Virtus Investment Partners, Inc. — 2013 Form 10-K
Business and reporting period. Virtus provides investment management and related services through affiliated managers and unaffiliated subadvisers, earning primarily asset-based fees. This filing covers the fiscal year ended December 31, 2013; it also reports unaudited fourth-quarter results. Assets under management (AUM) were $57.7 billion at year-end, including $24.1 billion managed by unaffiliated subadvisers.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $389.2 million | $280.1 million |
| Operating income | $113.5 million | $60.4 million |
| Operating margin | 29.2% | 21.6% |
| Net income | $77.1 million | $37.8 million |
| Net income attributable to common stockholders | $75.2 million | $37.6 million |
| Diluted earnings per share | $8.92 | $4.66 |
| Cash provided by operating activities | $28.8 million | $39.8 million |
| Year-end cash and cash equivalents | $271.0 million | $63.4 million |
| Year-end debt | None | $15.0 million |
| Working capital | $238.1 million | $39.6 million |
Fourth-quarter 2013 revenue was $106.5 million, operating income $33.9 million, common-stockholder net income $24.8 million, and diluted EPS $2.65. In fourth-quarter 2012, the respective figures were $78.9 million, $20.5 million, $12.2 million, and $1.50.
Material changes versus the prior period
- Full-year revenue increased 39.0%; operating income rose 87.8%, as average AUM grew 33.7% to $53.0 billion and the average management fee rate increased about 2 basis points.
- Year-end AUM grew 26.8% to $57.7 billion, reflecting $8.1 billion of net inflows and $4.9 billion of market appreciation, partly offset by other decreases of $0.7 billion. Long-term open-end fund sales rose 54.8% to $19.1 billion.
- Equity and alternative AUM grew 36.3% and 68.7%, respectively; cash-management AUM fell 21.8%. Major U.S. equity indexes rose strongly in 2013, while the Barclays U.S. Aggregate Bond Index declined 1.8%.
- Expenses increased 25.5% to $275.7 million, principally from employment and distribution costs associated with higher sales, AUM, compensation, and business growth.
- Cash from operations declined $11.0 million despite higher net income, partly due to investment purchases by consolidated sponsored funds, deferred commission payments, and changes in working capital. Financing cash flow included $191.8 million of net proceeds from a September share offering; Virtus also repaid $15.0 million of debt and repurchased $19.7 million of shares.
Outlook, risks, and unusual items
- The filing provides no quantified earnings, revenue, or AUM guidance. Management said working capital and operating cash flow should be adequate for short-term needs and identified growth investment, product seeding, infrastructure, acquisitions, and share repurchases as potential cash uses.
- Virtus had no debt outstanding at year-end and could draw up to $75 million under its secured revolving credit facility, subject to covenants. It reported covenant compliance. Contractual obligations totaled $22.0 million, primarily leases.
- Key risks include market declines and interest-rate changes reducing AUM and fee revenue; relative underperformance, client withdrawals, fee pressure, or loss of key investment personnel; dependence on distribution partners and unaffiliated subadvisers; regulatory and compliance exposure; and technology or cybersecurity incidents.
- Money-market funds may require support to maintain stable net asset values, although Virtus had no legal obligation to provide support. Legal and regulatory matters were not considered likely to materially harm consolidated financial condition, but adverse outcomes could affect results or cash flows in particular periods.
- 2013 income tax expense was $44.8 million, with a 36.7% effective tax rate. The company reported $64.5 million of net deferred tax assets and $32.6 million of unrecognized tax benefits; the IRS had begun an examination of its 2011 federal return. Management cited the risk that tax attributes may be limited or deferred tax assets may not be realized.
- The much higher reported net income in 2011 included a $132.4 million tax benefit, primarily from releasing a valuation allowance; comparisons with that year are therefore not directly representative of operating trends. The 2013 annual qualitative impairment review found no impairment.
Most important facts for investors to verify
- Whether AUM growth and positive long-term mutual-fund flows persisted after the strong 2013 equity-market performance, and whether cash-management outflows continued.
- How much of 2013 earnings growth reflects recurring fee revenue and operating leverage versus higher markets, product mix, investment gains, and consolidated-fund effects.
- The sustainability and recoverability of the $64.5 million deferred tax asset, the Section 382 limits on tax attributes, and resolution of the $32.6 million unrecognized tax benefits.
- That cash, assets, and liabilities include consolidated sponsored investment products; those fund assets are not generally available to corporate creditors. Confirm corporate liquidity separately from fund-level balances.
- Fund and product revenue concentration: three funds each generated at least 10% of 2013 revenue, together representing a material exposure to individual strategies and their investment performance.
- Share dilution and capital allocation following the 1.3 million-share offering, $19.7 million of 2013 repurchases, and the authorization to repurchase up to 350,000 additional shares.