Virtus Investment Partners, Inc. — 2019 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2019, with unaudited fourth-quarter data. Virtus is an investment manager whose revenues are primarily asset-based fees across affiliated managers and multiple investment products. Results are therefore sensitive to markets, investment performance, client flows and fee rates.
Financial and operating performance
- Revenue: $563.2 million, up 2.0% from $552.2 million in 2018. Investment management fees rose 5.6% to $461.5 million, while distribution and service fees declined 19.4% to $40.9 million.
- Profit: Operating income was $124.7 million, up 10.3%; net income was $105.5 million, up 38.7%; and net income attributable to common stockholders was $87.3 million, up 29.9%. Diluted EPS increased 32.5% to $11.74. Operating margin was approximately 22.1%, compared with 20.5% in 2018.
- Fourth quarter: Revenue was $146.1 million and operating income was $37.8 million, compared with $138.1 million and $29.2 million, respectively, in fourth-quarter 2018. Diluted EPS was $2.83 versus $0.01; fourth-quarter 2018 net income was unusually low.
- Assets and flows: Year-end AUM was $108.9 billion, up 18.3%, largely reflecting $19.3 billion of market appreciation and the full-year impact of the SGA acquisition. Long-term net outflows were $0.8 billion, improved from $3.7 billion in 2018. Total sales were $20.1 billion, down from $22.8 billion.
- Cash flow and liquidity: Operating cash flow was negative $36.7 million, versus negative $62.6 million in 2018; management attributed the improvement mainly to lower net purchases of consolidated investment products (CIP) and changes in operating balances. Year-end cash and cash equivalents were $221.8 million, and the $100 million revolving facility was undrawn.
- Debt: The company reported $285.7 million outstanding on its term loan before $7.9 million of unamortized issuance costs; the balance-sheet carrying amount was $277.8 million. The loan matures in June 2024, bears a floating rate, and requires scheduled and potentially excess-cash-flow repayments. CIP debt is separate and is generally non-recourse to Virtus beyond its investments in those products.
- Capital returns: Common dividends declared were $2.44 per share for 2019. Virtus repurchased 372,365 shares for approximately $40.0 million. The $7.25-per-share preferred dividend continued through 2019.
Material changes versus 2018
- AUM increased by $16.9 billion, with positive market performance more than offsetting net outflows and fund distributions. Long-term average AUM rose 6.2%.
- Operating income improved despite nearly flat total operating expenses. Lower distribution-related expenses helped, while amortization and restructuring costs increased.
- Other income (expense) improved to $8.3 million from an expense of $23.2 million, mainly reflecting investment and CIP valuation results. Conversely, net interest income declined to $7.7 million from $19.1 million, including higher CIP interest expense.
- The SGA acquisition, completed in July 2018, contributed a full year of operations in 2019. The company had acquired a 70% interest; the acquisition increased institutional and international capabilities.
Outlook, risks and unusual items
- Outlook: The filing provides no specific numerical earnings or AUM guidance. Management describes results as dependent on markets, performance, flows and investor preferences and cautions that forward-looking statements are uncertain.
- Key risks: AUM declines or client withdrawals; poor relative performance; fee pressure and competition from lower-cost products; dependence on key personnel and third-party distribution; regulatory, litigation, cybersecurity and operational risks; and market or interest-rate effects on investments and floating-rate debt.
- Liquidity and capital constraints: Debt covenants restrict certain distributions and capital actions. The credit agreement requires debt service and may require additional principal payments based on excess cash flow. The board retains discretion over dividends.
- Investment and consolidation exposure: Virtus reported $107.2 million of seed-capital investments and $83.4 million of net CLO investments. Consolidated CLOs had about $2.0 billion of investments and $1.8 billion of notes payable; the company states its exposure is limited principally to its retained interests and fees. Consolidation materially enlarges reported assets and liabilities, so CIP balances should not be treated as ordinary corporate liquidity or debt.
- Unusual items and subsequent events: 2019 included $2.3 million of restructuring and severance costs. On February 3, 2020, all 1.15 million mandatory convertible preferred shares converted into 912,870 common shares. The board declared a $0.67-per-share common dividend in February 2020.
- Contingencies and controls: Virtus said legal and regulatory matters were not expected, based on information then available, to have a material adverse effect, while noting outcomes remain uncertain. The company and auditor reported effective internal control over financial reporting; the audit identified consolidation of investment products as a critical audit matter.
Investor verification priorities
- Confirm AUM composition, net flows by product and the extent to which 2019 growth came from market appreciation rather than client inflows.
- Review operating cash flow and distinguish corporate cash and debt from cash, assets and liabilities of consolidated investment products.
- Check term-loan repayment requirements, floating-rate exposure, covenant restrictions and available revolving capacity.
- Assess the sustainability of fee revenue and margins given outflows, lower distribution fees, fee competition and investment performance.
- Review the effects of the preferred-stock conversion on common shares, EPS, dividends and capital allocation.
- Read the financial-statement notes for CLO exposures, valuation assumptions, legal contingencies and the unrecognized tax benefit balance.