Virtus Investment Partners, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Virtus provides investment management and related services; its revenue is principally asset-based fees. Financial statements are unaudited.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $154.8 million | $146.0 million | $432.3 million | $417.2 million |
| Operating income | $41.0 million | $35.8 million | $92.2 million | $86.9 million |
| Operating margin | 26.5% | 24.5% | 21.3% | 20.8% |
| Net income attributable to common stockholders | $29.6 million | $22.0 million | $36.6 million | $66.5 million |
| Diluted EPS | $3.71 | $2.95 | $4.60 | $8.86 |
Q3 revenue increased 6.1% and operating income rose 14.6% year over year, chiefly reflecting higher average assets under management (AUM). Nine-month revenue rose 3.6%, but common-stockholder income and diluted EPS fell substantially. The comparison reflects weaker year-to-date consolidated investment product results, higher income attributed to noncontrolling interests, and a higher effective tax rate. Nine-month effective tax rates were 33.9% in 2020 and 24.0% in 2019; the 2020 rate included valuation allowances related to unrealized investment losses.
- AUM and flows: AUM was $116.5 billion at September 30, up 11.9% from a year earlier and 7.0% from December 31, 2019. Q3 long-term net flows were positive $1.2 billion versus negative $1.1 billion a year earlier; nine-month long-term net flows were positive $2.4 billion versus negative $1.1 billion. Q3 total sales were $7.6 billion, up 60.3% year over year.
- Revenue mix: Q3 investment management fees rose 8.1% to $129.8 million. Retail separate account and institutional account fees increased; closed-end fund fees, distribution and service fees, and administration fees declined.
- Cash flow: Net cash used in operating activities was $380.3 million for the nine months, versus $103.0 million used in 2019. Management attributed the increase primarily to higher net purchases of consolidated investment product (CIP) investments. Financing activities provided $305.8 million, largely reflecting CIP borrowing activity. These consolidated cash flows include investment products and should not be read as corporate operating cash flow alone.
- Liquidity and debt: Corporate cash and cash equivalents were $202.2 million at September 30, versus $221.8 million at year-end 2019; corporate investments were $54.4 million versus $83.2 million. Balance-sheet debt, net of issuance costs, was $218.0 million; term-loan principal outstanding was $223.2 million. Virtus had no borrowings on its $100 million revolving facility. It repaid $62.5 million of term-loan principal during the first nine months; the term loan matures in June 2024.
- Capital returns: The company repurchased 239,720 shares for $25.0 million in the first nine months and paid $16.5 million in common dividends. It declared a Q3 dividend of $0.82 per common share, payable in November 2020. The mandatory convertible preferred stock converted to common stock in February 2020.
Material changes and unusual items
- Market volatility associated with COVID-19 drove AUM market changes of negative $16.6 billion in Q1, positive $15.2 billion in Q2, and positive $7.1 billion in Q3. Management said the financial-market recovery and broader economic recovery remained uncertain.
- Q3 net income included $6.2 million of total other income, compared with $4.6 million of net expense in Q3 2019. For the nine months, total other expense was $9.9 million, versus $9.8 million of income in 2019, substantially affected by CIP investment valuation changes.
- Q3 CIP investment gains were partly offset by changes in the value of CIP notes payable. For the nine months, CIP recorded net realized and unrealized losses on investments, partly offset by gains in notes payable. CIP notes are primarily obligations of consolidated CLOs, with recourse to the related CLO assets; Virtus states its exposure is limited to its beneficial interests and accrued management fees.
- Virtus agreed in July 2020 to become adviser, distributor and/or administrator for certain AllianzGI assets. Closing was expected in Q1 2021; the filing gives no quantified financial impact.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management reported that COVID-19 had not materially affected liquidity or capital resources to date, but warned that market declines could reduce AUM, fees and investment values. Other stated risks include client withdrawals or contract losses, competition, regulatory and legal matters, key-person retention, financing and covenant capacity, technology and cybersecurity, and prolonged remote-work or service-provider disruption.
Management said existing legal and regulatory proceedings were not expected, individually or collectively, to materially affect results, cash flows or financial condition, while noting outcomes remain uncertain and an adverse matter could affect a particular period. The company reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether AUM growth and positive net flows continue, particularly in open-end funds, retail separate accounts and institutional accounts.
- How much future earnings are driven by recurring management fees versus volatile CIP and investment valuation results, and how noncontrolling interests affect income attributable to stockholders.
- Corporate liquidity and debt repayment capacity, distinguishing Virtus cash and obligations from consolidated CLO and other CIP balances.
- Progress, closing conditions and expected economics of the AllianzGI agreement.
- Effects of COVID-19, market conditions, legal and regulatory developments, and remote-work or cybersecurity risks on operations and AUM.