VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Virtus operates in the investment management industry, providing services to individual and institutional clients through open-end mutual funds, closed-end funds, separately managed accounts, and institutional accounts. Harris Bankcorp, Inc. (a subsidiary of the Bank of Montreal) owns 100% of the Company's Series B Convertible Preferred Stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $7.2 million (27%) compared to Q1 2009. This was driven primarily by a 37% increase in investment management fees ($6.6 million increase), resulting from a $3.2 billion increase in average fee-earning assets under management and a shift toward higher-fee equity products.
• Profitability Turnaround: The Company reported a net income of $1.1 million, a significant improvement from a net loss of $5.8 million in the prior year. Operating income turned positive at $0.7 million from a loss of $4.5 million.
• Expense Management: Total operating expenses increased by $2.0 million to $32.7 million. Employment expenses rose $2.0 million due to higher variable compensation linked to improved sales and profitability. However, restructuring and severance costs dropped to zero from $0.4 million in the prior year, and intangible asset amortization decreased by $0.4 million.
• Accounting Presentation Change: Effective January 1, 2010, a new fund administration agreement resulted in third-party service fees no longer being recorded as both revenue and expense. This reduced reported revenues and expenses by approximately $1.1 million compared to the prior year presentation.
• Assets Under Management: AUM increased by $4.8 billion year-over-year to $25.6 billion, driven by $0.7 billion in market appreciation and $0.4 billion in net inflows.

Guidance, Outlook, Risks, and Unusual Items

• Market Environment: Management notes that while markets have rebounded from 2009 lows, volatility and economic uncertainty persist. Future results depend heavily on market performance and asset flows.
• Liquidity and Capital: The Company maintains a $30.0 million revolving credit facility (maturing September 2011) with $15.0 million outstanding. Working capital is $34.5 million. Management believes current cash and marketable securities are sufficient for short-term needs.
• Preferred Stock Dividends: The Company declared and paid $0.9 million in quarterly dividends on Series B Convertible Preferred Stock. These dividends are cumulative and may be paid in cash or additional shares.
• Risks: Key risks include adverse market conditions affecting AUM, potential impairment of goodwill or intangible assets, regulatory investigations, and the ability to satisfy financial covenants under the Credit Facility (minimum net worth of $55 million and minimum AUM of $15.0 billion excluding money market funds).
• Unusual Items: A $1.3 million revenue recognition on structured finance products occurred in Q1 2010, representing subordinated management fees earned in prior periods that were only recognized when payment resumed.

Investor Verification Checklist

• AUM Sustainability: Verify the durability of the $4.8 billion AUM increase, specifically the reliance on market appreciation versus net inflows.
• Debt Covenants: Confirm continued compliance with the Credit Facility's minimum net worth ($55 million) and minimum AUM ($15.0 billion excluding money market funds) covenants.
• Compensation Structure: Review the impact of variable compensation on future operating expenses, as Q1 2010 saw a significant increase due to incentive payouts.
• Intangible Assets: Monitor the $53.5 million in intangible assets for potential impairment risks given market volatility.
• Preferred Stock Obligations: Assess the impact of cumulative preferred dividends ($0.9 million quarterly) on cash flow available to common shareholders.