Virtus Investment Partners, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly comparisons are for the three months ended December 31. Amounts are U.S. dollars unless stated otherwise.
Business context
Virtus is a multi-manager investment management firm serving retail and institutional clients through mutual funds, closed-end funds, variable insurance funds, separately managed accounts and institutional mandates. Most revenue depends on asset-based fees. At year-end, AUM was $56.7 billion, including $52.0 billion in retail products and $4.7 billion in institutional accounts; 38.1% of AUM was managed by unaffiliated subadvisers.
Key financial metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $450.6 million | $389.2 million | +15.8% |
| Operating income | $130.7 million | $113.5 million | +15.2% |
| Operating margin | 29.0% | 29.2% | Down 0.2 percentage points |
| Net income attributable to common stockholders | $97.7 million | $75.2 million | +29.9% |
| Diluted EPS | $10.51 | $8.92 | +17.8% |
| Operating cash flow | $(58.9) million | $28.8 million | Declined $87.7 million |
| Year-end AUM | $56.7 billion | $57.7 billion | Down 1.8% |
| Average AUM | $59.1 billion | $53.0 billion | Up 11.6% |
Revenue growth reflected higher average AUM and a higher average fee rate. Investment management fees rose 15.4% to $300.7 million. Expenses grew 16.0% to $319.9 million, including higher distribution and administrative costs and $9.6 million of costs associated with launching the DSE closed-end fund. The effective tax rate was 28.9%, including a net $15.5 million benefit from resolving uncertain tax positions. Excluding that benefit, reported earnings growth would have been lower; the filing does not provide adjusted EPS excluding it.
In the fourth quarter, revenue was $112.1 million versus $106.5 million in Q4 2013; operating income was $36.7 million versus $33.9 million. Net income attributable to common stockholders was $18.9 million versus $24.8 million, and diluted EPS was $2.05 versus $2.65. The year-earlier quarter’s earnings comparison includes the timing of tax items; quarterly detail does not provide a clear standalone explanation of the full year-over-year decline.
Liquidity, capital and financial position
- Year-end cash and cash equivalents were $202.8 million, down from $271.0 million; marketable securities were $50.3 million, up from $29.0 million.
- No corporate debt was outstanding. The company had $75 million available under its revolving credit facility, expiring September 2017, and reported compliance with its covenants.
- Operating cash flow was negative primarily because consolidated sponsored investment products made net investment purchases of $195.7 million. The company said operating cash flow excluding those purchases increased year over year.
- Investing cash flow was $(8.2) million; financing cash flow was $(1.2) million. The company repurchased 225,441 shares for approximately $40.3 million and declared $1.35 per share in dividends during 2014.
- Total assets were $698.8 million and total equity was $563.4 million. Reported balances include consolidated sponsored investment products; their assets are not generally available to corporate creditors.
Material changes, outlook and risks
- Flows weakened sharply late in the year: Long-term open-end funds had $0.5 billion of net outflows for 2014, including $2.2 billion in Q4. The company cited capital-gain distribution reactions, performance in a rising market and developments involving subadviser F-Squared Investments. Virtus continued to report outflows in 2015, mainly in Premium AlphaSector and Dynamic AlphaSector funds.
- Subadviser and litigation exposure: F-Squared subadvised Virtus funds representing $9.9 billion of AUM at year-end. The SEC announced a settlement with F-Squared in December 2014 related to allegedly false performance advertising. A shareholder securities class action filed February 20, 2015 alleges misleading disclosures concerning those funds; Virtus said it believes the suit is without merit and intends to defend it. The company did not consider a material loss probable and reasonably estimable.
- New business and products: Virtus launched the DSE closed-end fund in Q2 2014, which added $493.8 million of AUM during the year. In January 2015 it announced an agreement to acquire a majority interest in ETF Issuer Solutions, with closing expected in March 2015.
- Guidance: The filing provides no quantified earnings, revenue or AUM guidance. Management emphasized that markets, investment performance and client flows materially affect results. Competition, fee pressure, reliance on intermediaries and key investment personnel, regulatory changes, cybersecurity and tax-asset limitations are among the disclosed risks.
- Controls and contingencies: A previously reported material weakness involving assessment of variable interest entities was reported remediated as of December 31, 2014; management and the auditor concluded internal control over financial reporting was effective at year-end. Virtus said other legal and regulatory matters were not likely to materially affect consolidated financial condition, while acknowledging potential period-specific effects.
Most important facts for investors to verify
- Whether 2015 outflows persisted or accelerated, particularly in the F-Squared-subadvised strategies, and the subsequent effect on AUM and fee revenue.
- How much of reported 2014 earnings growth depended on the $15.5 million tax benefit and whether comparable benefits recur.
- The drivers of negative operating cash flow, separating corporate liquidity from investment-product balances and activity.
- Developments in the F-Squared matter, the shareholder litigation and any related client redemptions, liabilities or disclosure updates.
- Closing, financing and expected costs or benefits of the ETFis acquisition, as well as continued dividend and repurchase capacity.