company’s current authorization through the share repurchase program.
On May 15, 2014, the Board of Directors approved a cash dividend on the Company’s common stock in the amount of $0.45 per share to stockholders of record as of July 31, 2014, to be paid on August 14, 2014. The total dividend to be paid is approximately $4.2 million and is included in liabilities in the condensed consolidated balance sheet at June 30, 2014.
7. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income, by component, for the six months ended June 30, 2014 and 2013 were as follows:
Balance December 31, 2013
Unrealized net gains on investments, net of tax of ($115)
Foreign currency translation adjustments, net of tax of $7
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income
Balance June 30, 2014
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Balance December 31, 2012
Unrealized net gains on investments, net of tax of $178
Foreign currency translation, net of tax of $11
Balance June 30, 2013
8. Stock-based Compensation
The Company has an Omnibus Incentive and Equity Plan (the “Plan”) under which officers, employees and directors may be granted equity-based awards, including restricted stock units (“RSUs”), stock options and unrestricted shares of common stock. At June 30, 2014, 433,130 shares of common stock remain available for issuance of the 1,800,000 shares that were reserved for issuance under the Plan. Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs generally have a term of one to three years and may be time-vested or performance-contingent. Stock options generally cliff vest after three years and have a contractual life of ten years. Stock options are granted with an exercise price equal to the fair market value of the shares at the date of grant. The fair value of each RSU is estimated using the intrinsic value method, which is based on the fair market value price on the date of grant unless it contains a performance metric that is considered a market condition. RSUs that contain a market condition are valued using a simulation valuation model. Shares that are issued upon exercise of stock options and vesting of RSUs are newly issued shares from the Plan and are not issued from treasury stock.
Restricted Stock Units
RSU activity for the six months ended June 30, 2014 are summarized as follows:
Outstanding at December 31, 2013
Granted
Forfeited
Settled
Outstanding at June 30, 2014
For the six months ended June 30, 2014 and 2013, a total of 49,819 and 36,427 RSUs, respectively, were withheld by the Company as a result of net share settlements to satisfy employee tax withholding obligations. During the six months ended June 30, 2014 and 2013, the Company paid $9.3 million and $7.2 million, respectively, in employee tax withholding obligations related to employee share transactions during each period. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting or exercise.
Stock Options
Stock option activity for the six months ended June 30, 2014 are summarized as follows:
Exercised
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The Company recognized total stock compensation expense of $2.9 million and $2.6 million, respectively, and $4.5 million and $4.0 million, respectively, for the three and six months ended June 30, 2014 and 2013. As of June 30, 2014 and 2013, unamortized stock-based compensation expense for unvested RSUs was $16.3 million and $13.3 million, with a weighted-average remaining amortization period of 1.6 years and 1.5 years, respectively. There was no unamortized stock-based compensation expense related to stock options as of June 30, 2014 as all outstanding options were fully vested and unamortized stock-based compensation expense related to stock options was $0.1 million with a weighted-average remaining amortization period of 0.6 years at June 30, 2013.
9. Earnings per Share
Basic earnings per share (“EPS”) excludes dilution for potential common stock issuances and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted EPS, the basic weighted-average number of shares is increased by the dilutive effect of RSUs and common stock options using the treasury stock method.
The computation of basic and diluted EPS is as follows:
Shares (in thousands):
Basic: Weighted-average number of shares outstanding
Plus: Incremental shares from assumed conversion of dilutive instruments
Diluted: Weighted-average number of shares outstanding
Earnings per share - basic
Earnings per share - diluted
For the three months ended June 30, 2014, there were 9,275 instruments excluded from the above computation of weighted-average shares for diluted EPS because the effect would be anti-dilutive. For the three and six months ended June 30, 2013, respectively, there were no instruments excluded from the above computation of weighted-average shares for diluted EPS.
10. Commitments and Contingencies
Legal Matters
The Company is regularly involved in litigation and arbitration as well as examinations and investigations by various regulatory bodies, including the SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature may involve activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. The Company cannot predict the ultimate outcome of such legal claims or matters or in certain instances provide reasonable ranges of potential losses. As of the date of this report, the Company believes that the outcomes of its legal or regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory
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matters, there can be no assurance that the Company’s assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
11. Consolidated Sponsored Investment Products
In the normal course of its business, the Company sponsors various types of investment products. The Company consolidates an investment product when it owns a majority of the voting interest in the entity or it is the primary beneficiary of an investment product that is a variable interest entity. The consolidation and deconsolidation of these investment products has no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its investment in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products, beyond the Company’s investments in, and fees generated from these products. If the Company were to liquidate, these investments would not be available to the general creditors of the Company. The Company does not consider cash and investments held by consolidated sponsored investment products to be assets of the Company other than its direct investment in these products.
As of June 30, 2014 and December 31, 2013, the Company consolidated eleven and eight sponsored investment products, respectively. During the six months ended June 30, 2014, the Company consolidated four additional sponsored investment products and deconsolidated one sponsored investment product because it no longer had a majority voting interest.
The following table presents the balances of the consolidated sponsored investment products that were reflected in the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013:
Total cash
All other assets
The Company’s net interests in consolidated sponsored investment products
Consolidation
The following tables reflect the impact of the consolidated sponsored investment products in the Condensed Consolidated Balance Sheets as of June, 30, 2014 and December 31, 2013 and the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013, respectively:
As of June 30, 2014
Equity attributable to stockholders of the Company
Non-redeemable noncontrolling interests
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As of December 31, 2013
The following table reflects the impact of the consolidated sponsored investment products in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2014 and 2013:
For the Three Months Ended June 30, 2014
Total operating revenues
Operating income (loss)
Total other non-operating income
Income before income tax expense
Net income attributable to the Company
For the Three Months Ended June 30, 2013
Eliminations
and
Adjustments (a)
Total other non-operating (expense) income
Income (loss) before income tax expense
Net income (loss) attributable to the Company
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For the Six Months Ended June 30, 2014
For the Six Months Ended June 30, 2013
Total other non-operating expense
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Fair Value Measurements of Consolidated Sponsored Investment Products
The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 by fair value hierarchy level were as follows:
Debt securities
Derivatives
Total Assets Measured at Fair Value
Liabilities
Short sales
The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated sponsored investment products measured at fair value.
Investments of consolidated sponsored investment products represent the underlying debt and equity securities held in sponsored products which are consolidated by the Company. Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1. Level 2 investments include certain equity securities for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service as well as most debt securities, which are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Pricing services do not provide pricing for all securities and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2. Level 3 investments include debt securities that are not widely traded and are illiquid that are priced by dealers based on pricing models used by market makers in the security.
The following table is a reconciliation of assets of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.
Balance at December 31, 2013
Purchases
Balance at June 30, 2014
The Company recognized no gain or loss in the three and six months ended June 30, 2014 related to changes in market value of these investments.
There were no transfers between Level 1, Level 2, and Level 3 during the six months ended June 30, 2014 and 2013, respectively.
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Beginning in the second quarter of 2014, the Company consolidated investment products which include derivative instruments as part of their investment strategies. These derivatives may include futures contracts, options contracts, and forward contracts. The fair value of such derivatives at June 30, 2014 was immaterial. The change in fair value of such derivatives, which is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, was immaterial for the three and six months ended June 30, 2014. In connection with entering into these derivative contracts these funds may be required to pledge to the broker an amount of cash equal to the “initial margin” requirements that varies based on the type of derivative. The cash pledged or on deposit is recorded in the Condensed Consolidated Balance Sheet of the Company as Cash pledged or on deposit of consolidated sponsored investment products.
Short Sales
Some of the Company’s consolidated sponsored investment products may engage in short sales, which are transactions in which a fund sells a security that it does not own (or that it owns but does not intend to deliver) in anticipation that the price of the security will decline. Short sales are recorded in the Condensed Consolidated Balance Sheet within Other liabilities of consolidated sponsored investment products.
12. New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is prohibited. The Company is currently evaluating the impact ASU 2014-09 is expected to have on its consolidated financial statements.
In July 2013, FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for the Company on January 1, 2014. The Company has adopted this standard as of January 1, 2014. The adoption of this standard did not have a material impact on the Company’s financial results.
In June, 2013, the FASB issued ASU No. 2013-08, Investment Companies: Amendments to the Scope, Measurement and Disclosure Requirements. The new standard clarifies the characteristics of an investment company and provides comprehensive guidance for assessing whether an entity is an investment company. The amendments apply to an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. The Company has adopted this standard as of January 1, 2014. The adoption of this standard did not have a material impact on the Company’s financial results.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “intend,” “believe,” “may,” “will,” “should,” “could,” “continue,” “project,” “opportunity,” “predict,” “would,” “potential,” “future,” “guarantee,” “assume,” “likely,” “target” or similar statements or variations of such terms.
Our forward-looking statements are based on a series of expectations, assumptions and projections about our Company and the markets in which we operate, and are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net cash inflows and outflows, operating cash flows and future credit facilities, for all future periods. All of our forward-looking statements contained in this Quarterly Report are as of the date of this Quarterly Report only.
We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Quarterly Report, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us which modify or impact any of the forward-looking statements contained in or accompanying this Quarterly Report, such statements or disclosures will be deemed to modify or supersede such statements in this Quarterly Report.
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2013, and in this Quarterly Report on Form 10-Q, as well as the following risks and uncertainties: (a) any reduction in our assets under management; (b) damage to our reputation; (c) our money market funds do not maintain stable net asset values; (d) our inability to attract and retain key personnel; (e) the competition we face in our business; (f) adverse regulatory and legal developments; (g) limitations on our deferred tax assets; (h) changes in key distribution or unaffiliated subadvisory relationships; (i) interruptions in service or failure to provide service by third-party service providers; (j) impairment of our goodwill or intangible assets; (k) lack of availability of required and necessary capital on satisfactory terms; (l) liabilities and losses not covered by our insurance policies; and (m) certain other risks and uncertainties described in our 2013 Annual Report on Form 10-K or in any of our filings with the Securities and Exchange Commission (“SEC”). Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to in this Quarterly Report or included in our 2013 Annual Report on Form 10-K or our other periodic reports filed with the SEC could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.
Certain other factors which may impact our continuing operations, prospects, financial results and liquidity or which may cause actual results to differ from such forward-looking statements are discussed or included in the Company’s periodic reports filed with the SEC and are available on our website at www.virtus.com under “Investor Relations.” You are urged to carefully consider all such factors.
Overview
We are a provider of investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers and unaffiliated subadvisers, each having its own distinct investment style, autonomous investment process and individual brand. By offering a broad array of products, we believe we can appeal to a greater number of investors, which allows us to have offerings across market cycles through changes in investor preferences. Our earnings are primarily driven by asset-based fees charged for services relating to these various products including investment management, fund administration, distribution and shareholder services.
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We offer investment strategies for individual and institutional investors in different product structures and through multiple distribution channels. Our investment strategies are available in a diverse range of styles and disciplines, managed by a collection of boutique investment managers, both affiliated and unaffiliated. We have offerings in various asset classes (domestic and international equity, fixed income and alternative), in all market capitalizations (large, mid and small), in different styles (growth, blend and value) and with various investment approaches (fundamental, quantitative and thematic). Our retail products include open-end mutual funds, closed-end funds, variable insurance funds and separately managed accounts. We also offer certain of our investment strategies to institutional clients.
We distribute our open-end mutual funds through financial intermediaries. We have broad access in the retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and independent financial advisory firms. In many of these firms, we have a number of products that are on firms’ preferred “recommended” lists and on fee-based advisory programs. Our sales efforts are supported by regional sales professionals, a national account relationship group and separate teams for the retirement and insurance markets.
Our separately managed accounts are distributed through financial intermediaries and directly by teams at our affiliated managers. Our institutional distribution strategy is an affiliate-centric and coordinated model. Through relationships with consultants, our affiliates target key market segments, including foundations and endowments, corporate, and public and private pension plans.
Financial Highlights
Assets Under Management
At June 30, 2014, we managed $61.4 billion in total assets, representing an increase of $8.7 billion, or 16.6%, from the $52.7 billion managed at June 30, 2013 and an increase of $3.7 billion, or 6.3%, from December 31, 2013. Long-term assets under management, which exclude cash management products, were $59.9 billion at June 30, 2014, an increase of $9.0 billion, or 17.8%, from $50.9 billion in June 30, 2013 and an increase of $3.8 billion, or 6.8%, from December 31, 2013. Average assets under management, which generally correspond to our fee-earning asset levels, were $58.1 billion for the six months ended June 30, 2014, an increase of $7.4 billion, or 14.6%, from $50.7 billion for the six months ended June 30, 2013.
Operating Results
In the second quarter of 2014, total revenues increased 17.3% to $112.7 million from $96.1 million in the second quarter of 2013. This increase was primarily the result of an increase in average assets under management. Operating income decreased by 16.3% from $26.9 million in the second quarter of 2013 to $22.5 million in the second quarter of 2014, primarily due to $10.1 million of costs related to the launch of the new closed-end fund, DSE, which were partially offset by the increased revenues due to higher levels of average assets under management.
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Assets Under Management by Product
The following table summarizes our assets under management by product:
Retail Assets
Mutual fund assets
Long-term open-end mutual funds
Closed-end funds
Money market open-end funds
Total mutual fund assets
Variable insurance funds
Separately managed accounts (1)
Total retail assets
Total institutional assets (1)
Total Assets Under Management
Average Assets Under Management for the Six Months Ended
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Asset Flows by Product
The following table summarizes our asset flows by product:
Mutual Funds—Long-Term Open-End
Beginning balance
Inflows
Outflows
Net flows
Market appreciation (depreciation)
Other (1)
Ending balance
Mutual Funds—Closed-End
Mutual Funds—Money Market Open-end
Variable Insurance Funds
Separately Managed Accounts (2)
Market appreciation
Institutional Accounts (2)
Total
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The following table summarizes our assets under management by asset class:
Asset Class
Equity
Fixed income
Alternatives (1)
Other (2)
Average Assets Under Management and Average Basis Points
The following table summarizes the average assets under management and the average management fee basis points:
Products
Mutual Funds—Long-Term Open-End (1)(2)
Mutual Funds—Money Market Open-End (1)
Variable Insurance Funds (1)
Separately Managed Accounts (3)
Institutional Accounts (3)
All Products
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Long-term and money market open-end mutual fund and variable insurance fund fees are calculated based on average daily net assets. Closed-end fund fees are calculated based on either average weekly or daily net assets. Average fees earned will vary based on several factors, including the asset mix and reimbursements to funds. Separately managed account fees are calculated based on the end of the preceding or current quarter’s asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances or current quarter’s asset values. Structured finance product fees, which are included in institutional accounts, are calculated based on a combination of the underlying cash flows and the principal value of the product.
The average fee rate earned for the three and six months ended June 30, 2014 increased as compared to the same periods in the prior year as equity and alternative products, which generally have higher fees, represented a higher percentage of our assets under management due to strong sales, positive flows and market appreciation. The average fee rate earned on closed-end funds increased for the three and six months ended June 30, 2014 as compared to the same periods in 2013 due to decreased fee waivers. The average fee rate earned on separately managed accounts increased in the three and six month periods ended June 30, 2014 as compared to same periods in 2013 due to the redemption of low fee earning accounts.
Results of Operations
Summary Financial Data
Other revenue
Operating expenses
Operating income
Interest income, net
Income before income taxes
Net income attributable to common stockholders
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Revenues by source are as follows:
Mutual funds
Separately managed accounts
Institutional accounts
Variable products
Total investment management fees
Investment Management Fees
Investment management fees are earned based on a percentage of assets under management, and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments. Investment management fees increased by $10.1 million, or 15.6%, for the three months ended June 30, 2014 compared to the same period in the prior year due to an 11.2% increase in average assets under management and an increase of 4.1% to the prior corresponding average fee rate earned. The increase in average assets under management for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 was due primarily to the cumulative four quarter impact of $2.4 billion in net flows and $7.0 billion of market appreciation. Revenues increased at a higher rate than assets under management due to the increase in the average fee rate earned. Equity and alternative assets, which generally earn a higher average fee rate, represented 69.4% of total assets under management at June 30, 2014 compared to 63.3% at June 30, 2013. Other assets, which represent assets under management related to cash management and options strategies were 3.4% of total assets under management at June 30, 2014 compared to 6.0% at June 30, 2013.
Investment management fees increased by $24.1 million, or 19.7%, for the six months ended June 30, 2014 compared to the same period in the prior year due to a 14.6% increase in average assets under management and an increase of approximately 4.1% to the prior corresponding average fee rate earned. The increase in average assets under management for the six months ended June 30, 2014 was due primarily to the cumulative four quarter impact of $2.4 billion in net flows and $7.0 billion of market appreciation on total assets under management. Revenues increased at a higher rate than assets under management due to the increase in the average fee rate earned.
Distribution and Service Fees
Distribution and service fees, which are asset-based fees earned from open-end mutual funds and variable insurance funds for distribution services, increased by $4.6 million or 23.9% and $9.7 million or 26.4%, respectively, for the three and six months ended June 30, 2014 compared to the same periods in the prior year due to higher average long-term open-end assets under management. The increase in fees also resulted in a corresponding increase in distribution and administrative expenses, primarily driven by increased payments to third-party distribution partners for providing services to investors in our sponsored funds, including marketing support services.
Administration and Transfer Agent Fees
Administration and transfer agent fees represent fees earned for fund administration and shareholder services from our open-end mutual funds, variable insurance funds and certain of our closed-end funds. Fund administration and transfer agent fees increased $1.9 million or 15.6% and $4.3 million or 18.7%, respectively, for the three and six months ended June 30, 2014 compared to the same periods in the prior year due to higher average long-term open-end assets under management.
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Other Income and Fees
Other income and fees primarily represent contingent sales charges earned from investor redemptions levied on certain shares sold without a front-end sales charge and fees earned for the distribution of unaffiliated products. Other income and fees increased $0.1 million or 17.9% and $0.3 million or 46.0%, respectively, for the three and six months ended June 30, 2014 compared to the same periods in the prior year primarily due to an increase in contingent sales charges earned.
Operating expenses by category were as follows:
Distribution and administrative expenses
Depreciation expense
Employment Expenses
Employment expenses primarily consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three months ended June 30, 2014 were $35.5 million, which represents an increase of $2.6 million, or 7.9%, compared to the same period in the prior year. The increase is primarily due to personnel additions related to the growth of the business, increases in profit-based variable incentive compensation, sales costs related to the launch of the new DSE closed end fund, payroll taxes and other benefits resulting from higher profits.
Employment expenses for the six months ended June 30, 2014 were $70.5 million, which represents an increase of $5.2 million, or 8.0%, compared to the same period in the prior year. The increase is primarily due to personnel additions related to the growth of the business, increases in profit-based variable incentive compensation, sales costs related to the launch of the new DSE closed end fund, payroll taxes and other benefits resulting from higher profits.
Distribution and Administrative Expenses
Distribution and administrative expenses primarily consist of payments to third-party distribution partners for providing services to investors in our sponsored funds. These payments are generally based on percentages of either assets under management or sales. These expenses also include the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge to shareholders. The deferred sales commissions are amortized on a straight line basis over the periods in which commissions are generally recovered from distribution fee revenues and contingent sales charges received from shareholders of the funds upon redemption of their shares. Distribution and administrative expenses increased by $15.0 million, or 61.7%, in the three months ended June 30, 2014, and $21.1 million or 45.9% during the six months ended June 30, 2014, compared to the same periods in the prior year primarily due to closed end fund structuring costs of $9.6 million incurred in connection with the launch of the new DSE closed end fund during the second quarter of 2014 as well as higher overall assets under management.
Other Operating Expenses
Other operating expenses primarily consist of investment research and technology costs, professional fees, travel and distribution related costs, rent and occupancy expenses and other miscellaneous costs. Other operating expenses for the three months ended June 30, 2014 increased $3.5 million, or 33.7%, to $13.9 million as compared to $10.4 million for the same period in the prior
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year primarily due to increases in investment research costs, expenses related to organizational, start-up and distribution costs associated with the launch of new funds, higher professional fees and costs related to the transition of middle-and-back office systems to a third party service provider.
Other operating expenses for the six months ended June 30, 2014 increased $5.2 million, or 26.8%, to $24.8 million as compared to $19.6 million for the same period in the prior year primarily due to increases in investment research costs, expenses related to organizational, start-up and distribution costs associated with the launch of new funds, higher professional fees and costs related to the transition of middle-and-back office systems to a third party service provider.
Depreciation Expense
Depreciation expense primarily consists of the straight-line depreciation of furniture, equipment, and leasehold improvements over their estimated useful lives. Depreciation expense was $0.7 million and $1.3 million during the three and six month periods ended June 30, 2014, consistent with depreciation expense during the same periods in the prior year.
Amortization Expense
Amortization expense primarily consists of the straight-line amortization of acquired investment advisory contracts recorded as definite-lived intangible assets over their estimated useful lives. Amortization expense was $0.9 million and $1.9 million during the three and six month periods ended June 30, 2014, which represented a decrease of $0.2 and $0.3 million, respectively during the same periods in the prior year.
Other Income, net
Other income, net primarily consists of realized and unrealized gains and losses recorded on trading securities and investments of consolidated sponsored investment products. Other income, net increased $10.9 million and $11.8 million in the three and six month periods ended June 30, 2014 compared to the same periods in the prior year due to an increase in realized and unrealized gains related to our investments and investments of our consolidated sponsored investment products, which increased by $27.8 million and $68.1 million respectively, from December 31, 2013.
Interest Income, net
Interest income, net consists of interest and dividend income earned on cash equivalents, investments and the investments of our consolidated sponsored investment products. Interest income, net increased $1.2 million and $2.0 million for the three and six month periods ended June 30, 2014 compared to the same periods in the prior year. The increase in interest income, net is primarily due to higher interest and dividend income earned on our investments and the investments of our consolidated sponsored investment products, which increased by $27.8 million and $68.1 million respectively, from December 31, 2013.
Income Tax Expense
The provision for income taxes reflects U.S. federal, state and local taxes at an estimated effective tax rate of 38.6% and 38.0%, for the six months ended June 30, 2014 and 2013, respectively. The primary difference in the effective tax rate for the six month period in 2014 compared to 2013 was attributable to an increase in state rates due to legislation changes enacted.
Liquidity and Capital Resources
Certain Financial Data
The following table summarizes certain key financial data relating to our liquidity and capital resources:
Balance Sheet Data
Net assets of consolidated sponsored investment products (1)
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Cash Flow Data:
Provided by (used in):
Operating Activities
Investing Activities
Financing Activities
Short-Term Capital Requirements
Our short-term capital requirements, which we consider to be those capital requirements due within one year, include payment of annual incentive compensation, dividends to shareholders and other operating expenses, primarily consisting of investment research and technology costs, professional fees, distribution and occupancy costs. Incentive compensation, which is generally the Company’s largest annual operating cash payment, is paid in the first quarter of the year. In the first quarter of 2014 and 2013, we paid approximately $45.0 million and $33.0 million, respectively, in incentive compensation earned during the years ended December 31, 2013 and 2012, respectively. Short-term capital requirements may also be affected by employee tax withholding payments related to net share settlement of equity awards. The Company paid $9.3 million and $7.2 million in employee tax withholding obligations related to net share settlements in the six months ended June 30, 2014 and 2013, respectively. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that otherwise would have been issued as a result of the vesting or exercise. The amount we pay in future periods will vary based on our stock price, the number of equity awards net settled during the period and whether we and our employees elect to satisfy withholding taxes through net share settlement.
Uses and Sources of Capital
We expect that our main uses of cash will be to (i) invest in our organic growth, including our distribution efforts and closed-end fund launches; (ii) seed new investment strategies and mutual funds to introduce new products or to enhance distribution access; (iii) return of capital to shareholders through acquisition of shares of our common stock, payment of dividends or other means; (iv) fund ongoing and potential investments in our infrastructure to achieve greater economies of scale and a more efficient overall cost structure; and (v) invest in inorganic growth opportunities as they arise.
Capital and Reserve Requirements
VP Distributors, LLC (“VPD”), a wholly-owned subsidiary of the Company, is a broker-dealer registered with the SEC and is therefore subject to certain rules regarding minimum net capital, as defined by those rules. VPD is required to maintain a ratio of “aggregate indebtedness” to “net capital,” as defined, which may not exceed 15 to 1 and must also maintain a minimum amount of net capital. Failure to meet these requirements could result in adverse consequences to us including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital or interruption of our business. At June 30, 2014 and December 31, 2013, the ratio of aggregate indebtedness to net capital of our broker-dealer was below the maximum allowed and its net capital was significantly greater than the required minimum.
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Balance Sheet
Cash and cash equivalents consist of cash in banks and money market fund investments. Cash and cash equivalents typically increase in the second, third and fourth quarters of the year as we record, but do not pay, variable incentive compensation. Annual incentive compensation is paid in the first quarter of the year. Investments consist primarily of investments in our affiliated mutual funds. Consolidated sponsored investment products primarily represent investment products we sponsor and where we own a majority of the voting interest in the entity. As of June 30, 2014, we consolidated a total of 11 sponsored investment products. At both June 30, 2014 and December 31, 2013, we had no debt outstanding. On April 23, 2014, we invested $129.9 million of cash and cash equivalents to seed three new mutual funds.
Operating Cash Flow
Net cash used in operating activities of $91.1 million for the six months ended June 30, 2014 decreased by $113.3 million from net cash provided by operating activities of $22.2 million in the same period in the prior year due primarily to purchases of investments, realized and unrealized gains on investments and cash pledged or on deposit by consolidated sponsored investment products, offset by sales of trading securities, increases in our net income resulting from increased revenues on higher average assets under management, increased other liabilities and other assets of consolidated sponsored investment products, a decrease in deferred tax assets as well as increased amortization of deferred commissions.
Investing Cash Flow
Net cash used in investing activities consists primarily of capital expenditures related to our business operations. Net cash used in investing activities of $2.0 million for the six months ended June 30, 2014, declined by $3.4 million from net cash used in investing activities of $5.5 million in the same period in the prior year due to the acquisition of an equity method investment in the prior year period with no corresponding acquisition in the current year period as well as a change in cash and cash equivalents as a result of the deconsolidation of certain consolidated sponsored investment products of $0.4 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.
Financing Cash Flow
Cash flows used in financing activities consist primarily of repurchases of our common stock and payments to settle tax withholding obligations for the net share settlement of employee share transactions and contributions to noncontrolling interests related to our consolidated sponsored investment products. For the six months ended June 30, 2014, net cash used in financing activities of $7.7 million consists of repurchases of our common stock of $12.5 million and payments to settle tax withholding obligations for employee share transactions of $9.3 million, offset by $13.1 million in contributions to noncontrolling interests and $0.4 million in proceeds from stock option exercises.
Debt
Our Credit Facility, as amended and restated, has a five-year term expiring in September 2017 and provides borrowing capacity of up to $75.0 million with a $7.5 million sub-limit for the issuance of standby letters of credit. In addition, the Credit Facility provides for a $50.0 million increase provision conditioned on approval by the lending group. The Credit Facility is secured by substantially all of our assets. At June 30, 2014 and December 31, 2013, no amount was outstanding under the Credit Facility. As of June 30, 2014, we had the capacity to draw on the entire $75.0 million available under the Credit Facility. The Credit Facility contains financial covenants with respect to leverage and interest coverage and requires us to pay an annual commitment fee on any unused portion. We were in compliance with all debt covenants as of June 30, 2014.
Contractual Obligations
Our contractual obligations are summarized in our 2013 Annual Report on Form 10-K. As of June 30, 2014, there have been no material changes outside of the ordinary course in our contractual obligations since December 31, 2013.
Critical Accounting Policies and Estimates
Our financial statements and the accompanying notes are prepared in accordance with Generally Accepted Accounting Principles, which requires the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our 2013 Annual Report on Form 10-K. There were no changes in our critical accounting policies in the six months ended June 30, 2014.
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Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for the Company on January 1, 2014. We adopted this standard as of January 1, 2014. The adoption of this standard did not have a material impact on our financial results.
In June, 2013, the FASB issued ASU No. 2013-08,Investment Companies: Amendments to the Scope, Measurement and Disclosure Requirements. The new standard clarifies the characteristics of an investment company and provides comprehensive guidance for assessing whether an entity is an investment company. The amendments apply to an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. We adopted this standard as of January 1, 2014. The adoption of this standard did not have a material impact on our financial results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Substantially all of our revenues are derived from investment management, distribution and service, and administration and transfer agent fees, which are based on the market value of assets under management. Accordingly, a decline in the prices of securities would cause our revenues and income to decline due to a decrease in the value of the assets under management. In addition, a decline in security prices could cause our clients to withdraw their investments in favor of other investments offering higher returns or lower risk, which would cause our revenues and income to decline.
We are also subject to market risk due to a decline in the market value of our investments, consisting primarily of marketable securities. At June 30, 2014, the fair value of marketable securities, excluding redeemable non-controlling interest was $252.7 million. Assuming a 10.0% increase or decrease in the fair value of marketable securities at June 30, 2014, our net income attributable to common stockholders would change by $15.4 million and our total comprehensive income would change by $15.6 million for the six months ended June 30, 2014.
Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. At June 30, 2014, we were exposed to interest rate risk as a result of holding investments in fixed-income sponsored funds of $79.6. Assuming a 1.0% increase or decrease in interest rates, the fair value of our fixed income investments would change by $2.9 million for the six months ended June 30, 2014.
At June 30, 2014, we had no amounts outstanding under our Credit Facility. Amounts outstanding under the Credit Facility bear interest at an annual rate equal to, at our option, either LIBOR for interest periods of 1, 2, 3 or 6 months or an alternate base rate (as defined in the Credit Facility agreement), plus, in each case, an applicable margin, that ranges from 0.75% to 2.50%.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our
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management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The Company is regularly involved in litigation and arbitration as well as examinations, inquiries, and investigations by various regulatory bodies, including the SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting our products and other activities. Legal and regulatory matters of this nature may involve activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. As of the date of this report, the Company believes that the outcomes of its legal or regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on its consolidated financial condition. However, it is not feasible to predict the ultimate outcome of all legal claims or matters or in certain instances provide reasonable ranges of potential losses. In the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, there can be no assurance that our assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
Item 1A. Risk Factors
There have been no material changes to our risk factors previously reported in our 2013 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the fourth quarter of 2010, we implemented a share repurchase program authorizing the repurchase of 350,000 shares of our common stock, which was renewed in the second quarter of 2013 permitting the repurchase of an additional 350,000 shares of our common stock prior to May 21, 2016. Under the terms of the program, we may repurchase shares of our common stock from time to time at our discretion through open market repurchases and/or privately negotiated transactions, depending on price and prevailing market and business conditions. The program is intended to generally offset dilution caused by shares issued under equity-based plans. The program may be suspended or terminated at any time.
The following table sets forth information regarding our share repurchases in each month during the quarter ended June 30, 2014:
Period
April 1 - 30, 2014
May 1 - 31, 2014
June 1 - 30, 2014
There were no unregistered sales of equity securities during the period covered by this Quarterly Report. Shares of our common stock purchased by participants in our Employee Stock Purchase Plan were delivered to participant accounts via open market purchases at fair value by the third-party administrator under the plan. We do not reserve shares for this plan or discount the purchase price of the shares.
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For the six months ended June 30, 2014, we paid $9.3 million in employee tax withholding obligations related to employee share transactions.
Item 6. Exhibits
ExhibitNumber
Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: July 29, 2014
/s/ Michael A. Angerthal
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