Virtus Investment Partners, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Virtus provides investment management and related services to retail and institutional clients. Figures below are in U.S. dollars; financial statement amounts are in millions unless specified.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $130.7 | $129.0 | +1.3% |
| Operating income | $21.0 | $22.6 | -7.2% |
| Operating margin | 16.1% | 17.5% | -1.5 percentage points |
| Net income | $22.5 | $23.8 | -5.7% |
| Net income attributable to common stockholders | $19.7 | $21.2 | -7.3% |
| Diluted EPS | $2.61 | $2.77 | -5.8% |
| Net cash used in operating activities | $23.2 | $61.8 | Use decreased by $38.5 |
- Revenue mix: Investment management fees increased 5.4% to $105.9 million, led by institutional accounts (+40.2%) and retail separate accounts (+8.9%). Distribution and service fees fell 20.2%, and administration and shareholder service fees fell 8.4%.
- Costs and taxes: Operating expenses rose 3.1% to $109.7 million, including $1.2 million of restructuring and severance costs. Amortization expense increased 49.7% to $7.5 million, primarily reflecting the SGA acquisition. The estimated effective tax rate was 15.8%, versus 21.5%, mainly due to a lower valuation allowance associated with investments.
- Cash and liquidity: Cash and cash equivalents were $142.3 million at March 31, down from $201.7 million at year-end. The cash-flow statement reports a $56.6 million decrease in cash, cash equivalents and restricted cash, to $198.1 million, including cash held by consolidated investment products.
- Debt: Balance-sheet debt was $317.7 million net of issuance costs; gross term-loan borrowings were $328.2 million. Virtus had no borrowings on its $100 million revolving facility and repaid $12.4 million of principal during the quarter. The term loan matures in 2024.
- Dividends and repurchases: Common dividends declared were $0.55 per share, up from $0.45 a year earlier; preferred dividends were $1.8125 per share. Virtus repurchased 147,962 common shares for $15.0 million at an average price of $101.34.
Assets under management and period-over-period changes
- Total AUM was $101.7 billion at March 31, up 14.2% year over year and 10.5% from December 31. Long-term AUM was $99.9 billion, up 14.3% year over year. Management attributed much of the annual increase to the July 2018 SGA acquisition; the quarterly increase was primarily market performance.
- Average long-term AUM increased 6.6% to $94.7 billion, while the average long-term fee rate declined from 46.0 to 45.6 basis points. Management cited the acquired SGA assets’ lower blended fee rates, particularly in institutional accounts.
- Long-term net flows were negative $54 million, compared with negative $731 million in Q1 2018. Open-end fund net outflows were $868 million, partly offset by inflows in ETFs, retail separate accounts and structured products. Market performance added $9.7 billion to long-term AUM.
- Revenue growth did not translate into operating-income growth: higher expenses, including acquisition-related amortization, outweighed much of the fee-revenue increase. Lower other income and expense also contributed to lower pretax income.
Outlook, risks and unusual items
- The filing provides no specific quantitative earnings or AUM guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Risks identified include AUM declines and client withdrawals, investment performance and market volatility, competition, retaining key personnel, regulatory or legal developments, technology disruptions, debt service and covenant compliance, and impairment of goodwill or intangible assets.
- Virtus is regularly involved in litigation, arbitration and regulatory examinations. Management did not expect these matters, based on information available, to have a material adverse effect overall, but noted that outcomes are uncertain and could affect particular periods.
- Consolidated investment products include CLOs with $1.64 billion of notes payable on Virtus’s consolidated balance sheet. These obligations are generally payable only from the related CLO assets; Virtus states its exposure is limited to its beneficial interests and accrued management fees. Do not treat this consolidated balance as equivalent to corporate recourse debt.
- Adoption of the lease accounting standard on January 1, 2019 recorded a $20.5 million right-of-use asset and $28.6 million lease liability. Management reported disclosure controls were effective, while excluding SGA from its internal-control assessment.
Important facts for investors to verify
- Whether improved net flows persist and how much future AUM growth depends on market returns versus client flows and acquisitions.
- The sustainability of fee rates and revenue growth given open-end fund outflows, lower average fee rates and changes in product mix.
- Corporate debt repayment capacity, interest costs and covenant headroom; distinguish corporate borrowings from consolidated CLO obligations.
- SGA integration and acquisition economics, including ongoing amortization and the expected benefits of the acquisition.
- Any material developments in legal or regulatory matters, market exposures, and the risks associated with CLO valuations and financing.