Virtus Investment Partners, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Virtus is an investment manager serving retail and institutional clients; revenue is principally tied to assets under management (AUM). Comparisons below are to fiscal 2010 unless stated otherwise.
Financial and operating performance
| Metric | 2011 | 2010 / change |
|---|---|---|
| Total revenue | $204.7 million | $144.6 million; up 41.6% |
| Investment management fees | $135.1 million | $98.0 million; up 37.8% |
| Operating income | $13.9 million | $9.3 million; up 50.0% |
| Operating margin | 6.8% | 6.4% (calculated from reported revenue and operating income) |
| Net income | $145.4 million | $9.6 million |
| Net income attributable to common stockholders | $111.7 million | $5.2 million |
| Diluted EPS | $16.34 | $0.81 |
| Operating cash flow | $23.7 million | $22.1 million |
| Cash and cash equivalents | $45.3 million | $43.9 million |
| Marketable securities | $15.0 million | $10.3 million |
| Working capital | $45.9 million | $44.2 million |
| Long-term debt | $15.0 million | $15.0 million |
- Year-end AUM rose 17.4% to $34.6 billion from $29.5 billion. Net flows were $5.2 billion and market appreciation was $0.8 billion; total sales were $11.2 billion, up 92.9%.
- Long-term open-end fund sales reached $9.5 billion, up 109.2%. The launch of Duff & Phelps Global Utility Income Fund added about $1.0 billion in AUM. Equity assets increased to 54.9% of AUM; cash-management assets declined to 7.0%.
- Operating cash flow exceeded investing outflows of $4.1 million and financing outflows of $18.3 million. Cash increased $1.3 million during the year.
- The $15.0 million secured revolving credit facility has $30.0 million of capacity, matures in September 2013, and carried a 2.625% rate at year-end. Virtus reported compliance with its financial covenants.
Material changes and unusual items
- 2011 net income was dominated by a $132.4 million income tax benefit, including a $174.5 million release of deferred-tax valuation allowance. The release followed management’s assessment that a substantial portion of deferred tax assets was more likely than not to be realized. The benefit is not representative of operating earnings.
- The tax accounting also included a $32.0 million uncertain tax position and $4.0 million of deferred tax assets deemed unusable under Section 382. A favorable IRS private letter ruling supported recharacterizing a subsidiary-dissolution loss, but the ruling depends on management’s underlying facts and representations.
- Expenses rose with growth: employment expense increased $27.3 million, including $8.2 million for the Newfleet team; distribution and administration expense increased $27.0 million, including $9.6 million in closed-end fund launch costs. Management said operating income improved despite these costs and cited continued control of fixed costs.
- Virtus paid $8.1 million in October 2011 in connection with the agreed conversion of BMO’s remaining Series B preferred shares. The shares converted into 1,349,300 common shares on January 6, 2012; preferred stock was retired. The conversion increases common shares outstanding and removes future preferred dividends.
- Virtus repurchased 135,000 common shares for $7.9 million during 2011; no common shares were repurchased in the fourth quarter. No common-stock cash dividend was declared, and management reported no current plan to pay one.
- There were no goodwill or intangible-asset impairment charges. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Outlook, risks and contingencies
- The filing provides no quantified earnings or AUM guidance. Management expected available cash, marketable securities and operating cash generation to cover operating and capital requirements over the next 12 months, while noting that future cash needs depend on operating performance and AUM.
- Management expected first-quarter 2012 incentive compensation to be higher than the $14.5 million paid in first-quarter 2011. Approximately 360,000 restricted stock units were expected to vest in March and April 2012.
- Principal business risks include market declines and volatility, poor relative investment performance, client redemptions or contract terminations, reliance on distribution partners and third-party providers, loss of key investment personnel, competitive fee pressure, regulatory or legal exposure, and potential impairment of intangible assets.
- Persistently low short-term rates may make money-market fund operating costs exceed underlying income. Virtus is not required to support its funds, but any voluntary liquidity or credit support could be costly.
- Legal and regulatory matters arise in the ordinary course. The company considered material adverse effects on consolidated financial condition unlikely, but said outcomes are inherently uncertain and could affect results or cash flows in a particular period.
- Other exposures include variable-rate debt, tax-attribute limitations and the risk that tax authorities challenge positions supporting deferred tax assets. The filing reports $34.1 million of unrecognized tax benefits at year-end; the timing or amount of any settlement was not reasonably estimable.
Important facts for investors to verify
- Separate recurring operating performance from the large one-time tax benefit; assess the realizability and possible limitations of deferred tax assets and the IRS ruling’s assumptions.
- Track AUM flows, redemptions and sales mix, especially growth in long-term funds versus declines in cash-management and institutional assets.
- Review whether higher compensation, distribution costs and fund-launch expenses are matched by durable revenue growth and margin improvement.
- Confirm post-conversion common-share count and dilution from BMO’s conversion, employee awards and any future repurchases.
- Monitor credit-facility maturity, covenant headroom, variable interest costs, and the ability to fund incentive compensation and other near-term commitments.