Virtus Investment Partners, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Virtus is an investment manager whose revenue is primarily asset-based; year-end AUM was $45.4 billion.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $322.6 million | $382.0 million | Down 15.6% |
| Operating income | $50.8 million | $80.4 million | Down 36.8% |
| Operating margin | 15.8% | 21.0% | Down 5.2 percentage points |
| Net income attributable to common stockholders | $48.5 million | $35.1 million | Up 38.2% |
| Diluted EPS | $6.20 | $3.92 | Up 58.2% |
| Net cash from operating activities | $30.5 million | $(209.4) million | Improved $240.0 million |
Despite lower revenue and operating income, net income increased mainly as other income improved from a $26.7 million loss to an $8.8 million gain, including gains on consolidated sponsored investments; the effective tax rate also fell to 30.1% from 54.6%. Operating cash flow includes consolidated investment vehicles, so it does not directly represent cash generated for common shareholders.
Fourth quarter: Revenue was $79.9 million, operating income $12.8 million, net income attributable to common stockholders $12.4 million, and diluted EPS $1.87. In Q4 2015, the corresponding figures were $86.1 million, $16.5 million, $6.6 million, and $0.76.
AUM and material changes
- Year-end AUM fell 4.3% to $45.4 billion from $47.4 billion. Net outflows of $4.7 billion and distributions of $0.5 billion were partly offset by $3.2 billion of market appreciation.
- Open-end fund AUM declined 18.9% to $23.4 billion. The Emerging Markets Opportunities Fund generated $3.4 billion of outflows, largely following a subadviser organizational change; outflows moderated substantially in the second half.
- Average AUM fell 13.4% to $45.3 billion. Investment management fees declined 11.2%; distribution and service fees fell 28.1%.
- Separately managed account AUM rose 24.9% to $8.5 billion, and institutional AUM rose 18.4% to $6.1 billion.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $64.6 million; investments were $89.4 million, including $74.9 million in marketable securities. Virtus had $30.0 million drawn under its $150 million revolving facility and reported covenant compliance.
- Virtus repurchased 2.57 million shares for approximately $233.7 million in 2016 and declared $1.80 per common share in dividends.
- After year-end, Virtus repaid the $30 million revolver balance. It raised $207.1 million net from common and 7.25% mandatory convertible preferred stock offerings, plus $14.3 million net from an additional common-stock issuance.
- The separately consolidated CLO had $328.8 million of notes payable at year-end, with recourse limited to CLO assets; the company’s stated exposure is principally its investment and related interests.
Outlook, risks and unusual items
- Virtus agreed to acquire RidgeWorth for $472 million plus the fair value of certain investments, subject to adjustments and closing conditions, including client consents. Closing was expected in mid-2017, but was not assured. RidgeWorth reported $40.2 billion in AUM at year-end 2016.
- Acquisition financing was expected to include a $260 million term loan and a $100 million revolver, alongside offering proceeds, cash and investment sales. Management cited integration, client-retention, employee-retention, leverage and covenant risks; expected synergies were not assured.
- No formal operating or earnings guidance is provided in the supplied filing text. Management noted that market movements and investor flows can materially affect AUM, fee revenue and profitability.
- 2016 included $4.3 million of restructuring and severance costs and $3.3 million of RidgeWorth-related expenses. The prior year included a $16.5 million regulatory loss contingency that was settled and paid.
- Two securities class actions concerning funds formerly subadvised by F-Squared remained pending. Virtus said it intended to defend them and that no material loss was probable and reasonably estimable; adverse outcomes could nonetheless affect individual periods.
- Key business risks include sustained net outflows or poor investment performance, fee pressure, reliance on distribution partners and key personnel, regulatory or litigation exposure, cybersecurity and operational failures, and market-sensitive seed investments.
Investor verification priorities
- Track AUM flows and investment performance, particularly in open-end funds and the Emerging Markets Opportunities Fund.
- Verify RidgeWorth closing status, client consents and retention, final purchase price, integration costs, realized synergies and post-deal leverage.
- Assess recurring earnings and cash generation separately from investment gains, tax valuation-allowance changes and cash flows of consolidated products.
- Review the preferred stock’s 7.25% cumulative dividend, conversion terms, dilution and priority over common dividends.
- Monitor developments in the F-Squared-related lawsuits and any material changes to reserves or potential exposure.