Virtus Investment Partners, Inc. — FY2020 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2020. Virtus is an investment manager serving retail and institutional clients through affiliated and unaffiliated investment managers and multiple product structures. Revenue is primarily asset-based management, distribution, administration and shareholder-service fees. The results consolidate certain investment products (CIP); their assets and liabilities are not equivalent to corporate operating resources, and Virtus states its exposure is generally limited to its interests in those products.
Key financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $603.9 million | $563.2 million | +7.2% |
| Operating income | $143.2 million | $124.7 million | +14.8% |
| Operating margin | 23.7% | 22.1% | +1.6 percentage points |
| Net income | $120.0 million | $105.5 million | +13.7% |
| Net income attributable to common stockholders | $80.0 million | $87.3 million | -8.4% |
| Diluted EPS | $10.02 | $11.74 | -14.7% |
| Net cash from (used in) operating activities | $(226.1) million | $(36.7) million | Cash use increased |
Investment management fees rose 9.5% to $505.3 million, reflecting higher average AUM and a modest increase in average fee rate. Common-stockholder earnings and EPS declined despite higher operating income; noncontrolling-interest attribution rose substantially, and preferred stock converted to common stock in February 2020. The filing does not present a single standalone margin measure beyond the figures above.
Assets under management and flows
- Year-end AUM was $132.2 billion, up 21.4% from $108.9 billion. The increase comprised $19.2 billion of market appreciation and $5.1 billion of net long-term inflows.
- Full-year long-term net flows were positive $5.1 billion, versus negative $0.8 billion in 2019. Sales were $32.3 billion, up 60.5%.
- Equity AUM grew 35.2% to $95.6 billion; fixed-income AUM declined 2.8% to $30.3 billion; alternatives declined 17.4% to $4.8 billion.
- For Q4 2020, revenue was $171.6 million, operating income $50.9 million, net income $61.8 million and diluted EPS $5.40. Q4 2019 revenue was $146.1 million, operating income $37.8 million, net income $29.8 million and diluted EPS $2.83.
Cash, debt and capital
- Corporate cash and cash equivalents were $246.5 million at year-end, compared with $221.8 million a year earlier; investments were $64.9 million, down from $83.2 million.
- Term-loan borrowings were $205.7 million gross at year-end, with no borrowings on the $100 million revolving facility. The balance sheet reports debt net of issuance costs at $201.2 million. The term loan matures in June 2024; the revolver expires in June 2022. Virtus repaid about $80.1 million of term-loan principal during 2020.
- Operating cash use of $226.1 million was driven primarily by increased net purchases of CIP investments. Financing cash provided was $235.3 million, including increased CIP borrowing. The company says it believes it has sufficient liquidity and capital for the foreseeable future.
- Virtus repurchased 279,796 shares for approximately $32.5 million and declared $2.98 per common share in dividends during 2020. The board declared a $0.82 quarterly dividend in February 2021.
Changes, outlook and notable items
- COVID-19 drove first-quarter AUM declines, including $16.6 billion of market depreciation and $1.3 billion of net outflows. Markets subsequently recovered; the rest of the year saw $35.8 billion of market appreciation and $6.4 billion of positive net flows. Management cautioned that the economic recovery and sustainability of market gains remained uncertain.
- Higher revenue and operating income were partly offset by employment expenses, up 11.1% to $267.3 million, largely due to profit- and sales-based compensation. Other operating expenses fell, mainly because of reduced travel during the pandemic.
- Operating cash flow was unusually negative because of CIP investment purchases; interpret this alongside the consolidated investment-product accounting and the company’s stated limited risk exposure to those products.
- In February 2021, Virtus finalized its AllianzGI strategic partnership and became adviser, distributor and/or administrator for certain assets. It also agreed to acquire Westchester Capital Management, with closing expected in the second half of 2021, subject to customary conditions and approvals. No quantified financial guidance was provided.
- Risks highlighted include market and AUM declines, investment performance and client withdrawals, fee and distribution pressure, COVID-19 and remote-work/cybersecurity risks, retention of key investment staff, regulatory or legal matters, investment losses, and debt covenants and repayment obligations. Legal proceedings arise in the ordinary course; management did not consider their outcomes likely to materially affect consolidated results, cash flows or financial condition, while noting uncertainty and possible period-specific effects.
- The company recorded no goodwill or indefinite-lived intangible impairment in its 2020 annual assessments. The auditor issued an unqualified opinion on the financial statements and internal controls; consolidation of investment products was identified as a critical audit matter.
Investor verification points
- Reconcile common-stockholder earnings and diluted EPS with the sharp increase in noncontrolling interests, including redeemable affiliate interests.
- Assess the quality and repeatability of AUM inflows and market-driven growth, by product and asset class, and compare fee rates and investment performance.
- Separate operating cash generation from CIP-related cash flows; verify the nature, funding and risk limits of consolidated products.
- Review debt repayment requirements, floating-rate exposure, covenant conditions, and restrictions on dividends and repurchases.
- Check the realized impact and integration risks of the AllianzGI arrangement and the pending Westchester acquisition, including closing conditions and any subsequent disclosures.
- Monitor the pandemic’s effects, client redemptions, key-person retention, litigation/regulatory developments, and potential impairment of goodwill or intangible assets.