Virtus Investment Partners, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Virtus provides investment management and related services to retail and institutional clients. Financial statements are unaudited.
Business and operating context
Revenue is primarily asset-based. Assets under management (AUM) were $55.0 billion at quarter-end, up 31.6% from September 30, 2012 and 20.8% from year-end 2012. Management attributed the year-to-date increase principally to $7.5 billion of net inflows and $2.6 billion of market appreciation. Long-term open-end mutual funds were the principal source of sales and net flows.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $100.4 million | $72.0 million | $282.7 million | $201.2 million |
| Operating income | $31.6 million | $17.8 million | $79.6 million | $40.0 million |
| Net income | $21.3 million | $11.6 million | $50.3 million | $25.5 million |
| Net income attributable to common stockholders | $21.1 million | $11.6 million | $50.4 million | $25.4 million |
| Diluted EPS | $2.56 | $1.43 | $6.21 | $3.15 |
| Operating margin, approximately | 31.5% | 24.7% | 28.2% | 19.9% |
Quarterly revenue grew 39.6%; operating income rose 78.0% and common-stockholder net income rose 81.1%. For the nine months, revenue increased 40.5%, operating income 99.2%, and common-stockholder net income 98.6%. Investment management fees grew 39.9% in Q3 and 40.6% year to date, mainly reflecting higher average AUM. Total operating expenses rose 26.9% in Q3 and 26.0% year to date, with higher compensation and distribution costs among the drivers.
- Cash flow: Operating cash flow was $26.1 million for the first nine months, versus $14.6 million a year earlier. Investing activities used $5.8 million; financing activities provided $161.0 million. The financing inflow principally reflected the September stock offering.
- Liquidity and debt: Cash and cash equivalents were $244.7 million at September 30, 2013, versus $63.4 million at December 31, 2012. Working capital was $352.2 million; this reported measure includes consolidated sponsored investment products. Virtus repaid its $15.0 million revolving-facility balance and had no debt outstanding at quarter-end, with capacity to draw up to $75.0 million under the facility.
- Capital and balance sheet: Total assets were $601.6 million and total equity $465.8 million. A September public offering of approximately 1.3 million shares generated $191.6 million net proceeds. The company also repurchased $19.7 million of shares year to date and extended authorization for up to 350,000 additional repurchases.
Material changes and notable items
- Q3 total sales were $4.9 billion, up 24.6%; long-term open-end mutual fund sales rose 28.8% to $4.3 billion. Total net flows were $1.2 billion in Q3 and $7.5 billion year to date.
- Long-term open-end fund AUM reached $34.2 billion, up 44.7% year over year. Separately managed account AUM rose 53.4%. Alternative AUM increased 157.1% to $5.9 billion, while fixed-income AUM grew 10.8%.
- The Virtus Emerging Markets Opportunities Fund represented 25.6% of Q3 and 31.4% of year-to-date long-term open-end fund sales. New investments were limited in Q1 to existing shareholders and certain broker-dealer platforms.
- Virtus acquired a 24% noncontrolling interest in Kleinwort Benson Investors International for $3.4 million in April. Rampart, acquired in October 2012, contributed to year-over-year AUM and fee growth.
- Nine-month other income/expense included a $2.46 million net loss on investments of consolidated sponsored investment products, compared with a $0.54 million gain in 2012. Consolidation of sponsored funds affected reported assets and liabilities; the filing states it did not affect net income attributable to stockholders.
Outlook, risks, and contingencies
The filing provides no specific earnings, revenue, or AUM guidance. Management said working capital and operating cash flows were expected to be adequate for short-term capital needs. Planned uses of capital include organic and acquisition growth, fund seeding, infrastructure, and share repurchases. Results remain dependent on AUM levels and mix, investment performance, flows, and market conditions.
Key disclosed risks include market declines or redemptions reducing AUM and fee revenue; investment performance and product concentration; competition and fee pressure; retaining key personnel; changes in distribution relationships; regulatory or legal developments; service-provider disruptions; and impairment of goodwill or intangibles. A 10% change in the fair value of marketable securities was estimated to change nine-month net income by $11.5 million and comprehensive income by $11.8 million. The company reported no material change to previously disclosed risk factors. Legal and regulatory matters were not considered likely to have a material adverse effect, though outcomes are uncertain and adverse developments could affect particular periods. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether AUM growth and positive flows continued after quarter-end, especially in long-term open-end funds and the Emerging Markets Opportunities Fund.
- How sustainable the unusually strong revenue and earnings growth is, and whether compensation and distribution costs continue to grow more slowly than revenue.
- The use and returns of the $191.6 million offering proceeds and the expanded seed-capital investments.
- The effect of market movements, fund redemptions, product concentration, and sponsored-fund investment marks on future earnings and liquidity.
- That reported working capital and cash balances include consolidated sponsored investment products, whose assets are not generally available to Virtus’s creditors.