VRTS Virtus Investment Partners Inc

HARTFORD, Conn., Jan. 31, 2020 /PRNewswire/ -- Virtus Investment Partners, Inc. (NASDAQ: VRTS) today reported financial results for the three months ended December 31, 2019.

Financial Highlights (Unaudited)

(in millions, except per share data or as noted)

Earnings Summary

The company presents U.S. GAAP and non-GAAP earnings information in this release. Management believes that the non-GAAP financial measures presented reflect the company's operating results from providing investment management and related services to individuals and institutions and uses these measures to evaluate financial performance. Non-GAAP financial measures have material limitations and should not be viewed in isolation or as a substitute for U.S. GAAP measures. Reconciliations of the non-GAAP financial measures to the most comparable U.S. GAAP measures can be found beginning on page 11 of this earnings release.

Assets Under Management and Asset Flows

(in billions)

Long-term assets under management increased 5% to $107.7 billion at December 31, 2019 from $102.8 billion at September 30, 2019 due to market appreciation and positive net flows. Total assets under management at December 31, 2019 were $108.9 billion, including $1.2 billion of assets in liquidity strategies.

Total sales of $4.8 billion were unchanged from the third quarter as higher sales from retail separate accounts, institutional, and exchange traded funds (ETFs) were offset by lower open-end fund sales. Retail separate account sales were $1.0 billion, up 24% sequentially, with growth in both the intermediary-sold and private client channels. Institutional sales increased 45% sequentially to $1.2 billion as a result of new mandates across multiple affiliates. ETF sales of $0.2 billion increased 74% from the third quarter. Open-end fund sales declined 21% to $2.3 billion from $3.0 billion in the third quarter, which included $0.6 billion of model wins and reallocations.

Total net flows of $0.3 billion improved meaningfully from ($1.1) billion in the third quarter and included positive net flows in retail separate accounts, institutional, and ETFs that were partially offset by net outflows in open-end funds. Net flows in retail separate accounts were $0.6 billion, up $0.2 billion from the prior quarter as a result of stronger sales. Institutional net flows of $0.1 billion improved from ($1.4) billion in the prior quarter, which included a single large client redemption. Open-end fund net flows of ($0.4) billion were a result of continued net outflows in bank loan strategies, partially offset by positive net flows in domestic and international equity strategies.

GAAP Results

Operating income increased 6% sequentially to $37.8 million from $35.8 million in the prior quarter, primarily reflecting lower employment expenses.

Net income attributable to common stockholders of $2.83 per diluted common share included ($0.71) of fair value adjustments on affiliate non-controlling interests, ($0.31) of net realized and unrealized losses on investments, and ($0.11) of acquisition and integration costs. Third quarter net income per diluted share of $2.95 included ($0.63) of net realized and unrealized losses on investments and ($0.12) of acquisition and integration costs.

The effective tax rate of 28% during the fourth quarter compared with 30% in the prior quarter, reflecting a change in the valuation allowance related to marketable securities.

Non-GAAP Results

Revenues, as adjusted, of $128.4 million increased 1% from the prior quarter as a result of an increase in both average long-term assets and the average fee rate. Revenues included $1.1 million of performance-related fees compared with $1.2 million in the prior quarter. Employment expenses, as adjusted, declined 2% to $58.8 million primarily due to lower incentive compensation. Other operating expenses, as adjusted, of $18.2 million compared with $18.1 million in the prior quarter.

Operating income, as adjusted, and the related margin increased to $50.1 million and 39%, respectively, from $47.7 million and 38%, respectively, in the prior quarter. The higher margin reflected growth in investment management fees and a decline in employment expenses.

Interest and dividends earned on cash equivalents, seed capital, and collateralized loan obligation (CLO) investments were $4.1 million, an increase from $3.5 million in the third quarter, primarily due to higher dividend income.

Net income attributable to common stockholders, as adjusted, which is net of noncontrolling interests, was   $4.32 per diluted common share, an increase of $0.29, or 7%, from $4.03 in the prior quarter. The increase primarily reflected higher operating income, as adjusted.

The effective tax rate, as adjusted, was 27%, unchanged from the prior quarter.

Select Balance Sheet Items (Unaudited)

(in millions)

Working capital at December 31, 2019 of $160.1 million increased 1% from September 30, 2019, reflecting net cash generated from the business partially offset by principal payments on debt and return of capital to shareholders.

During the fourth quarter, the company repurchased 85,745 shares, or 1.2% of beginning-of-quarter outstanding common shares, for $10.0 million. In addition, the company net settled 7,954 shares for $0.9 million to satisfy employee tax obligations on restricted stock units.

The company repaid $15.0 million of debt in the fourth quarter. The net leverage ratio, which is net debt to EBITDA (in accordance with the company's credit agreement), was 0.3x at December 31, 2019, down from 0.5x at September 30, 2019 and 0.7x at December 31, 2018.

As previously disclosed, each share of the company's 7.25% mandatorily convertible preferred stock will automatically convert into 0.7938 shares of the company's common stock and be available to commence trading on February 4, 2020. The conversion will result in the issuance of 912,870 shares of common stock, modestly lower than the estimated converted shares assumed in the calculation of outstanding shares at December 31, 2019.

Conference Call

Management will host an investor conference call on Friday, January 31, 2020, at 10 a.m. Eastern to discuss these financial results and related matters. The webcast of the call can be accessed in the Investor Relations section of www.virtus.com, or by telephone at 877-930-7765 for callers in the U.S. and Canada or 253-336-7413 for international callers (Conference ID: 4583175). The presentation that will be reviewed as part of the conference call will be available prior to the call in the Investor Relations section of www.virtus.com. A replay of the call will be available through February 7, 2020, by telephone at 855-859-2056 (U.S. and Canada) or 404-537-3406 (international) (Conference ID: 4583175).

About Virtus Investment Partners

Virtus Investment Partners (NASDAQ: VRTS) is a distinctive partnership of boutique investment managers singularly committed to the long-term success of individual and institutional investors. The company provides investment management products and services through its affiliated managers and select subadvisers, each with a distinct investment style, autonomous investment process, and individual brand. Virtus Investment Partners offers access to a variety of investment styles across multiple disciplines to meet a wide array of investor needs. Its affiliated managers include Ceredex Value Advisors, Duff & Phelps Investment Management, Kayne Anderson Rudnick Investment Management, Newfleet Asset Management, Rampart Investment Management, Seix Investment Advisors, Silvant Capital Management, and Sustainable Growth Advisers.

U.S. GAAP Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

Assets Under Management - Product and Asset Class

(in millions)

Assets Under Management - Average Management Fees Earned (5)

(in basis points)

 

 

Assets Under Management - Asset Flows by Product

(in millions)

Assets Under Management - Asset Flows by Product (continued)

(in millions)

Non-GAAP Information and Reconciliations

(in thousands except per share data)

The following are reconciliations and related notes of the most comparable U.S. GAAP measure to each non-GAAP measure.

The non-GAAP financial measures included in this release differ from financial measures determined in accordance with U.S. GAAP as a result of the reclassification of certain income statement items, as well as the exclusion of certain expenses and other items that are not reflective of the earnings generated from providing investment management and related services. Non-GAAP financial measures have material limitations and should not be viewed in isolation or as a substitute for U.S. GAAP measures.

Reconciliation of Total Revenues, GAAP to Total Revenues, as Adjusted:

Reconciliation of Total Operating Expenses, GAAP to Operating Expenses, as Adjusted:

Reconciliation of Operating Income (Loss), GAAP to Operating Income (Loss), as Adjusted:

Reconciliation of Net Income (Loss) Attributable to Common Stockholders, GAAP to Net Income (Loss) Attributable to Common Stockholders, as Adjusted:

Reconciliation of Income (Loss) Before Taxes, GAAP to Income (Loss) Before Taxes, as Adjusted:

Reconciliation of Income Tax Expense (Benefit), GAAP to Income Tax Expense (Benefit), as Adjusted:

Reconciliation of Administration and Shareholder Service Fees, GAAP to Administration and Shareholder Service Fees, as Adjusted:

Reconciliation of Employment Expenses, GAAP to Employment Expenses, as Adjusted:

Reconciliation of Other Operating Expenses, GAAP to Other Operating Expenses, as Adjusted:

Reconciliation of Total Other Income (Expense), Net, GAAP to Total Other Income (Expense), Net, as Adjusted:

Reconciliation of Interest and Dividend Income, GAAP to Interest and Dividend Income, as Adjusted:

Reconciliation of Total Noncontrolling Interests, GAAP to Total Noncontrolling Interests, as Adjusted

Notes to Reconciliations:

Reclassifications:

1.  Consolidated investment products - Revenues and expenses generated by operating activities of mutual funds and CLOs that are consolidated in the financial statements. Management believes that excluding these operating activities to reflect net revenues and expenses of the company prior to the consolidation of these products is consistent with the approach of reflecting its operating results from managing third-party client assets.

Other adjustments:

Revenue Related

2.  Investment management / Distribution and service fees - Each of these revenue line items is reduced to exclude fees passed through to third-party client intermediaries who own the retail client relationship and are responsible for distributing the product and servicing the client.  The amount of fees fluctuates each period, based on a predetermined percentage of the value of assets under management, and varies based on the type of investment product.  The specific adjustments are as follows:

Investment management fees - Based on specific agreements, the portion of investment management fees passed-through to third-party intermediaries for services to investors in sponsored investment products.

Distribution and service fees - Based on distinct arrangements, fees collected by the company then passed-through to third-party client intermediaries for services to investors in sponsored investment products. The adjustment represents all of the company's distribution and service fees that are recorded as a separate line item on the condensed consolidated statements of operations. Management believes that making these adjustments aids in comparing the company's operating results with other asset management firms that do not utilize third-party client intermediaries.

Expense Related

3.  Distribution and other asset-based expenses - Primarily payments to third-party client intermediaries for providing services to investors in sponsored investment products. Management believes that making this adjustment aids in comparing the company's operating results with other asset management firms that do not utilize third-party client intermediaries.

4.  Amortization of intangible assets - Non-cash amortization expense or impairment expense, if any, attributable to acquisition-related intangible assets, including any portion that is allocated to noncontrolling interests. Management believes that making this adjustment aids in comparing the company's operating results with other asset management firms that have not engaged in acquisitions.

5.  Restructuring and severance - Certain expenses associated with restructuring the business, including lease abandonment-related expenses and severance costs associated with staff reductions, that are not reflective of the ongoing earnings generation of the business. Management believes that making this adjustment aids in comparing the company's operating results with prior periods.

6.  Acquisition and integration expenses - Expenses that are directly related to acquisition and integration activities. Acquisition expenses include transaction closing costs, certain professional fees, and financing fees. Integration expenses include costs incurred that are directly attributable to combining businesses, including compensation, restructuring and severance charges, professional fees, consulting fees, and other expenses. Management believes that making these adjustments aids in comparing the company's operating results with other asset management firms that have not engaged in acquisitions.

            Components of Acquisition and Integration Expenses for the respective periods are shown below:

7.   Other - Certain expenses that are not reflective of the ongoing earnings generation of the business. Employment expenses and noncontrolling interests are adjusted for fair value measurements of affiliate minority interests. Income tax expense (benefit) items are adjusted for uncertain tax positions, changes in tax law, valuation allowances, and other unusual or infrequent items not related to current operating results to reflect a normalized effective rate.  Preferred dividends are adjusted as the shares are mandatorily convertible into common shares at the end of three years, and the non-GAAP weighted average shares are adjusted to reflect the conversion. Management believes that making these adjustments aids in comparing the company's operating results with prior periods.

Components of Other for the respective periods are shown below:

Seed Capital and CLO Related

8.  Seed capital and CLO investments (gains) losses - Gains and losses (realized and unrealized) of seed capital and CLO investments. Gains and losses (realized and unrealized) generated by investments in seed capital and CLO investments can vary significantly from period to period and do not reflect the company's operating results from providing investment management and related services. Management believes that making this adjustment aids in comparing the company's operating results with prior periods and with other asset management firms that do not have meaningful seed capital and CLO investments.

Definitions:

Revenues, as adjusted, comprise the fee revenues paid by clients for investment management and related services. Revenues, as adjusted, for purposes of calculating net income attributable to common stockholders, as adjusted, differ from U.S. GAAP, namely in excluding the impact of operating activities of consolidated investment products and reduced to exclude fees passed-through to third-party client intermediaries who own the retail client relationship and are responsible for distributing the product and servicing the client.

Operating expenses, as adjusted, is calculated to reflect expenses from ongoing continuing operations. Operating expenses, as adjusted, for purposes of calculating net income attributable to common stockholders, as adjusted, differ from U.S. GAAP expenses in that they exclude amortization or impairment, if any, of intangible assets, restructuring and severance, the effect of consolidated investment products, acquisition and integration-related expenses and certain other expenses that do not reflect the ongoing earnings generation of the business.

Operating margin, as adjusted, is a metric used to evaluate efficiency represented by operating income, as adjusted, divided by revenues, as adjusted.

Earnings (loss) per share, as adjusted, represent net income (loss) attributable to common stockholders, as adjusted, divided by weighted average shares outstanding, as adjusted, on either a basic or diluted basis.

Forward-Looking Information

This press release contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995, as amended. These statements may be identified by such forward-looking terminology as "expect," "estimate," "intent," "plan," "intend," "believe," "anticipate," "may," "will," "should," "could," "continue," "project," "opportunity," "predict," "would," "potential," "future," "forecast," "guarantee," "assume," "likely," "target" or similar statements or variations of such terms.

Our forward-looking statements are based on a series of expectations, assumptions and projections about the company and the markets in which we operate, are not guarantees of future results or performance, and involve substantial risks and uncertainty including assumptions and projections concerning our assets under management, net asset inflows and outflows, operating cash flows, business plans and ability to borrow, for all future periods. All forward-looking statements are as of the date of this release only. The company can give no assurance that such expectations or forward-looking statements will prove to be correct.  Actual results may differ materially.

Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Annual Report on Form 10-K as well as the following risks and uncertainties: (a) any reduction in our assets under management; (b) withdrawal, renegotiation or termination of investment advisory agreements; (c) damage to our reputation; (d) failure to comply with investment guidelines or other contractual requirements; (e) inability to satisfy financial covenants and payments related to our indebtedness; (f) inability to attract and retain key personnel; (g) challenges from the competition we face in our business; (h) adverse regulatory and legal developments; (i) unfavorable changes in tax laws or limitations; (j) adverse developments related to unaffiliated subadvisers; (k) negative implications of changes in key distribution relationships; (l) interruptions in or failure to provide critical technological service by us or third parties; (m) volatility associated with our common and preferred stock; (n) adverse civil litigation and government investigations or proceedings; (o) risk of loss on our investments; (p) inability to make quarterly common and preferred stock distributions; (q) lack of sufficient capital on satisfactory terms; (r) losses or costs not covered by insurance; (s) impairment of goodwill or intangible assets; (t) inability to achieve expected acquisition-related benefits; and other risks and uncertainties described in our 2018 Annual Report on Form 10-K and our filings with the Securities and Exchange Commission (the "SEC").

Certain other factors that may impact our continuing operations, prospects, financial results and liquidity, or that may cause actual results to differ from such forward-looking statements, are discussed or included in the company's periodic reports filed with the SEC and are available on our website at www.virtus.com under "Investor Relations." You are urged to carefully consider all such factors.

The company does not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this release, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us that modify or affect any of the forward-looking statements contained in or accompanying this release, such statements or disclosures will be deemed to modify or supersede such statements in this release.

 

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SOURCE Virtus Investment Partners, Inc.