Virtus Investment Partners, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Virtus is a multi-manager investment management business earning primarily asset-based fees across retail and institutional products.
Financial and operating performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $280.1 million | $204.7 million | +36.9% |
| Operating income | $60.4 million | $13.9 million | +334.8% |
| Operating margin | 21.6% | 6.8% | +14.8 percentage points |
| Net income | $37.8 million | $145.4 million | −74.0% |
| Net income attributable to common stockholders | $37.6 million | $111.7 million | −66.3% |
| Diluted EPS | $4.66 | $16.34 | −71.5% |
| Cash from operating activities | $39.8 million | $23.7 million | +68.4% |
| Cash and cash equivalents at year-end | $63.4 million | $45.3 million | +$18.2 million |
| Long-term debt at year-end | $15.0 million | $15.0 million | No change |
| Total AUM at year-end | $45.5 billion | $34.6 billion | +31.7% |
- Average AUM rose 20.1% to $39.6 billion. Revenue growth reflected higher average assets and an increase in average fee rates; investment management fees increased 39.1% to $187.9 million.
- AUM growth comprised $6.7 billion in net flows, $3.8 billion in market appreciation and approximately $1.3 billion from the Rampart acquisition. Long-term open-end fund sales were $12.3 billion, up 30.2%.
- Retail AUM increased 36.8% to $41.2 billion; institutional AUM declined 2.7% to $4.4 billion. Equity rose to 59.1% of AUM from 54.9%; cash management fell to 4.5% from 7.0%.
- Total expenses rose 15.1% to $219.6 million, slower than revenue. Employment expenses were $105.6 million and distribution and administrative expenses were $72.2 million.
- FY 2012 cash flow was $39.8 million from operations, $(5.2) million from investing and $(16.5) million from financing. Working capital was $102.4 million, or $58.9 million excluding consolidated sponsored investment products.
- The operating margin is calculated as operating income divided by revenue. FY 2012 net income included $27.0 million of income tax expense; FY 2011 net income benefited from a $132.4 million tax benefit, primarily related to releasing a deferred-tax valuation allowance.
Fourth-quarter results
FY 2012 fourth-quarter revenue was $78.9 million, operating income was $20.5 million, common-stockholder income was $12.2 million, and diluted EPS was $1.50. The corresponding FY 2011 quarter recorded revenue of $56.2 million, operating income of $8.2 million, common-stockholder income of $109.6 million, and diluted EPS of $16.35; the unusually high prior-year earnings reflected the tax benefit described above.
Material changes, outlook and risks
- Virtus acquired substantially all of Rampart Investment Management’s assets in October 2012 for $0.7 million cash. The acquisition added approximately $1.3 billion of AUM; a contingent payment may be due based on future profitability.
- In September 2012, the company amended and restated its secured revolving credit facility, increasing capacity from $30 million to $75 million and extending its term to five years, with maturity in September 2017. The balance remained $15 million; the year-end rate was 2.35%. Virtus reported compliance with financial covenants.
- All Series B preferred shares converted into 1,349,300 common shares in January 2012. BMO held 22.1% of common shares at year-end. Virtus reported no common-stock dividend and repurchased 90,000 shares for $8.9 million during 2012.
- Management provided no specific numerical earnings or AUM guidance. It expects cash and operating cash flow to fund near-term needs and identifies investment in distribution, new products, acquisitions, infrastructure, share repurchases and debt payments as anticipated uses of capital.
- Key risks include market declines or volatility reducing fee-generating AUM, investment underperformance and client redemptions, fee and distribution-channel competition, loss of key investment personnel, regulatory and compliance exposure, and potential costs to support money-market fund stability.
- Tax uncertainty is significant: the company reported $96.9 million of net deferred tax assets and a $31.8 million unrecognized tax benefit related to a private letter ruling. If the ruling’s underlying facts or representations are challenged, tax liabilities could increase. The filing also notes continued potential volatility in state tax rates.
- No goodwill or intangible-asset impairment was recorded in 2012. Legal and regulatory matters were not expected by management to materially affect consolidated financial condition, but particular adverse outcomes could affect results or cash flows. The company reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether net flows, AUM growth and investment performance persisted after year-end, particularly given the concentration of revenue in a few funds; three funds each generated at least 10% of FY 2012 revenue.
- The sustainability of higher average fee rates and whether expense growth, including compensation and distribution costs, keeps pace with AUM and revenue.
- The realizability and timing of deferred tax assets, the tax ruling’s status, and any developments in the $31.8 million unrecognized tax benefit.
- Credit-facility covenants, available borrowing capacity, variable-rate exposure and the company’s capacity to meet contractual obligations and planned capital uses.
- Rampart’s post-acquisition flows and profitability, and the amount of any contingent consideration ultimately payable.