Virtus Investment Partners, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Virtus is an investment manager serving retail and institutional clients; revenue is primarily asset-based fees. Financial statements are unaudited.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the same 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $146.0 | $152.2 | $417.2 | $414.2 |
| Operating income | $35.8 | $33.9 | $86.9 | $83.9 |
| Net income attributable to common stockholders | $22.0 | $24.9 | $66.5 | $67.1 |
| Diluted EPS | $2.95 | $3.19 | $8.86 | $8.67 |
| Operating margin | 24.5% | 22.3% | 20.8% | 20.3% |
- Q3 revenue fell 4.1%, while operating income increased 5.4% as lower expenses more than offset lower revenue. Common-stockholder income declined 11.7%, principally reflecting higher income tax expense.
- Nine-month revenue rose 0.7% and operating income rose 3.6%; common-stockholder income was down 0.9%. Diluted EPS increased 2.2%, supported in part by fewer weighted-average diluted shares.
- Q3 investment management fees declined 1.4%; lower open-end fund and structured-product fees were partly offset by growth in retail separate-account and institutional fees. Distribution and service fees declined 23.9%.
Assets under management and flows
- Total AUM was $104.1 billion at September 30, down 1.4% year over year but up 13.1% from December 31, 2018. Long-term AUM was $102.8 billion, down 1.0% year over year.
- Q3 long-term net flows were negative $1.1 billion, versus positive $0.5 billion in Q3 2018. Nine-month long-term net flows were negative $1.1 billion, versus positive $1.1 billion in 2018.
- Open-end funds had $3.98 billion less AUM year over year; fixed-income AUM declined 13.9%. Retail separate-account AUM increased 12.2%, while alternatives AUM rose 25.8%.
- Management cited net outflows as the primary reason total AUM was lower year over year; market performance partially offset the effect. Nine-month average long-term AUM rose 6.4%, primarily reflecting the 2018 SGA acquisition and market performance.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was negative $103.0 million, compared with negative $101.7 million in 2018. Investing cash flow was positive $13.5 million, versus negative $111.9 million, which included the SGA acquisition in 2018. Financing cash flow was positive $113.9 million.
- At September 30, cash and cash equivalents were $195.9 million and investments were $44.6 million. Cash and investments are not presented here net of liabilities.
- Balance-sheet debt was $292.0 million, net of debt issuance costs. The company reported $300.7 million outstanding on its term loan, due June 2024, and no borrowings on its $100 million revolving facility, due June 2022. It repaid $39.8 million of company debt during the nine months.
- Consolidated investment products (CIP) included $1.82 billion of notes payable and $2.02 billion of investments. These product liabilities are generally payable from the related products’ assets; Virtus says its exposure is limited to its beneficial interests and fees. CIP consolidation affects reported assets, liabilities and cash flows, and should be distinguished from company-level obligations.
- The filing reports negative operating cash flow in part because of investment activity in CIP. Its statement does not present a conventional company-only free-cash-flow measure.
Other material developments, outlook and risks
- Virtus incurred $2.0 million of restructuring and severance costs in the first nine months. Amortization expense increased $5.1 million year over year, primarily due to intangible assets from the SGA acquisition.
- The company declared a quarterly common dividend of $0.67 per share and repurchased 286,620 common shares for $30.0 million during the nine months; 338,183 shares remained authorized for repurchase at quarter-end.
- Its mandatory convertible preferred stock is scheduled to convert on February 1, 2020 unless converted earlier. The stated conversion range was 0.7605–0.9126 common shares per preferred share, subject to customary adjustments.
- No numeric earnings or AUM guidance is provided. Management cautions that forward-looking statements are uncertain and identifies risks including AUM declines and client withdrawals, market movements, competition, distribution relationships, key-personnel retention, regulatory or legal matters, debt covenant compliance, technology disruptions, investment losses and acquisition-related risks.
- Virtus said legal and regulatory proceedings were not expected, based on information then available, to have a material adverse effect overall, while noting an adverse outcome could affect particular periods. Management concluded disclosure controls were effective as of September 30, 2019.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of a $20.5 million right-of-use asset and a $28.6 million lease liability. At quarter-end those balances were $17.6 million and $26.0 million, respectively.
Important facts for investors to verify
- Whether net outflows—especially from open-end funds and institutional accounts—persist, and how they affect fee revenue and AUM.
- How much of reported cash flow, debt and balance-sheet growth relates to consolidated investment products versus Virtus itself.
- The sustainability of expense reductions and operating-margin improvement amid lower revenue and ongoing amortization and restructuring costs.
- Term-loan repayment capacity, covenant headroom and the February 2020 preferred-stock conversion and resulting dilution.
- Developments in legal or regulatory matters and the market, investment, distribution and other risks described in the filing.