Virtus Investment Partners, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Virtus provides investment management and related services to retail and institutional clients; earnings are primarily driven by asset-based fees. Dollar amounts below are in millions unless noted.
Financial and operating performance
- Revenue: $86.2, up 38.1% from $62.4. Investment management fees rose 38.1% to $57.8; distribution and service fees increased 36.5% to $17.4; administration and transfer-agent fees rose 44.5% to $10.7.
- Profit: Operating income was $21.1, up 165.3% from $8.0. Net income was $14.2 versus $5.5; net income attributable to common stockholders was $14.0 versus $5.4. Diluted EPS was $1.73 versus $0.68. The effective tax rate was 37.3%, compared with 40.0%.
- Margins: Operating margin was approximately 24.5%, versus 12.7% in Q1 2012; net income attributable to common stockholders was approximately 16.2% of revenue, versus 8.6%.
- Assets and flows: Assets under management (AUM) were $51.2 billion at quarter-end, up 34.6% year over year and 12.5% from December 31, 2012. Average AUM increased 33.1% to $48.3 billion. Quarterly net flows were $3.7 billion and market appreciation was $2.2 billion. Total inflows were $6.2 billion and outflows $2.5 billion.
- Cash flow: Operating cash flow was negative $5.4, versus negative $9.4 in Q1 2012. Investing cash flow was negative $1.5; financing cash flow was negative $10.6, including $10.4 of common-share repurchases and $5.2 of employee tax withholding payments, partly offset by $4.9 of contributions to noncontrolling interests. Cash and cash equivalents ended at $45.9, down $17.5 from year-end.
- Liquidity and debt: Working capital was $109.3, up from $102.4 at year-end. Long-term debt was unchanged at $15.0. The company had a $75.0 revolving credit facility, with remaining capacity available; the interest rate was 2.0% at quarter-end, and the company reported compliance with financial covenants.
- Balance sheet: Total assets were $314.7, versus $332.7 at year-end; total liabilities were $67.5, versus $85.1. Deferred tax assets, current and long-term combined, were $89.1, down from $96.9.
Material changes versus comparable periods
- Revenue growth reflected average AUM growth, strong long-term open-end mutual fund flows, and higher average fee rates. Average fees earned increased to 49 basis points from 46 basis points.
- Long-term open-end mutual fund sales rose 97.7% to $5.7 billion. The Virtus Emerging Markets Opportunities Fund represented 40.1% of these sales; during Q1, new investments in the fund were limited to existing shareholders and certain designated broker-dealer platforms.
- Expenses rose 19.5% to $65.1, slower than revenue growth. Employment expense increased 23.2% to $32.4, while distribution and administrative expense increased 14.3% to $21.6. Q1 2012 included $3.9 million in closed-end fund launch costs that did not recur in Q1 2013.
- Q1 2013 included $0.2 million of restructuring and severance charges. A $1.3 million decrease in cash and investments associated with deconsolidating three mutual funds is reflected in cash-flow and balance-sheet activity; consolidation accounting did not affect net income attributable to Virtus stockholders.
Outlook, commentary, risks, and contingencies
- The filing provides no specific earnings, revenue, AUM, or other quantitative guidance. Management said working capital and operating cash flows were expected to meet short-term capital needs, and identified growth investment, fund seeding, acquisitions, share repurchases, infrastructure, and debt payments as expected uses of capital. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Key risks include lower AUM from market declines, investment performance or redemptions; fee-rate reductions; competition; loss of key personnel or distribution relationships; regulatory and legal matters; technology-service interruptions; and limitations on deferred tax assets.
- Management said pending legal and regulatory matters were not expected to have a material adverse effect, while noting that outcomes are uncertain and an adverse development could affect results or cash flows. No material changes to the previously reported risk factors were identified.
- Market sensitivity: management estimated that a 10% change in the fair value of marketable securities would change net income by $5.6 million and comprehensive income by $5.8 million. A hypothetical 300-basis-point interest-rate change would have changed quarterly interest expense by approximately $0.1 million.
- Subsequent event: on April 9, 2013, Virtus acquired a 24% noncontrolling interest in Kleinwort Benson Investors International, Ltd. for $3.4 million.
Important facts for investors to verify
- Whether the strong AUM and sales growth continues, particularly given the Emerging Markets Opportunities Fund’s material share of sales and restrictions on new investments.
- How much earnings growth is recurring and attributable to fee-based operations versus market movements, investment gains, and other factors.
- Operating cash conversion and seasonal cash needs, including incentive compensation and employee tax-withholding payments.
- Available liquidity, revolving-facility capacity, covenant headroom, and the effect of variable interest rates.
- The sustainability of the $89.1 million deferred tax asset and the outcomes of legal or regulatory matters.
- The cost and strategic contribution of the KBII investment and future share repurchases; 45,000 shares remained authorized for repurchase at March 31, 2013.