Virtus Investment Partners, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Virtus is an asset manager whose revenues are primarily fees tied to assets under management (AUM); 2018 growth included acquisitions, notably Sustainable Growth Advisers (SGA).
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $552.2 million | $425.6 million | +29.8% |
| Operating income | $113.1 million | $58.0 million | +94.9% |
| Net income | $76.1 million | $39.9 million | +90.5% |
| Net income attributable to common stockholders | $67.2 million | $28.7 million | +134.3% |
| Diluted EPS | $8.86 | $3.96 | +123.7% |
| Operating margin (calculated) | 20.5% | 13.6% | +6.9 percentage points |
Revenue growth was led by investment management fees, up 32.0% to $437.0 million, as average AUM increased 33.2%, primarily from acquired businesses. Operating expenses rose 19.5% to $439.1 million, including higher employment costs and amortization. The effective tax rate fell to about 30% from about 50% in 2017, when tax reform drove a significant tax charge.
Fourth quarter: Revenue was $138.1 million, up 7.8% from $128.0 million in fourth-quarter 2017. Operating income was $29.2 million versus $28.0 million. Net income fell to $1.1 million from $5.6 million, and common-stockholder income to $0.1 million from $3.4 million; diluted EPS was $0.01 versus $0.46. The filing’s quarterly table does not clearly attribute the sharp fourth-quarter net-income decline to specific items.
AUM and flows: Year-end AUM was $92.0 billion, up 1.2% from $91.0 billion. Long-term AUM was $90.4 billion. 2018 long-term inflows were $22.8 billion and outflows $26.5 billion, producing $3.7 billion of net outflows; market performance reduced AUM by $4.5 billion. SGA’s contribution helped offset those declines. Open-end fund AUM fell 12.5% year over year, while institutional account AUM rose 31.8%.
Cash flow and liquidity: Net cash used in operating activities was $62.6 million, compared with $182.9 million used in 2017; the company attributed the improvement mainly to higher net income and lower net purchases by consolidated investment products. Investing activities used $121.2 million, including $127.0 million for SGA. Financing activities provided $204.2 million. At year-end, cash and cash equivalents were $201.7 million and the undrawn revolving credit facility was $100.0 million. Consolidated cash and investment-product balances include assets not freely available for general corporate use.
Debt and capital: Corporate term-loan principal was $340.6 million; the balance sheet reported debt of $329.2 million net of issuance costs. No revolving-facility borrowings were outstanding. The term loan has a variable rate, scheduled amortization, excess-cash-flow repayment provisions and restrictive covenants. Consolidated investment products had $1.6 billion of notes payable; the company states its exposure is generally limited to its interests in those products, rather than a general corporate obligation. Total equity was $643.9 million, including $110.8 million of mandatory convertible preferred stock. Common dividends declared rose to $2.00 per share for 2018; preferred dividends were $7.25 per share.
Material changes and notable items
- Virtus acquired a 70% interest in SGA on July 1, 2018, for a purchase price of $129.5 million. The acquisition added $120.2 million of goodwill and $62.0 million of intangible assets and was funded with additional term debt and existing resources.
- RidgeWorth, acquired in 2017, continued to materially affect year-over-year comparisons. 2018 average AUM growth and fee revenue reflect the acquired businesses, not solely organic growth.
- Average fee earned on long-term products declined 0.5 basis points, primarily because acquired assets had lower blended fee rates. The total long-term average fee rate was 46.4 basis points versus 46.9.
- Adoption of ASC 606 increased both reported distribution revenue and distribution expense by $6.0 million in 2018 through gross presentation of certain sales charges; the filing says the adoption did not materially affect the financial statements.
- Other income/expense shifted from $18.2 million of income in 2017 to $23.2 million of expense in 2018, primarily reflecting losses on investments, including consolidated investment products. No goodwill or indefinite-lived intangible impairment was identified.
- A securities class action was settled, approved by the court in December 2018, and concluded by final judgment in January 2019. The filing does not provide a clear settlement amount in the supplied text and says legal matters are not expected to have a material adverse effect overall, while noting outcomes remain uncertain.
Outlook, risks and controls
The filing provides no quantified earnings or AUM guidance. Management emphasizes that results depend on market levels, investment performance, client flows and fee rates. The principal risks include market declines and redemptions, sustained net outflows, weaker relative performance, fee pressure, loss of key investment personnel or distribution relationships, regulatory and litigation exposure, cyber or service-provider disruption, and acquisition integration or impairment risk. Variable-rate corporate and CLO debt also creates interest-rate exposure.
Management and the auditor concluded that internal control over financial reporting was effective at year-end; the assessment excluded SGA, which represented 6.6% of consolidated assets and 3.1% of 2018 revenue. The auditor issued an unqualified opinion on the financial statements and controls. A 100-basis-point change in rates was estimated to change corporate borrowing interest expense by about $3.4 million and the fair value of fixed-income investments by about $2.4 million.
Investor verification priorities
- Separate acquisition-driven AUM and earnings growth from organic results; track net flows, especially open-end funds and institutional accounts.
- Investigate the fourth-quarter 2018 collapse in net income and common EPS; verify the detailed quarterly investment gains, losses, taxes and other unusual items in the complete statements and notes.
- Review the quality and sustainability of earnings given market-sensitive investment results, fee-rate pressure and amortization from acquired intangibles.
- Confirm corporate debt principal, floating-rate exposure, scheduled and excess-cash-flow repayments, covenant headroom and restrictions on dividends or repurchases.
- Assess the cash available to the parent separately from cash and debt of consolidated investment products, and examine SGA integration and potential affiliate-interest purchase obligations.
- Verify the settlement’s financial impact and monitor remaining litigation, regulatory matters, and the internal-control scope limitation for SGA.