Business context and reporting period
Virtus Investment Partners, Inc. is an investment manager serving retail and institutional clients. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the first quarter of 2016 unless otherwise noted. Results include consolidated sponsored investment products and a collateralized loan obligation (CLO); their assets and liabilities should be distinguished from Virtus’s own operating resources and obligations.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $79.8 million | $80.3 million |
| Operating income / margin | $10.0 million / 12.6% | $12.8 million / 15.9% |
| Net income | $13.7 million | $11.9 million |
| Net income attributable to stockholders | $13.0 million | $12.4 million |
| Net income attributable to common stockholders | $10.9 million | $12.4 million |
| Diluted EPS | $1.62 | $1.45 |
| Operating cash flow | $(15.3) million | $(38.4) million |
| Cash and cash equivalents, March 31 | $235.9 million | $64.6 million at Dec. 31, 2016 |
| Company debt under credit facility, March 31 | None outstanding | $30.0 million at Dec. 31, 2016 |
| Assets under management (AUM), March 31 | $48.0 billion | $45.7 billion at March 31, 2016 |
The company’s CLO had $325.8 million of notes payable at quarter-end; these obligations are recourse to CLO assets, and Virtus states its exposure is limited to its beneficial interests and accrued management fees. The filing reports $552.4 million of total equity, including $110.8 million of mandatory convertible preferred stock.
Changes versus the prior comparable period
- Revenue was down 0.6%. Investment management fees rose 2.8%, supported by higher average AUM and a higher average fee rate; distribution and service fees fell 13.6% and administration and transfer-agent fees fell 10.2%.
- Operating expenses increased 3.2%, with employment expenses up 10.2% and other operating expenses up 16.0%. Management cited $1.6 million of RidgeWorth acquisition-related costs, including $1.5 million of incremental incentive compensation and professional/advisory fees.
- Operating income declined 21.2%. Net income increased 15.8%, helped by lower income-tax expense and higher other income, including gains on consolidated sponsored products. Preferred dividends of $2.1 million reduced common-stockholder income; diluted EPS nevertheless rose as weighted-average common shares declined.
- Net flows improved to positive $519.5 million from negative $2.6 billion. AUM increased 5.2% year over year and 5.7% from year-end, mainly reflecting $2.4 billion of market appreciation and $0.5 billion of net inflows during Q1.
Liquidity, capital, outlook and risks
Financing cash flow was $179.2 million, principally reflecting approximately $220.1 million net proceeds from common and preferred stock offerings, partly offset by repayment of the $30.0 million credit-facility balance. Investing cash flow was $5.2 million; operating cash flow remained negative, although the outflow improved year over year. The existing $150 million revolving facility had no borrowings at quarter-end.
Virtus agreed to acquire RidgeWorth for $472 million plus the fair market value of certain investments, subject to adjustments and client consents. RidgeWorth reported $42.3 billion of AUM at March 31, 2017. Closing was expected in mid-2017, but was not assured. Financing priced for the transaction included a $260 million first-lien term loan and a $100 million revolving facility, expected to be drawn or made available at closing and secured by substantially all company assets, subject to customary conditions.
No quantified full-year earnings or revenue guidance is provided in the supplied filing text. Management identifies market levels and client flows as important drivers: lower security prices can reduce fee-generating AUM and prompt withdrawals. Other disclosed risks include competition, retention of key personnel, regulatory and legal matters, distribution relationships, acquisition completion and integration, financing availability and covenant compliance. Two securities class actions related to funds formerly subadvised by F-Squared remained pending, with class-certification motions awaiting decision; the company said it intended to defend the cases and did not consider a material loss probable and reasonably estimable. Management reported disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Whether the RidgeWorth acquisition closed, its final purchase price, client consents, financing terms and realized integration costs or synergies.
- Subsequent AUM, net flows and market-driven changes, particularly in open-end funds, where Q1 net flows remained negative.
- Whether operating expenses and acquisition-related costs continue to pressure operating margins.
- The impact of preferred dividends and eventual mandatory conversion on common-share dilution and per-share results.
- Developments in the securities litigation and any changes to legal contingencies or reserves.
- That CLO notes payable are consolidated accounting liabilities but, as described by the company, are supported by CLO assets rather than general corporate recourse.