Business context and reporting period
Virtus Investment Partners, Inc. is an investment manager serving retail and institutional clients. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; amounts below are U.S. dollars unless stated otherwise. Results consolidate certain sponsored investment products and a newly consolidated loan-warehousing entity, which can add investment gains and losses and balance-sheet items not belonging solely to Virtus shareholders.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $92.4m | $117.8m | $295.9m | $338.5m |
| Operating income | $23.1m | $38.9m | $63.9m | $94.1m |
| Operating margin | 25.0% | 33.0% | 21.6% | 27.8% |
| Net income (loss) attributable to common stockholders | ($0.6m) | $37.3m | $28.5m | $78.8m |
| Diluted EPS | ($0.07) | $4.02 | $3.15 | $8.46 |
- Q3 revenue fell 21.6%, principally with lower average assets under management (AUM); investment management fees declined 17.8%. Operating expenses fell 12.2%, less than the revenue decline.
- Q3 results included a $17.6m net investment loss in consolidated sponsored products and a $0.8m loss in the consolidated investment product. Management said Q3 diluted EPS included $1.89 per share of unrealized mark-to-market adjustments. A $4.6m negative variable incentive fee from one mutual fund also reduced investment management fees.
- Nine-month net income attributable to common stockholders declined 63.9%. The period included a $16.5m regulatory loss contingency in operating expenses; the related potential tax benefit was $5.5m. The estimated effective tax rate was 53.1%, versus 23.6% in 2014, reflecting valuation allowances and a prior-year tax audit benefit.
- AUM was $47.9bn at September 30, down 21.3% from $60.9bn a year earlier, including the prior-year money-market assets; excluding money-market assets, the reported decline was 19.6%. AUM fell $8.8bn from year-end 2014, primarily from $5.2bn net outflows and $3.1bn market depreciation. Former AlphaSector funds accounted for $5.9bn of nine-month net outflows; excluding those funds, net inflows were $0.7bn.
- Nine-month operating cash flow was negative $57.0m, versus negative $102.3m in 2014; investing cash flow was negative $5.4m and financing cash flow negative $12.1m. Consolidated investment-product activity affects reported cash flows. Cash and cash equivalents on the balance sheet were $126.5m at September 30, down from $202.8m at December 31, 2014; investments were $55.2m and $63.4m, respectively.
- Virtus had no borrowings under its $75m corporate credit facility and reported compliance with its covenants. It had no debt that was a general obligation of the Company. Separately, the consolidated loan-warehousing entity had $9.1m outstanding under a $160m facility; Virtus’s $20m contribution provides first-loss protection, and recourse on default is limited to its investment.
- Total equity was $539.3m at September 30, versus $563.4m at year-end. Virtus repurchased $45.0m of shares and declared dividends of $1.35 per share during the first nine months. The board authorized an additional 1.5m shares for repurchase on October 21, leaving 1,756,091 shares available.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management described liquidity and capital as significant and expects cash uses to include growth investments, product seeding, infrastructure, acquisitions, dividends and share repurchases. Results remain sensitive to market levels, AUM flows, investment performance, product mix and fee rates. Management highlighted risks including client withdrawals or termination of advisory agreements, competition and fee pressure, key-person retention, regulatory and legal developments, and reliance on distribution and service providers.
- SEC matter: Virtus reached an agreement in principle to pay $16.5m concerning historical performance information associated with former subadviser F-Squared. Commission approval remained outstanding; the company cautioned that final terms or losses could differ.
- Shareholder litigation: Two putative class actions relating to F-Squared and the former AlphaSector funds were pending. The company disputed the claims and said a material loss was not probable and reasonably estimable for these suits.
- New CLO-related investment: Virtus contributed $20m to an SPE accumulating bank loans for a potential CLO. At quarter-end the consolidated SPE held $131.9m of investments, alongside $9.1m debt and $103.5m securities-purchase payable.
- Disclosure controls were concluded effective as of September 30, 2015; management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Track AUM, net flows and fee rates, particularly open-end fund flows and developments following the AlphaSector subadviser termination.
- Review the SEC’s decision and final settlement terms for the proposed $16.5m payment, and monitor the related shareholder litigation.
- Distinguish Virtus’s corporate liquidity and debt from assets, liabilities and investment losses of consolidated funds and the SPE.
- Assess whether the lower revenue base, unusual investment marks and the elevated estimated tax rate persist in subsequent periods.
- Confirm subsequent share repurchases, dividends and progress toward securitizing the loan portfolio.