VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Virtus operates a multi-manager asset management business providing investment management, distribution, and administrative services to retail and institutional clients. Products include open-end mutual funds, closed-end funds, variable insurance funds, and separately managed accounts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 32.0% year-over-year, driven by a 20.9% increase in average fee-earning assets under management and the inclusion of a full quarter of revenue from variable insurance funds acquired in late 2010.
• Profitability: Operating income surged 528% to $4.4 million, primarily due to strong sales of long-term mutual funds and market appreciation.
• Asset Flows: Total positive net flows were $1.4 billion, with long-term mutual fund sales increasing 133% to $2.3 billion. Market appreciation contributed an additional $0.9 billion to AUM growth.
• Expense Increases: Operating expenses rose 21.1% to $39.7 million. Employment expenses increased 19.6% due to higher variable compensation tied to sales and profitability. Distribution expenses rose 50.8% due to higher trail commissions on increased AUM.
• Share Repurchases: The company repurchased 50,000 common shares for approximately $2.8 million during the quarter.

Outlook, Risks, and Contingencies

• Liquidity: Management anticipates that available cash, marketable securities, and operating cash flows will be sufficient to fund requirements for the next 12 months. The company has a $30.0 million credit facility with $15.0 million outstanding and capacity to draw the remainder.
• Preferred Stock: The company holds 35,217 shares of Series B Convertible Preferred Stock. A conversion feature was triggered in Q4 2010 when the common stock price exceeded 175% of the conversion price for 20 days; however, the company has not yet elected to force conversion.
• Tax Contingency: The company has a full valuation allowance against deferred tax assets. In April 2011, a request was submitted to the IRS for a private letter ruling to potentially reclassify a $93.0 million capital loss as an ordinary loss. Success is not assured.
• Risk Factors: Key risks include market volatility impacting AUM and revenue, regulatory examinations, and the ability to attract and retain key personnel. The company is subject to financial covenants under its credit facility, including minimum AUM and net worth requirements, all of which were met as of March 31, 2011.

Investor Verification Checklist

• AUM Sustainability: Verify the durability of the $1.4 billion in net inflows, particularly the reliance on specific funds like the Multi-Sector Short-Term Bond Fund and Premium AlphaSector Fund.
• Variable Insurance Funds: Confirm the impact of the new variable insurance fund business on fee rates and expense reimbursements, which offset some revenue gains.
• Preferred Stock Conversion: Monitor the status of the Series B Preferred Stock conversion trigger and the potential dilution or cash impact if conversion is forced.
• Tax Ruling Outcome: Track the status of the IRS private letter ruling regarding the $93.0 million capital loss, as a favorable ruling could significantly alter future tax liabilities.
• Expense Leverage: Assess whether operating expense growth (21.1%) will continue to outpace revenue growth if asset flows normalize or decline.