Business Context and Reporting Period
Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Virtus operates as a multi-manager investment management firm providing products to individuals and institutions. Its business model relies on asset-based fees derived from open-end mutual funds, closed-end funds, variable insurance funds, separately managed accounts, and institutional mandates. Following a spin-off from The Phoenix Companies, Inc. (PNX) in December 2008, the company operates as a standalone entity. Harris Bankcorp, Inc. (a subsidiary of Bank of Montreal) owns 100% of the outstanding Series B Convertible Preferred Stock.
Key Financial Metrics
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Total Revenues | $144.6 million | $117.2 million | $178.3 million |
| Operating Income (Loss) | $9.3 million | ($6.6 million) | ($581.8 million) |
| Net Income (Loss) | $9.6 million | ($6.5 million) | ($529.1 million) |
| Net Income Attributable to Common Stockholders | $5.2 million | ($10.2 million) | ($529.6 million) |
| Earnings Per Share (Basic) | $0.87 | ($1.76) | ($91.75) |
| Assets Under Management (AUM) | $29.5 billion | $25.4 billion | $22.6 billion (excl. Goodwin) |
| Cash and Cash Equivalents | $43.9 million | $28.6 million | $51.1 million |
| Long-Term Debt | $15.0 million | $15.0 million | $20.0 million |
| Working Capital | $44.2 million | $32.1 million | $33.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23% to $144.6 million in 2010 compared to $117.2 million in 2009. This was driven by a 14% increase in average fee-earning assets under management and the addition of the Virtus Variable Insurance Trust (VIT).
- Profitability Turnaround: The company returned to profitability, reporting operating income of $9.3 million in 2010, reversing an operating loss of $6.6 million in 2009. This improvement was due to higher revenues and disciplined expense management.
- Asset Growth: AUM grew 16% to $29.5 billion, driven by positive net flows of $1.6 billion, market appreciation of $2.3 billion, and the strategic acquisition of the VIT ($1.2 billion in assets).
- Expense Management: Operating expenses increased 9% to $135.3 million, primarily due to higher variable compensation linked to improved sales and profitability. Notably, there were no goodwill or intangible asset impairments in 2010 or 2009, contrasting with a $559.3 million impairment charge in 2008.
Guidance, Outlook, and Risks
- Outlook: Management anticipates that available cash and operating cash flows will be sufficient to fund short-term capital requirements. The company expects to pay approximately $15.0 million in incentive compensation in the first quarter of 2011.
- Share Repurchase Program: In Q4 2010, the company authorized a program to repurchase up to 350,000 shares of common stock. As of December 31, 2010, 20,000 shares had been repurchased.
- Series B Preferred Stock: A conversion feature was triggered in Q4 2010 when the common stock price exceeded 175% of the conversion price for 20 days. The company may elect to force conversion, which would increase the number of common shares outstanding. Harris Bankcorp holds the right to nominate a director.
- Key Risks:
- Market Volatility: Revenue is directly tied to AUM, which fluctuates with market performance and investor sentiment.
- Asset Flows: Negative net flows or redemptions could materially reduce revenue.
- Competition: Intense competition from larger firms with greater resources and lower cost structures.
- Regulatory Environment: Subject to extensive regulation by the SEC, FINRA, and state agencies; non-compliance could result in fines or suspension.
- Intangible Asset Impairment: Significant declines in AUM or revenue could trigger future impairment charges on goodwill and intangible assets.
Investor Verification Checklist
- AUM Sustainability: Verify the sustainability of the $1.6 billion in positive net flows and the impact of the new Variable Insurance Trust on long-term fee rates.
- Preferred Stock Conversion: Monitor the status of the Series B Convertible Preferred Stock conversion trigger and potential dilution to common shareholders.
- Expense Discipline: Assess whether the increase in variable compensation (employment expenses) is commensurate with revenue growth and sustainable in a downturn.
- Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the minimum consolidated AUM of $15.0 billion (excluding money market funds) and the minimum interest coverage ratio of 3.00:1.
- Intangible Assets: Review the valuation assumptions for goodwill ($4.8 million) and intangible assets ($53.0 million) to ensure they remain supportable given market conditions.