Virtus Investment Partners, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless stated otherwise. Virtus provides investment management and related services to individual and institutional clients. Figures below are in U.S. dollars.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $216.9 million | $144.6 million | Up 50.0% |
| Operating income | $62.1 million | $24.6 million | Up 152.6%; operating margin was approximately 28.6%, versus 17.0% |
| Net income attributable to common stockholders | $36.6 million | $(4.3) million | Diluted EPS was $4.54 versus $(0.58) |
| Net cash from operating activities | $150.2 million | $(252.3) million | Improved mainly because CIP investment purchases, net of sales, were lower |
| Cash and cash equivalents | $228.3 million | $246.5 million at Dec. 31, 2020 | Company cash; excludes cash held by consolidated investment products (CIP) |
| Debt | $195.7 million carrying value | $201.2 million at Dec. 31, 2020 | $199.8 million term-loan principal outstanding; no revolver borrowings |
| Total assets / total equity | $3.70 billion / $738.7 million | $3.47 billion / $720.9 million at Dec. 31, 2020 | Balance sheet includes substantial CIP assets and liabilities |
Revenue growth reflected higher average assets under management (AUM), including market gains, positive net flows and the AllianzGI transaction. Employment expense rose 38.8% to $91.8 million, primarily from higher profit- and sales-based compensation; total operating expenses rose 29.0%. The reported effective tax rate was 22.5%, compared with 91.1% in Q1 2020, when valuation allowances related to unrealized investment losses increased the rate.
AUM, flows and material changes
- AUM was $168.9 billion at March 31, up 86.2% year over year and 27.8% from year-end 2020. The year-over-year increase included $40.5 billion of positive market performance, $29.5 billion from the AllianzGI transaction and $9.2 billion of positive net flows.
- Q1 2021 total sales were $10.6 billion, up 47.4%; net flows were positive $2.4 billion, compared with negative $1.4 billion in Q1 2020. Positive net flows were concentrated in retail separate accounts and open-end funds.
- On February 1, Virtus finalized its AllianzGI strategic partnership, adding $29.5 billion in AUM and the NFJ Investment Group. The transaction added $120.4 million of definite-lived intangibles and $25.0 million of goodwill. Estimated future contingent consideration of $137.7 million was recorded as a liability, with payments based on fees earned over seven years.
- Virtus entered into an agreement on February 1 to acquire Westchester Capital Management; closing was expected in the second half of 2021, subject to customary conditions and approvals, including fund shareholder approvals.
Cash, debt and capital allocation
Virtus repaid $5.9 million of term-loan principal in the quarter. The $100 million revolving facility, which expires in June 2022, was undrawn; the term loan matures in June 2024. Company cash flow should be distinguished from CIP cash flows: CIP are consolidated investment products, and the filing states Virtus’s exposure to them is generally limited to its beneficial interests and fees. The $2.2 billion of CIP notes payable is not equivalent to corporate borrowings.
Investing activities used $2.6 million, mainly for capital expenditures. Financing activities used $87.7 million, including debt repayments, common dividends, share repurchases, employee tax withholding and net redemptions to noncontrolling interests. Virtus declared a quarterly dividend of $0.82 per share and repurchased 19,912 shares for $5.0 million during the quarter.
Outlook, risks and unusual items
- The filing provides no numerical earnings, revenue or AUM guidance. Management cautions that interim results are not necessarily indicative of full-year results and describes continued uncertainty in the economic and market recovery from COVID-19.
- Key stated risks include falling AUM or adverse investment performance, client withdrawals or termination of advisory agreements, competition, dependence on key personnel and distribution relationships, technology interruptions, regulatory or legal matters, and inability to meet debt obligations or maintain dividends.
- Management said legal and regulatory matters were not expected, based on information then available, to materially adversely affect the company overall; outcomes remain uncertain and could affect particular periods.
- Market-related gains and losses, and consolidated CLO income and expenses, affect reported results. Q1 operating cash flow comparisons were also heavily affected by CIP investment activity, so the year-over-year swing is not solely a measure of underlying corporate cash generation.
- Management reported effective disclosure controls as of March 31, 2021, no material changes to internal control over financial reporting, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of AUM growth and future fee revenue reflects sustainable net flows and market performance versus the AllianzGI asset addition.
- The assumptions underlying the $137.7 million contingent consideration estimate and the expected costs, approvals and closing timetable for Westchester.
- Corporate liquidity, debt repayment capacity and dividend sustainability, distinguishing Virtus’s own obligations from consolidated but generally non-recourse CIP obligations.
- The underlying drivers of compensation and distribution costs, effective tax rate changes, and recurring earnings relative to market-related and CIP effects.
- Potential developments in legal, regulatory and COVID-19-related risks; the filing does not quantify a probable loss for the described legal matters.