Virtus Investment Partners, Inc. — 2015 Form 10-K
Business and period: Virtus is an investment manager serving retail and institutional clients through affiliated managers and unaffiliated subadvisers. Revenue is primarily asset-based. This annual report covers the year ended December 31, 2015; unaudited fourth-quarter results are also presented.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $382.0 million | $450.6 million |
| Operating income | $80.4 million | $130.7 million |
| Operating margin | 21.0% | 29.0% |
| Net income | $30.7 million | $97.0 million |
| Net income attributable to common stockholders | $35.1 million | $97.7 million |
| Diluted EPS | $3.92 | $10.51 |
| Cash and cash equivalents (balance sheet) | $87.6 million | $202.8 million |
| Cash flow from operating activities | $(209.4) million | $(58.9) million |
| Company debt outstanding | None | None |
At year-end, AUM was $47.4 billion, down 16.4% from $56.7 billion. The decline reflected $6.3 billion of net outflows, $2.2 billion of market depreciation, and other changes. Total sales were $12.7 billion; outflows were $19.0 billion. The former AlphaSector funds drove $6.6 billion of net outflows; excluding those funds, Virtus reported $0.3 billion of net inflows. Average AUM fell 11.5% to $52.3 billion. The average fee rate declined 0.8 basis points to 50.1 basis points, including a negative $13.3 million variable incentive fee at one mutual fund.
Operating cash use was attributed primarily to lower net income and purchases of investments by the consolidated investment product. Consolidated fund and product cash flows include amounts that do not directly represent cash flows available to Virtus shareholders. The cash flow statement reports $97.4 million of ending cash and cash equivalents, including consolidated product cash; the balance sheet reports $87.6 million in the company cash line.
Virtus had $41.5 million of marketable securities and an undrawn $75 million revolving credit facility, expiring September 2017. The separately consolidated loan-warehouse SPE had $152.6 million of debt outstanding, secured by SPE assets; Virtus’s recourse is limited to its $40 million investment, which provides first-loss protection. The filing reports a $4.2 million dividend payable and $197.9 million in total contractual obligations, including the SPE facility.
Material changes and unusual items
- Revenue fell 15.2%; operating income declined 38.5%, as lower average AUM and fee rates more than offset expense reductions. Operating expenses decreased 5.7% to $301.6 million.
- Net income attributable to common stockholders fell 64.1%. The comparison includes a 2014 net tax benefit of approximately $15.5 million from resolution of an IRS audit. In 2015, the effective tax rate rose to 54.6% from 28.9%, largely due to valuation allowances and the absence of that 2014 benefit.
- Other expense, net was $26.7 million, mainly reflecting realized and unrealized losses on consolidated sponsored products and the consolidated investment product.
- Virtus paid $16.5 million in the fourth quarter to settle SEC allegations relating to historical performance information associated with former subadviser F-Squared. The amount contributed to higher 2015 operating expenses.
- Virtus acquired a majority interest in Virtus ETF Solutions in April 2015 and launched or seeded new products. ETF AUM was $340.8 million at year-end.
- Share repurchases totaled 638,703 shares for approximately $80.0 million; dividends declared were $1.80 per share, totaling $16.0 million.
Fourth-quarter results
Fourth-quarter 2015 revenue was $86.1 million, operating income was $16.5 million, net income attributable to common stockholders was $6.6 million, and diluted EPS was $0.76. In fourth-quarter 2014, the corresponding figures were $112.1 million, $36.7 million, $18.9 million, and $2.05. 2015 quarterly results included a loss attributable to common stockholders of $0.6 million in the third quarter and income of $6.6 million in the fourth quarter.
Outlook, risks, and contingencies
The filing provides no specific financial guidance or quantified forward outlook. Management notes that market conditions, investment performance, client flows, and investor preferences affect AUM and therefore fee revenue. Principal risks include continued outflows or weak performance, fee and distribution-channel competition, regulatory change, reliance on key employees and unaffiliated subadvisers, operational and cybersecurity events, and market losses on seed investments.
Two putative class actions related to F-Squared performance information remained pending; the company said it intended to defend them and did not consider a material loss probable and reasonably estimable. Virtus stated that, based on information then available, legal and regulatory matters were not likely to have a material adverse effect overall, while cautioning that an adverse outcome could materially affect results or cash flows in a particular period. It reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether AUM outflows persist, particularly in open-end funds and products formerly subadvised by F-Squared, and how flows affect fee revenue.
- The source and persistence of the sharp earnings decline, including the $16.5 million settlement, investment losses, and elevated 2015 tax rate.
- The composition and shareholder relevance of negative operating cash flow, distinguishing corporate cash from consolidated product activity.
- Progress and potential losses or refinancing needs associated with the SPE loan warehouse and planned CLO; recourse is limited to Virtus’s investment, according to the filing.
- Developments in the securities litigation, future regulatory costs, and the sustainability of dividends and share repurchases amid lower earnings and cash balances.