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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-10994
VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 26-3962811 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
One Financial Plaza, Hartford, CT 06103
(Address of principal executive offices, including Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
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Common Stock, $0.01 par value | | VRTS | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
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| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock was 7,184,989 as of October 27, 2023.
VIRTUS INVESTMENT PARTNERS, INC.
INDEX
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
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"We," "us," "our," the "Company," and "Virtus" as used in this Quarterly Report on Form 10-Q (the "10-Q") refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except share data) | September 30, 2023 | | December 31, 2022 |
Assets: | | | |
Cash and cash equivalents | $ | 195,403 | | | $ | 338,234 | |
Investments | 152,349 | | | 100,330 | |
Accounts receivable, net | 107,014 | | | 99,274 | |
Assets of consolidated investment products ("CIP") | | | |
Cash and cash equivalents of CIP | 209,747 | | | 250,301 | |
Cash pledged or on deposit of CIP | 683 | | | 644 | |
Investments of CIP | 2,069,215 | | | 2,190,113 | |
Other assets of CIP | 34,481 | | | 45,445 | |
Furniture, equipment and leasehold improvements, net | 25,503 | | | 19,123 | |
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Intangible assets, net | 452,338 | | | 442,519 | |
Goodwill | 397,098 | | | 348,836 | |
Deferred taxes, net | 23,659 | | | 23,171 | |
Other assets | 97,809 | | | 94,944 | |
Total assets | $ | 3,765,299 | | | $ | 3,952,934 | |
Liabilities and Equity | | | |
Liabilities: | | | |
Accrued compensation and benefits | $ | 161,745 | | | $ | 181,805 | |
Accounts payable and accrued liabilities | 32,740 | | | 33,200 | |
Dividends payable | 16,860 | | | 15,812 | |
Contingent consideration | 94,421 | | | 128,400 | |
Debt | 273,815 | | | 255,025 | |
Other liabilities | 93,134 | | | 87,827 | |
Liabilities of CIP | | | |
Notes payable of CIP | 1,943,949 | | | 2,083,314 | |
Securities purchased payable and other liabilities of CIP | 184,817 | | | 230,897 | |
Total liabilities | 2,801,481 | | | 3,016,280 | |
Commitments and Contingencies (Note 14) | | | |
Redeemable noncontrolling interests | 96,266 | | | 113,718 | |
Equity: | | | |
Equity attributable to Virtus Investment Partners, Inc.: | | | |
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 12,160,311 shares issued and 7,182,763 shares outstanding at September 30, 2023; and 12,033,247 shares issued and 7,181,554 shares outstanding at December 31, 2022 | 122 | | | 120 | |
Additional paid-in capital | 1,295,988 | | | 1,286,244 | |
Retained earnings (accumulated deficit) | 190,615 | | | 130,261 | |
Accumulated other comprehensive income (loss) | (373) | | | (358) | |
Treasury stock, at cost, 4,977,548 and 4,851,693 shares at September 30, 2023 and December 31, 2022, respectively | (624,248) | | | (599,248) | |
Total equity attributable to Virtus Investment Partners, Inc. | 862,104 | | | 817,019 | |
Noncontrolling interests | 5,448 | | | 5,917 | |
Total equity | 867,552 | | | 822,936 | |
Total liabilities and equity | $ | 3,765,299 | | | $ | 3,952,934 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
Revenues | | | | | | | |
Investment management fees | $ | 184,869 | | | $ | 172,850 | | | $ | 529,326 | | | $ | 564,691 | |
Distribution and service fees | 14,333 | | | 15,746 | | | 42,618 | | | 52,912 | |
Administration and shareholder service fees | 19,069 | | | 20,563 | | | 55,668 | | | 66,889 | |
Other income and fees | 1,000 | | | 1,102 | | | 3,069 | | | 3,516 | |
Total revenues | 219,271 | | | 210,261 | | | 630,681 | | | 688,008 | |
Operating Expenses | | | | | | | |
Employment expenses | 101,587 | | | 88,230 | | | 304,895 | | | 283,583 | |
Distribution and other asset-based expenses | 24,157 | | | 26,818 | | | 73,332 | | | 88,247 | |
Other operating expenses | 30,494 | | | 31,096 | | | 94,707 | | | 94,367 | |
Operating expenses of consolidated investment products ("CIP") | 553 | | | 538 | | | 1,613 | | | 1,927 | |
Change in fair value of contingent consideration | — | | | — | | | (6,800) | | | 2,900 | |
Restructuring expense | 691 | | | 4,015 | | | 691 | | | 4,015 | |
Depreciation expense | 1,504 | | | 938 | | | 4,134 | | | 2,835 | |
Amortization expense | 15,382 | | | 14,609 | | | 45,581 | | | 43,895 | |
Total operating expenses | 174,368 | | | 166,244 | | | 518,153 | | | 521,769 | |
Operating Income (Loss) | 44,903 | | | 44,017 | | | 112,528 | | | 166,239 | |
Other Income (Expense) | | | | | | | |
Realized and unrealized gain (loss) on investments, net | (1,918) | | | (2,493) | | | 2,469 | | | (16,018) | |
Realized and unrealized gain (loss) of CIP, net | (1,013) | | | (8,440) | | | (2,853) | | | (43,443) | |
Other income (expense), net | 128 | | | (659) | | | (1,062) | | | 199 | |
Total other income (expense), net | (2,803) | | | (11,592) | | | (1,446) | | | (59,262) | |
Interest Income (Expense) | | | | | | | |
Interest expense | (6,222) | | | (3,557) | | | (17,444) | | | (8,661) | |
Interest and dividend income | 2,872 | | | 1,013 | | | 8,785 | | | 1,870 | |
Interest and dividend income of investments of CIP | 49,803 | | | 28,644 | | | 144,501 | | | 71,436 | |
Interest expense of CIP | (38,218) | | | (20,356) | | | (112,153) | | | (46,860) | |
Total interest income (expense), net | 8,235 | | | 5,744 | | | 23,689 | | | 17,785 | |
Income (Loss) Before Income Taxes | 50,335 | | | 38,169 | | | 134,771 | | | 124,762 | |
Income tax expense (benefit) | 12,181 | | | 10,754 | | | 31,794 | | | 43,969 | |
Net Income (Loss) | 38,154 | | | 27,415 | | | 102,977 | | | 80,793 | |
Noncontrolling interests | (7,248) | | | 4,265 | | | (3,190) | | | 1,348 | |
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Net Income (Loss) Attributable to Virtus Investment Partners, Inc. | $ | 30,906 | | | $ | 31,680 | | | $ | 99,787 | | | $ | 82,141 | |
Earnings (Loss) per Share—Basic | $ | 4.26 | | | $ | 4.33 | | | $ | 13.72 | | | $ | 11.05 | |
Earnings (Loss) per Share—Diluted | $ | 4.19 | | | $ | 4.25 | | | $ | 13.50 | | | $ | 10.76 | |
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Weighted Average Shares Outstanding—Basic | 7,258 | | | 7,308 | | | 7,272 | | | 7,434 | |
Weighted Average Shares Outstanding—Diluted | 7,379 | | | 7,463 | | | 7,393 | | | 7,636 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Net Income (Loss) | $ | 38,154 | | | $ | 27,415 | | | $ | 102,977 | | | $ | 80,793 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment, net of tax of $82 and $31 for the three months ended September 30, 2023 and 2022, respectively and $5 and $280 for the nine months ended September 30, 2023 and 2022 | (226) | | | (504) | | | (15) | | | (791) | |
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Other comprehensive income (loss) | (226) | | | (504) | | | (15) | | | (791) | |
Comprehensive income (loss) | 37,928 | | | 26,911 | | | 102,962 | | | 80,002 | |
Comprehensive (income) loss attributable to noncontrolling interests | (7,248) | | | 4,265 | | | (3,190) | | | 1,348 | |
Comprehensive Income (Loss) Attributable to Virtus Investment Partners, Inc. | $ | 30,680 | | | $ | 31,176 | | | $ | 99,772 | | | $ | 81,350 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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| Nine Months Ended September 30, |
(in thousands) | 2023 | | 2022 |
Cash Flows from Operating Activities: | | | |
Net income (loss) | $ | 102,977 | | | $ | 80,793 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation expense, intangible asset and other amortization | 51,017 | | | 48,143 | |
Stock-based compensation | 20,072 | | | 19,267 | |
Amortization of deferred commissions | 1,261 | | | 3,653 | |
Payments of deferred commissions | (1,105) | | | (1,789) | |
Equity in earnings of equity method investments | 810 | | | (527) | |
Distributions from equity method investments | 1,789 | | | 2,239 | |
Right of use asset | — | | | 3,222 | |
Realized and unrealized (gains) losses on investments, net | (2,459) | | | 16,056 | |
Sales (purchases) of investments, net | (24,881) | | | (8,396) | |
Change in fair value of contingent consideration | (6,800) | | | 2,900 | |
Deferred taxes, net | 2,735 | | | (5,500) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net and other assets | 3,441 | | | 32,940 | |
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities | (38,966) | | | (76,639) | |
Operating activities of consolidated investment products ("CIP"): | | | |
Realized and unrealized (gains) losses on investments of CIP, net | (1,769) | | | 41,312 | |
Purchases of investments by CIP | (905,184) | | | (601,749) | |
Sales of investments by CIP | 1,028,251 | | | 595,451 | |
Net proceeds (purchases) of short-term investments and securities sold short by CIP | (168) | | | (655) | |
Change in other assets and liabilities of CIP | (1,181) | | | 4,129 | |
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Net cash provided by (used in) operating activities | 229,840 | | | 154,850 | |
Cash Flows from Investing Activities: | | | |
Capital expenditures | (6,438) | | | (5,495) | |
Acquisition of businesses, net of cash acquired of $4,395 and $8,443 for the nine months ended September 30, 2023 and 2022, respectively | (108,999) | | | (19,944) | |
Change in cash and cash equivalents of CIP due to consolidation (deconsolidation), net | (267) | | | (308) | |
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Purchase of equity method investment | (11,645) | | | — | |
Net cash provided by (used in) investing activities | (127,349) | | | (25,747) | |
Cash Flows from Financing Activities: | | | |
Borrowings on credit agreement | 50,000 | | | — | |
Repayments on credit agreement | (32,063) | | | (12,062) | |
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Common stock dividends paid | (38,385) | | | (35,244) | |
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Repurchase of common shares | (25,000) | | | (80,000) | |
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Payment of contingent consideration | (27,179) | | | (33,036) | |
Taxes paid related to net share settlement of restricted stock units | (13,436) | | | (16,450) | |
Affiliate equity sales (purchases) | (20,784) | | | (11,089) | |
Net contributions from (distributions to) noncontrolling interests | 5,967 | | | (1,091) | |
Financing activities of CIP: | | | |
Payments on borrowings by CIP | (317,362) | | | (129,996) | |
Borrowings by CIP | 132,473 | | | — | |
Net cash provided by (used in) financing activities | (285,769) | | | (318,968) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (68) | | | (650) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (183,346) | | | (190,515) | |
Cash, cash equivalents and restricted cash, beginning of period | 589,179 | | | 586,145 | |
Cash, cash equivalents and restricted cash, end of period | $ | 405,833 | | | $ | 395,630 | |
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Non-Cash Investing Activities: | | | |
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Contingent consideration | $ | — | | | $ | 1,200 | |
Non-Cash Financing Activities: | | | |
Increase (decrease) to noncontrolling interests due to consolidation (deconsolidation) of CIP, net | $ | (7,170) | | | $ | (338) | |
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Common stock dividends payable | $ | 13,788 | | | $ | 12,014 | |
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(in thousands) | September 30, 2023 | | December 31, 2022 |
Reconciliation of cash, cash equivalents and restricted cash | | | |
Cash and cash equivalents | $ | 195,403 | | | $ | 338,234 | |
Cash of CIP | 209,747 | | | 250,301 | |
Cash pledged or on deposit of CIP | 683 | | | 644 | |
Cash, cash equivalents and restricted cash at end of period | $ | 405,833 | | | $ | 589,179 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
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| Permanent Equity | | Temporary Equity |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Attributed To Virtus Investment Partners, Inc. | | Non- controlling Interests | | Total Equity | | Redeemable Non- controlling Interests |
(in thousands, except per share data) | Shares | | Par Value | | | | | | Shares | | Amount | |
Balances at June 30, 2022 | 7,275,337 | | | $ | 120 | | | | | | | $ | 1,275,907 | | | $ | 88,196 | | | $ | (267) | | | 4,747,951 | | | $ | (579,248) | | | $ | 784,708 | | | $ | 6,997 | | | $ | 791,705 | | | $ | 139,147 | |
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Net income (loss) | — | | | — | | | | | | | — | | | 31,680 | | | — | | | — | | | — | | | 31,680 | | | 151 | | | 31,831 | | | (4,416) | |
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Foreign currency translation adjustments | — | | | — | | | | | | | — | | | — | | | (504) | | | — | | | — | | | (504) | | | — | | | (504) | | | — | |
Net subscriptions (redemptions) and other | — | | | — | | | | | | | 2,035 | | | — | | | — | | | — | | | — | | | 2,035 | | | (414) | | | 1,621 | | | (10,289) | |
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Cash dividends declared ($1.65 per common share) | — | | | — | | | | | | | — | | | (12,552) | | | — | | | — | | | — | | | (12,552) | | | — | | | (12,552) | | | — | |
Repurchases of common shares | (50,422) | | | — | | | | | | | — | | | — | | | — | | | 50,422 | | | (10,000) | | | (10,000) | | | — | | | (10,000) | | | — | |
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Issuance of common shares related to employee stock transactions | 7,058 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Taxes paid on stock-based compensation | — | | | — | | | | | | | (1,166) | | | — | | | — | | | — | | | — | | | (1,166) | | | — | | | (1,166) | | | — | |
Stock-based compensation | — | | | — | | | | | | | 5,004 | | | — | | | — | | | — | | | — | | | 5,004 | | | — | | | 5,004 | | | — | |
Balances at September 30, 2022 | 7,231,973 | | | $ | 120 | | | | | | | $ | 1,281,780 | | | $ | 107,324 | | | $ | (771) | | | 4,798,373 | | | $ | (589,248) | | | $ | 799,205 | | | $ | 6,734 | | | $ | 805,939 | | | $ | 124,442 | |
Balances at June 30, 2023 | 7,254,786 | | | $ | 122 | | | | | | | $ | 1,286,775 | | | $ | 174,011 | | | $ | (147) | | | 4,903,533 | | | $ | (609,248) | | | $ | 851,513 | | | $ | 5,196 | | | $ | 856,709 | | | $ | 110,399 | |
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Net income (loss) | — | | | — | | | | | | | — | | | 30,906 | | | — | | | — | | | — | | | 30,906 | | | 671 | | | 31,577 | | | 6,577 | |
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Foreign currency translation adjustments | — | | | — | | | | | | | — | | | — | | | (226) | | | — | | | — | | | (226) | | | — | | | (226) | | | — | |
Net subscriptions (redemptions) and other | — | | | — | | | | | | | 3,218 | | | — | | | — | | | — | | | — | | | 3,218 | | | (419) | | | 2,799 | | | (20,710) | |
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Cash dividends declared ($1.90 per common share) | — | | | — | | | | | | | — | | | (14,302) | | | — | | | — | | | — | | | (14,302) | | | — | | | (14,302) | | | — | |
Repurchases of common shares | (74,015) | | | — | | | | | | | — | | | — | | | — | | | 74,015 | | | (15,000) | | | (15,000) | | | — | | | (15,000) | | | — | |
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Issuance of common shares related to employee stock transactions | 1,992 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Taxes paid on stock-based compensation | — | | | — | | | | | | | (214) | | | — | | | — | | | — | | | — | | | (214) | | | — | | | (214) | | | — | |
Stock-based compensation | — | | | — | | | | | | | 6,209 | | | — | | | — | | | — | | | — | | | 6,209 | | | — | | | 6,209 | | | — | |
Balances at September 30, 2023 | 7,182,763 | | | $ | 122 | | | | | | | $ | 1,295,988 | | | $ | 190,615 | | | $ | (373) | | | 4,977,548 | | | $ | (624,248) | | | $ | 862,104 | | | $ | 5,448 | | | $ | 867,552 | | | $ | 96,266 | |
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| Permanent Equity | | Temporary Equity |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Attributed To Virtus Investment Partners, Inc. | | Non- controlling Interests | | Total Equity | | Redeemable Non- controlling Interests |
(in thousands, except per share data) | Shares | | Par Value | | | | | | Shares | | Amount | |
Balances at December 31, 2021 | 7,506,151 | | | $ | 119 | | | | | | | $ | 1,276,424 | | | $ | 60,962 | | | $ | 20 | | | 4,400,596 | | | $ | (509,248) | | | $ | 828,277 | | | $ | 8,350 | | | $ | 836,627 | | | $ | 138,965 | |
Net income (loss) | — | | | — | | | | | | | — | | | 82,141 | | | — | | | — | | | — | | | 82,141 | | | (184) | | | 81,957 | | | (1,164) | |
Foreign currency translation adjustments | — | | | — | | | | | | | — | | | — | | | (791) | | | — | | | — | | | (791) | | | — | | | (791) | | | — | |
Net subscriptions (redemptions) and other | — | | | — | | | | | | | 2,035 | | | — | | | — | | | — | | | — | | | 2,035 | | | (1,432) | | | 603 | | | (13,359) | |
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Cash dividends declared ($4.65 per common share) | — | | | — | | | | | | | — | | | (35,779) | | | — | | | — | | | — | | | (35,779) | | | — | | | (35,779) | | | — | |
Repurchases of common shares | (397,777) | | | — | | | | | | | — | | | — | | | — | | | 397,777 | | | (80,000) | | | (80,000) | | | — | | | (80,000) | | | — | |
Issuance of common shares related to employee stock transactions | 123,599 | | | 1 | | | | | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Taxes paid on stock-based compensation | — | | | — | | | | | | | (16,450) | | | — | | | — | | | — | | | — | | | (16,450) | | | — | | | (16,450) | | | — | |
Stock-based compensation | — | | | — | | | | | | | 19,772 | | | — | | | — | | | — | | | — | | | 19,772 | | | — | | | 19,772 | | | — | |
Balances at September 30, 2022 | 7,231,973 | | | $ | 120 | | | | | | | $ | 1,281,780 | | | $ | 107,324 | | | $ | (771) | | | 4,798,373 | | | $ | (589,248) | | | $ | 799,205 | | | $ | 6,734 | | | $ | 805,939 | | | $ | 124,442 | |
Balances at December 31, 2022 | 7,181,554 | | | $ | 120 | | | | | | | $ | 1,286,244 | | | $ | 130,261 | | | $ | (358) | | | 4,851,693 | | | $ | (599,248) | | | $ | 817,019 | | | $ | 5,917 | | | $ | 822,936 | | | $ | 113,718 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | | | | | — | | | 99,787 | | | — | | | — | | | — | | | 99,787 | | | 786 | | | 100,573 | | | 2,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | — | | | — | | | | | | | — | | | — | | | (15) | | | — | | | — | | | (15) | | | — | | | (15) | | | — | |
Net subscriptions (redemptions) and other | — | | | — | | | | | | | 3,218 | | | — | | | — | | | — | | | — | | | 3,218 | | | (1,255) | | | 1,963 | | | (19,856) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends declared ($5.20 per common share) | — | | | — | | | | | | | — | | | (39,433) | | | — | | | — | | | — | | | (39,433) | | | — | | | (39,433) | | | — | |
Repurchases of common shares | (125,855) | | | — | | | | | | | — | | | — | | | — | | | 125,855 | | | (25,000) | | | (25,000) | | | — | | | (25,000) | | | — | |
Issuance of common shares related to employee stock transactions | 127,064 | | | 2 | | | | | | | (2) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Taxes paid on stock-based compensation | — | | | — | | | | | | | (13,436) | | | — | | | — | | | — | | | — | | | (13,436) | | | — | | | (13,436) | | | — | |
Stock-based compensation | — | | | — | | | | | | | 19,964 | | | — | | | — | | | — | | | — | | | 19,964 | | | — | | | 19,964 | | | — | |
Balances at September 30, 2023 | 7,182,763 | | | $ | 122 | | | | | | | $ | 1,295,988 | | | $ | 190,615 | | | $ | (373) | | | 4,977,548 | | | $ | (624,248) | | | $ | 862,104 | | | $ | 5,448 | | | $ | 867,552 | | | $ | 96,266 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Virtus Investment Partners, Inc. (the "Company," "we," "us," "our" or "Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries.
The Company provides investment management and related services to institutions and individuals. The Company's investment strategies are offered to institutional clients through separate accounts and pooled, or commingled, structures. The Company’s retail investment management services are provided to individuals through products consisting of: mutual funds registered pursuant to the Investment Company Act of 1940, as amended ("U.S. retail funds"); Undertaking for Collective Investment in Transferable Securities and Qualifying Investor Funds (collectively, "global funds") and collectively with U.S. retail funds, variable insurance funds, and exchange-traded funds ("ETFs"), (the "open-end funds"); closed-end funds (collectively, with open-end funds, the "funds"); and retail separate accounts that include intermediary-sold and private client accounts. The Company also provides subadvisory services to other investment advisers and serves as the collateral manager for structured products.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report on Form 10-K") filed with the Securities and Exchange Commission (the "SEC"). The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2022 Annual Report on Form 10-K.
3. Revenues
The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. Investment management fees, distribution and service fees, and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which these fees are calculated are variable in nature and subject to factors outside of the Company's control, such as additional investments, withdrawals and market performance. Because of this, these fees are considered constrained until the end of the contractual measurement period (monthly or quarterly), which is when asset values are generally determinable.
Investment Management Fees by Source
The following table summarizes investment management fees by source:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Investment management fees | | | | | | | |
Open-end funds | $ | 80,294 | | | $ | 80,234 | | | $ | 229,721 | | | $ | 262,486 | |
Closed-end funds | 14,673 | | | 15,773 | | | 44,025 | | | 48,887 | |
| | | | | | | |
Retail separate accounts | 44,441 | | | 39,154 | | | 127,323 | | | 134,069 | |
Institutional accounts | 45,461 | | | 37,689 | | | 128,257 | | | 119,249 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total investment management fees | $ | 184,869 | | | $ | 172,850 | | | $ | 529,326 | | | $ | 564,691 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
4. Acquisitions
AlphaSimplex Group, LLC
On April 1, 2023, the Company completed the acquisition of AlphaSimplex Group, LLC ("AlphaSimplex"), which was accounted for in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"). The total purchase price paid of $113.4 million was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. Goodwill of $48.3 million and intangible assets of $55.4 million were recorded for the acquisition. The Company expects $103.7 million of the purchase price, related to goodwill and intangibles, to be tax deductible over 15 years. The purchase price allocation is based upon preliminary information and is subject to change if additional information becomes available. The final fair value of the net assets acquired may result in adjustments to certain assets and liabilities, including goodwill. The revenues and operating income of AlphaSimplex were not material to the Company's results of operations for the three and nine months ended September 30, 2023.
The following table summarizes the identified acquired assets and liabilities assumed as of the AlphaSimplex acquisition date:
| | | | | |
| April 1, 2023 |
| (in thousands) |
Assets: | |
Cash and cash equivalents | $ | 4,395 | |
Investments | 8,567 | |
Accounts receivable | 5,422 | |
Furniture, equipment and leasehold improvements | 4,161 | |
Intangible assets | 55,400 | |
Goodwill | 48,262 | |
Other assets | 9,126 | |
Total Assets | 135,333 | |
Liabilities: | |
| |
Accounts payable and accrued liabilities | 21,939 | |
Total Liabilities | 21,939 | |
Total Net Assets Acquired | $ | 113,394 | |
Identifiable Intangible Assets Acquired
In connection with the allocation of the AlphaSimplex purchase price, the Company identified the following intangible assets:
| | | | | | | | | | | |
| April 1, 2023 |
| Approximate Fair Value (in thousands) | | Weighted Average of Useful Life (in years) |
Definite-lived intangible assets: | | | |
Investment management agreements | 52,000 | | | 10.5 |
Trade names | 3,400 | | | 9.0 |
Total definite-lived intangible assets | $ | 55,400 | | | |
The fair value of investment management agreements was estimated using a discounted cash flow method and the fair value of the trade names was estimated using a royalty savings method, each of which was prepared with the assistance of an independent valuation firm.
Stone Harbor Investment Partners
On January 1, 2022, the Company acquired Stone Harbor Investment Partners, LLC ("Stone Harbor"), which was accounted for in accordance with ASC 805. The total purchase price of $30.1 million was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values at the date of the acquisition, as well as goodwill of $10.3 million and definite-lived intangible assets of $10.8 million.
5. Goodwill and Intangible Assets, Net
Activity in goodwill was as follows:
| | | | | | | | |
| | (in thousands) |
Balance at December 31, 2022 | | $ | 348,836 | |
Acquisitions | | 48,262 | |
| | |
Balance at September 30, 2023 | | $ | 397,098 | |
Below is a summary of intangible assets, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Definite-Lived | | Indefinite-Lived | | Total |
(in thousands) | Gross Book Value | | Accumulated Amortization | | Net Book Value | | Net Book Value | | Net Book Value |
Balances at December 31, 2022 | $ | 756,028 | | | $ | (355,807) | | | $ | 400,221 | | | $ | 42,298 | | | $ | 442,519 | |
Additions | 55,400 | | | — | | | 55,400 | | | — | | | 55,400 | |
Intangible amortization | — | | | (45,581) | | | (45,581) | | | — | | | (45,581) | |
Balances at September 30, 2023 | $ | 811,428 | | | $ | (401,388) | | | $ | 410,040 | | | $ | 42,298 | | | $ | 452,338 | |
Definite-lived intangible asset amortization for the remainder of fiscal year 2023 and succeeding fiscal years is estimated as follows:
| | | | | | | | |
Fiscal Year | | Amount (in thousands) |
Remainder of 2023 | | $ | 15,445 | |
2024 | | 56,739 | |
2025 | | 51,971 | |
2026 | | 50,991 | |
2027 | | 47,890 | |
2028 and thereafter | | 187,004 | |
Total | | $ | 410,040 | |
6. Investments
Investments consist primarily of investments in the Company's sponsored products. The Company's investments, excluding the assets of consolidated investment products ("CIP") discussed in Note 16, at September 30, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | |
(in thousands) | September 30, 2023 | | December 31, 2022 |
Investment securities - fair value | $ | 118,464 | | | $ | 76,999 | |
| | | |
Equity method investments (1) | 22,557 | | | 11,448 | |
Nonqualified retirement plan assets | 11,328 | | | 10,154 | |
Other investments | — | | | 1,729 | |
Total investments | $ | 152,349 | | | $ | 100,330 | |
(1) The Company's equity method investments are valued on a three-month lag based upon the availability of financial information. On January 1, 2023, the Company made an additional investment in an existing minority interest in an affiliated manager for $11.6 million including transaction costs.
Investment Securities - fair value
Investment securities - fair value consist of investments in the Company's sponsored funds and separately managed accounts. The composition of the Company’s investment securities - fair value was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
(in thousands) | Cost | | Fair Value | | Cost | | Fair Value |
Investment Securities - fair value | | | | | | | |
Sponsored funds | $ | 82,156 | | | $ | 76,958 | | | $ | 67,472 | | | $ | 62,744 | |
Equity securities | 15,829 | | | 17,167 | | | 13,440 | | | 14,255 | |
Debt securities | 24,339 | | | 24,339 | | | — | | | — | |
Total investment securities - fair value | $ | 122,324 | | | $ | 118,464 | | | $ | 80,912 | | | $ | 76,999 | |
For the three and nine months ended September 30, 2023, the Company recognized net realized losses of $0.1 million and net realized gains $2.1 million, respectively, related to its investment securities - fair value. For the three and nine months ended September 30, 2022, the Company recognized net realized gains of $0.4 million and $0.4 million, respectively, related to its investment securities - fair value.
7. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of CIP discussed in Note 16, as of September 30, 2023 and December 31, 2022 by fair value hierarchy level were as follows:
September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 157,635 | | | $ | — | | | $ | — | | | $ | 157,635 | |
Investment securities - fair value | | | | | | | |
Sponsored funds | 76,958 | | | — | | | — | | | 76,958 | |
Equity securities | 17,167 | | | — | | | — | | | 17,167 | |
Debt securities | — | | | — | | | 24,339 | | | 24,339 | |
| | | | | | | |
Nonqualified retirement plan assets | 11,328 | | | — | | | — | | | 11,328 | |
Total assets measured at fair value | $ | 263,088 | | | $ | — | | | $ | 24,339 | | | $ | 287,427 | |
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 54,910 | | | $ | 54,910 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 54,910 | | | $ | 54,910 | |
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 287,126 | | | $ | — | | | $ | — | | | $ | 287,126 | |
Investment securities - fair value | | | | | | | |
Sponsored funds | 62,744 | | | — | | | — | | | 62,744 | |
Equity securities | 14,255 | | | — | | | — | | | 14,255 | |
| | | | | | | |
| | | | | | | |
Nonqualified retirement plan assets | 10,154 | | | — | | | — | | | 10,154 | |
Total assets measured at fair value | $ | 374,279 | | | $ | — | | | $ | — | | | $ | 374,279 | |
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 78,100 | | | $ | 78,100 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 78,100 | | | $ | 78,100 | |
The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:
Cash equivalents represent investments in money market funds. Cash investments in money market funds are valued using published net asset values and are classified as Level 1.
Sponsored funds represent investments in open-end funds, closed-end funds and ETFs for which the Company acts as the investment manager. The fair value of open-end funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds and ETFs is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.
Equity securities represent securities traded on active markets, are valued at the official closing price (typically the last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Nonqualified retirement plan assets represent mutual funds within the Company's nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Debt securities represent investments in senior secured bank loans and are based on evaluated quotations received from independent pricing services and are categorized as Level 2 or Level 3.
Contingent consideration represents liabilities associated with the Company's business combinations. The estimated fair values are measured with simulation models using unobservable market data inputs prepared with the assistance of an independent valuation firm. These liabilities are categorized as Level 3.
Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.
The following tables present a reconciliation of beginning and ending balances of recurring fair value measurements classified as Level 3 assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Assets | | | | | | | |
Balance at beginning of period | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
Purchases (sales), net | 24,339 | | | — | | | 24,339 | | | — | |
| | | | | | | |
| | | | | | | |
Balance at end of period | $ | 24,339 | | | $ | — | | | $ | 24,339 | | | $ | — | |
| | | | | | | |
Liabilities | | | | | | | |
Balance at beginning of period | $ | 54,910 | | | $ | 72,980 | | | $ | 78,100 | | | $ | 88,400 | |
Additions for acquisition | — | | | — | | | — | | | 1,200 | |
| | | | | | | |
Reduction for payments made | — | | | — | | | (16,390) | | | (19,520) | |
Increase (reduction) of liability related to re-measurement of fair value | — | | | — | | | (6,800) | | | 2,900 | |
Balance at end of period | $ | 54,910 | | | $ | 72,980 | | | $ | 54,910 | | | $ | 72,980 | |
8. Equity Transactions
Dividends Declared
On August 16, 2023, the Company declared a quarterly cash dividend of $1.90 per common share to be paid on November 15, 2023 to stockholders of record at the close of business on October 31, 2023.
Common Stock Repurchases
During the three and nine months ended September 30, 2023, the Company repurchased 74,015 and 125,855 common shares, respectively, at a weighted average price of $202.63 and $198.61 per share, respectively, for a total cost, including fees and expenses, of $15.0 million and $25.0 million, respectively, under its share repurchase program. As of September 30, 2023, 702,497 shares remained available for repurchase. Under the terms of the program, the Company may repurchase shares of its
common stock from time to time at its discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time.
9. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) were as follows:
| | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
(in thousands) | | | 2023 | | 2022 |
Balance at beginning of period | | | $ | (358) | | | $ | 20 | |
Net current-period other comprehensive income (loss) (1) | | | (15) | | | (791) | |
Balance at end of period | | | $ | (373) | | | $ | (771) | |
(1) Consists of foreign currency translation adjustments, net of tax of $5 and $280 for the nine months ended September 30, 2023 and 2022, respectively.
10. Stock-Based Compensation
Equity-based awards, including restricted stock units ("RSUs"), performance stock units ("PSUs"), stock options and unrestricted shares of common stock, may be granted to officers, employees and directors of the Company pursuant to the Company's Omnibus Incentive and Equity Plan (the "Omnibus Plan"). At September 30, 2023, 478,711 shares of common stock remained available for issuance of the 3,370,000 shares that are authorized for issuance under the Omnibus Plan.
Stock-based compensation expense is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Stock-based compensation expense | $ | 7,668 | | | $ | 5,148 | | | $ | 20,072 | | | $ | 19,267 | |
Restricted Stock Units
Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs may be time-vested or performance-contingent (PSUs) that convert into RSUs after the performance measurement is complete and generally vest in one to three years. Shares that are issued upon vesting are newly issued shares from the Omnibus Plan and are not issued from treasury stock.
RSU activity, inclusive of PSUs, for the nine months ended September 30, 2023 is summarized as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2022 | 377,087 | | | $ | 178.21 | |
Granted | 207,206 | | | $ | 160.10 | |
Forfeited | (35,341) | | | $ | 146.07 | |
Settled | (199,880) | | | $ | 119.68 | |
Outstanding at September 30, 2023 | 349,072 | | | $ | 204.23 | |
For the nine months ended September 30, 2023 and 2022, a total of 77,583 and 77,508 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $13.4 million and $16.5 million for the nine months ended September 30, 2023 and 2022, respectively, in minimum employee tax withholding obligations related to RSUs withheld for the net share settlements. These net s