Virtus Investment Partners, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are against December 31, 2013 unless noted. Virtus provides investment management and related services to retail and institutional clients. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
- Revenue: $107.9 million, up 25.2% from $86.2 million in Q1 2013. Investment management fees rose 24.3% to $71.8 million; distribution and service fees increased 29.2% to $22.4 million.
- Profit and margins: Operating income was $32.6 million, up 54.6%; operating margin was approximately 30.2%, versus 24.5% a year earlier. Net income was $21.8 million, and net income attributable to common stockholders was $21.9 million, up 57.1%. Basic and diluted EPS were $2.41 and $2.34, respectively, compared with $1.79 and $1.73. Attributable net margin was approximately 20.3%, versus 16.2%.
- Assets under management (AUM): $58.0 billion at quarter-end, up 13.3% year over year and 0.5% from year-end. Average AUM was $57.2 billion, up 18.4%. Average management fees increased to 51 basis points from 49.
- Flows and markets: Total net flows were negative $459.7 million, compared with positive $3.7 billion in Q1 2013; market appreciation added $955.5 million. Long-term open-end mutual funds had positive net flows of $252.4 million, down from $3.6 billion a year earlier. Separately managed accounts and institutional accounts recorded net outflows.
- Cash flow: Operating cash flow was negative $33.2 million, versus negative $5.4 million in Q1 2013; investing cash flow was negative $0.9 million and financing cash flow negative $0.1 million. The operating cash outflow reflected, among other items, annual incentive compensation payments, purchases of investments, and decreases in accrued liabilities. Cash and cash equivalents were $234.8 million at quarter-end, excluding $2.5 million held by consolidated sponsored products.
- Debt and liquidity: No debt was outstanding. The company had access to a $75 million revolving credit facility, with capacity to draw the full amount, and reported compliance with its covenants. Total equity was $510.1 million.
- Balance-sheet items: Investments were $102.5 million, compared with $37.3 million at year-end; deferred taxes, net, were $56.5 million, down from $64.5 million. Total liabilities were $71.9 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher average AUM and a higher average fee rate, supported by a greater proportion of equity and alternative assets, which generally earn higher fees.
- Operating expenses rose 15.6% to $75.2 million, slower than revenue growth. Distribution and administration expense increased 28.2%, primarily with higher long-term open-end AUM and related distribution-partner payments; employment expense increased 8.1%.
- Q1 2014 total net flows turned negative from strong positive flows in Q1 2013, despite positive long-term open-end mutual fund flows. The company attributed the year-over-year AUM increase to cumulative net flows and market appreciation over the preceding four quarters.
- Reported balances for sponsored investment products changed materially with product consolidation and deconsolidation. Virtus consolidated eight products at March 31, 2014; the company says these changes do not affect net income attributable to stockholders, and its exposure is limited to its investments and fees.
Outlook, commentary, risks, and unusual items
- No specific financial guidance or quantified forecast was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- On April 23, 2014, after quarter-end, Virtus invested $129.9 million of cash and cash equivalents to seed three new mutual funds. These investments were expected to be included in consolidated sponsored products while Virtus held a majority voting interest.
- The company identified market declines, weaker investment performance, redemptions, competition and fee pressure, loss of key personnel or distribution relationships, regulatory and legal developments, technology-service disruptions, and impairment of goodwill or intangible assets among its risks. It noted that substantially all revenue depends on AUM values and that falling markets or client withdrawals could reduce revenue and income.
- Virtus regularly faces litigation, arbitration, and regulatory examinations or investigations. Management did not expect the matters, individually or collectively, to materially adversely affect consolidated financial condition, but said outcomes are uncertain and could affect results or cash flows in particular periods. No material changes to previously reported risk factors were disclosed.
- The filing reported no debt, no material change in contractual obligations outside the ordinary course, and effective disclosure controls. It also reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether negative Q1 net flows, particularly in separately managed and institutional accounts, continued after quarter-end.
- How sustainable the higher average fee rate and recent revenue and operating-margin growth are, including the effects of asset mix and fee waivers.
- The liquidity and investment implications of the $129.9 million post-quarter fund seeding, including how much cash remained afterward.
- Whether operating cash flow improves after seasonal incentive compensation payments and how much cash usage reflects investment purchases versus recurring operations.
- The exposure and potential financial impact of legal and regulatory matters, market movements, and the sponsored-product consolidation activity.