Virtus Investment Partners Announces Financial Results for 2011 Fourth Quarter and Full Year - Operating Income, as Adjusted, of $13.6 Million for the Fourth Quarter and $43.7 Million for the Full Year, up 90 Percent and 101 Percent from 2010; Operating Income Increases to $8.2 Million in Fourth Quarter and $13.9 Million for 2011

- Net Income of $140.7 Million in Fourth Quarter Includes $132.0 Million Net Benefit from Release of Tax Valuation Allowance

- Net Flows of $0.8 Billion in Quarter up 64 Percent from 2010 Fourth Quarter; Full-Year Net Flows of $5.2 Billion up from $1.5 Billion in 2010

- Long Term, Open-End Mutual Fund Sales Increase to $2.4 Billion from $1.5 Billion in Fourth Quarter 2010, and to $9.5 Billion for Full Year from $4.5 Billion in 2010; Net Flows Increase to $5.1 Billion for Full Year from $1.7 Billion in 2010

HARTFORD, Conn., Feb. 1, 2012 /PRNewswire/ -- Virtus Investment Partners, Inc. (NASDAQ: VRTS), which operates a multi-manager asset management business, today reported financial results for the fourth quarter of 2011 that included its 11th consecutive quarter of positive flows, a fourth consecutive quarter of more than $1 billion of net flows from long-term open-end mutual funds, and its highest quarter of operating income, as adjusted, and operating margin, as adjusted, since it became a public company.

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Operating income, as adjusted, of $13.6 million for the quarter ended December 31, 2011, increased 90 percent from $7.1 million in the fourth quarter of 2010 and 6 percent from $12.8 million in the third quarter of 2011. Operating margin, as adjusted, was 32 percent for the fourth quarter, compared with 23 percent in the prior year's fourth quarter and 31 percent in the third quarter of 2011.

Operating income for the fourth quarter was $8.2 million with a margin of 15 percent, compared with $4.5 million and 11 percent in the fourth quarter of 2010 and an operating loss of $2.2 million and margin of (4) percent in the third quarter of 2011, which included $10.8 million in expenses related to the launch of a closed-end fund. The company also reported net income for the quarter of $140.7 million that includes a tax benefit of $132.0 million primarily related to the release of a valuation allowance on certain deferred tax assets. The company released the valuation allowance when it determined that, based on projected future taxable income, it will more likely than not realize these deferred tax assets.

Operating income, as adjusted, and operating margin, as adjusted, are non-GAAP measures that exclude certain non-cash and other items, such as costs related to the July launch of the Duff & Phelps Global Utility Income (NYSE: DPG) closed-end fund, and transition costs for the Newfleet Multi-Sector Fixed Income team that joined the company in June. These measures are further described and reconciled to GAAP measures in the table at the end of the release.

Assets under management were $34.6 billion at December 31, 2011, an increase of 17 percent from the prior year and 5 percent from the quarter ended September 30, 2011. Long-term assets under management, which exclude cash management products, were $32.2 billion at the end of the 2011 fourth quarter, an increase of 23 percent from the prior year and 8 percent from the prior quarter.

Financial Highlights (Unaudited)

(Dollars in thousands, except per share data or as noted)

In evaluating its performance, the company considers certain non-GAAP measures, including operating income, as adjusted, operating margin, as adjusted, operating expenses, as adjusted, and revenue, as adjusted, that are described and reconciled to GAAP-reported amounts in the table at the end of the release. These non-GAAP measures net the distribution and administration expenses against the related revenue and also exclude certain other cash and non-cash items.


Three Months Ended




Three Months Ended




Twelve Months Ended




12/31/2011


12/31/2010


Change


9/30/2011


Change


12/31/2011


12/31/2010


Change

Ending Assets Under Management (in billions)

$      34.6


$      29.5


17%


$      33.1


5%


$      34.6


$      29.5


17%

Average Assets Under Management (in billions)

$      34.2


$      28.6


20%


$      34.3


-


$      33.0


$      26.5


25%

















Gross Sales (in millions)

$   2,629.2


$   1,719.2


53%


$   3,339.4


(21)%


$  11,223.8


$   5,819.1


93%

Net Flows (in millions)

$     790.3


$     481.4


64%


$   1,613.8


(51)%


$   5,208.2


$   1,511.9


N/M

















Revenue

$    56,172


$    40,739


38%


$    55,457


1%


$   204,652


$   144,556


42%

Revenue, as adjusted (1)

$    42,690


$    30,881


38%


$    41,857


2%


$   155,146


$   111,351


39%

















Operating expenses

$    47,978


$    36,289


32%


$    57,650


(17)%


$   190,749


$   135,285


41%

Operating expenses, as adjusted (1)

$    29,116


$    23,732


23%


$    29,066


-


$   111,468


$    89,622


24%

















Operating income (loss)

$     8,194


$     4,450


84%


$    (2,193)


N/M


$    13,903


$     9,271


50%

Operating income, as adjusted (1)

$    13,574


$     7,149


90%


$    12,791


6%


$    43,678


$    21,729


101%

















Net income (loss)

$   140,665


$     4,450


N/M


$    (2,778)


N/M


$   145,420


$     9,642


N/M

Net income (loss) attributable to common stockholders

$   109,554


$     3,071


N/M


$    (3,483)


N/M


$   111,678


$     5,209


N/M

Avg. shares outstanding - diluted (in thousands) (2)

6,700


6,834


(2)%


6,219


8%


6,834


6,437


6%

Net income (loss) per diluted share

$     16.35


$      0.45


N/M


$     (0.56)


N/M


$     16.34


$      0.81


N/M

















Operating margin

15%


11%




(4)%




7%


6%



Operating margin, as adjusted (1)

32%


23%




31%




28%


20%



















N/M - Not Meaningful

(1) See "Schedule of Non-GAAP Information" at the end of the release

(2) Does not reflect the January 6, 2012 conversion of 35,217 shares of Series B Convertible Preferred stock into 1,349,300 shares of common stock



Management Commentary
"We delivered an exceptionally strong finish to an outstanding year," said George R. Aylward, president and chief executive officer. "The significant growth in sales and net flows over the prior year, and the completion of several business initiatives that have immediate and long-term benefits for the company, were among the primary contributors to the increase in earnings and margin."

"I am particularly proud of the consistency in sales and net flows throughout the year, which is the result of having a variety of attractive investment strategies with strong long-term investment performance," he added.

Aylward noted several of the company's accomplishments that contributed to its best year as a public company on all key metrics, including sales, flows and operating income, as adjusted:

  • Strong investment performance for the company's open-end mutual fund complex, which had three funds that were the best in their Lipper categories(1) for one-year investment performance, and 85 percent of assets in 5- and 4-star Morningstar®-rated funds at year-end(2);
  • The internalization of the Newfleet Multi-Sector Fixed Income team, which now manages nearly $6 billion of assets and has contributed $3.4 million of operating income, as adjusted, which excludes transition costs;
  • The successful launch of the Duff & Phelps Global Utility Income Fund (DPG), a closed-end fund that raised $735 million in the third quarter and added $979 million to assets under management;
  • The continued strength of its distribution capabilities, as demonstrated by a sales rate of 38 percent on sales of $11.2 billion, and an organic growth rate of 18 percent on net flows of $5.2 billion; and
  • The significant increase in Virtus' common stock, which was up 68% during 2011, making it the best-performing stock among public asset managers for the second consecutive year.

"The growth in fund sales, and the diversity of those sales among many different investment strategies, reinforces the advantages of our business model, the breadth of our product offerings, our solid distribution, and the benefit of consistently strong relative investment performance," Aylward said. "In particular, the significant growth in fund sales during the year shows that financial advisors recognize we have attractive investment solutions that can address their clients' specific investment needs."

"In 2011 we demonstrated our ability to deliver strong growth and profitability, and we are focused on continuing this success in 2012 for the benefit of our clients and our shareholders."

Asset Flows and Assets Under Management
Virtus completed a year of consistently strong sales and net flows with long-term open-end mutual fund sales that were more than double 2010 sales, and net flows that were more than triple 2010's net flows.

  • Sales increased 53 percent to $2.6 billion in the fourth quarter from $1.7 billion in the fourth quarter of 2010, and were consistent with the strong sales in the third quarter of 2011, excluding the July raise for the DPG closed-end fund. Positive net flows were $0.8 billion in the fourth quarter, compared with $0.5 billion in the prior year quarter and $1.6 billion in the third quarter of 2011, which included $0.7 billion from the closed-end fund offering. Sales and net flows exclude flows from cash management products and structured products.
  • Long-term open-end mutual fund sales, which exclude money market funds, were $2.4 billion in the fourth quarter, with a sales rate of 63 percent, higher than sales of $1.5 billion and a sales rate of 54 percent in the fourth quarter of 2010 and relatively unchanged from the third quarter. For the full year, fund sales more than doubled to $9.5 billion from $4.5 billion in 2010.
  • Long-term open-end mutual funds generated $1.1 billion of positive net flows in the fourth quarter, compared with $0.6 billion in the prior year quarter and $1.0 billion in the third quarter. The company's long-term open-end mutual funds registered a tenth consecutive quarter with double-digit organic growth and a sixth consecutive quarter with organic growth of 20 percent or more. Organic growth, defined as annualized net flows divided by beginning assets under management, was 29 percent for the quarter and 43 percent for the full year, compared with 19 percent in 2010.
  • Assets under management at December 31, 2011 increased by 17 percent to $34.6 billion from $29.5 billion at December 31, 2010 and by 5 percent from $33.1 billion at September 30, 2011. The sequential increase was a result of positive net flows of $0.8 billion and market appreciation of $1.7 billion. Long-term assets under management, which exclude cash management products, were $32.2 billion at December 31, 2011, an increase of 23 percent from $26.2 billion a year earlier and up 8 percent from $29.9 billion at the end of the 2011 third quarter as a result of both positive net flows and market appreciation.
  • Average assets under management, which correspond to the company's fee-earning asset levels, were $34.2 billion at December 31, 2011, up 20 percent from $28.6 billion at December 31, 2010 and essentially unchanged from $34.3 billion at September 30, 2011.

Revenue
Revenue increased sequentially and year over year due to the continued growth of mutual fund assets resulting from strong sales and net flows, the addition of the Newfleet Multi-Sector team, and the DPG closed-end fund offering.

  • Revenue of $56.2 million in the fourth quarter increased 38 percent from $40.7 million in the fourth quarter of 2010 and 1 percent from $55.5 million in the third quarter. The increase in revenue from the prior year quarter included $11.0 million of higher investment management fees and $2.7 million of additional distribution and administration fees related to higher average assets. For the year, total revenue increased 42 percent to $204.7 million from $144.6 million.
  • Revenue, as adjusted, which is net of certain mutual fund distribution and administration expenses, increased by 38 percent to $42.7 million in the fourth quarter from $30.9 million in the prior year quarter and by 2 percent from $41.9 million in the third quarter. The increase from the prior quarter was driven by higher average fee rates on mutual funds as well as lower fund reimbursement expenses. For the full year, revenue, as adjusted, increased by 39 percent to $155.1 million from $111.4 million for 2010, as a result of the higher asset levels.
  • Investment management fees increased 41 percent to $37.7 million in the fourth quarter from $26.7 million in the 2010 fourth quarter, and by 2 percent from $37.1 million in the third quarter, reflecting the additional closed-end fund assets; the impact of positive flows on average long-term open-end mutual fund assets; and higher open-end fund fee rates resulting from both the internalization of the multi-sector team and the increase in sales of higher-fee products.
  • Administration and transfer agent fees increased to $6.5 million from $4.8 million in the fourth quarter of 2010 and from $6.4 million in the third quarter and as a result of higher average long-term open-end mutual fund assets and the addition of the closed-end funds. For the full year, administration and transfer agent fees increased 56 percent to $23.9 million from $15.3 million in 2010.

Expenses
The increase in operating expenses for the year reflects the company's stable ongoing operating cost structure, the impact of a half-year of costs related to the addition of the Newfleet Multi-Sector team, and the structuring and selling costs related to the closed-end fund offering.

  • Total operating expenses of $48.0 million in the fourth quarter of were 32 percent higher than the fourth quarter of 2010 reflecting the additional costs related to higher sales and assets under management, and higher employment costs resulting from the addition of the Newfleet Multi-Sector team. Total operating expenses in the fourth quarter decreased from $57.7 million in the prior quarter, which included $10.8 million of structuring and incremental sales compensation related to the launch of the DPG closed-end fund. The fourth quarter also included $1.3 million of restructuring and severance costs, compared with $0.3 million in the prior year quarter and a nominal amount in the third quarter.
  • Employment expenses of $24.4 million in the fourth quarter of were 39 percent greater than $17.5 million in the fourth quarter of 2010 reflecting the incentive compensation related to higher mutual fund sales and asset levels, as well as the impact of the addition of the Newfleet Multi-Sector team. Employment expenses in the fourth quarter were 4 percent lower than $25.5 million in the prior quarter, which included $1.2 million for sales compensation related to the DPG launch. For the full year, employment expenses of $92.5 million were 42 percent higher than $65.2 million in 2010.
  • Distribution and administration expenses were $13.5 million in the fourth quarter, compared with $9.9 million in the fourth quarter of 2010 and $23.3 million in the third quarter, which included $9.6 million of structuring costs related to the launch of the DPG fund. For the full year, distribution and administration expenses of $60.2 million were 81 percent higher than $33.2 million in 2010, reflecting the additional costs related to the launch of the DPG fund as well as expenses related to significantly higher mutual fund sales.
  • Other operating expenses of $7.4 million in the fourth quarter were up 4 percent from the prior year quarter and flat to the third quarter. For the full year, other operating expenses of $30.2 million were 7 percent higher than $28.3 million in 2010, reflecting higher costs associated with the establishment of the Newfleet Multi-Sector team.
  • Operating expenses, as adjusted, were $29.1 million in the fourth quarter, 23 percent higher than $23.7 million in the fourth quarter of 2010 and flat to the  third quarter of 2011. The change from the prior year is primarily driven by impact of additional operating expenses for the Newfleet Multi-Sector team. This non-GAAP measure excludes distribution and administration expenses and certain non-cash and cash charges such as the Newfleet Multi-Sector transition-related costs and DPG structuring and sales costs.

Product
The company continued to introduce and expand its product offerings, and recent product activities include:

  • The Virtus Market Neutral Fund received approval from fund shareholders to change its investment strategy to become another option in Virtus' popular AlphaSector fund offerings. The fund, which will be renamed the Virtus Dynamic AlphaSector™ Fund, will employ a long/short strategy built upon the AlphaSector asset allocation model.(4)
  • In December, the company completed the adoption of the DCA Total Return Fund (NYSE: DCA), a diversified closed-end fund with $111.0 million in assets at January 31, 2012. Virtus is the investment adviser and administrator of the fund and its affiliated managers, Duff & Phelps Investment Management and Newfleet Asset Management, manage the equity and fixed income assets, respectively.

Investment Performance
Virtus has generated strong relative investment performance among a wide range of investment strategies in its mutual funds. Highlights include:

  • Eighteen of 30 funds eligible for rating, representing 85 percent of mutual fund assets, are either 5- or 4-star funds, as rated by Morningstar on an overall load-waived basis.(2) Five-star funds include three of the company's four largest funds: Multi-Sector Short-Term Bond (Class A: NARAX), Emerging Markets Opportunities (Class A: HEMZX), and Foreign Opportunities (Class A: JVIAX); as well as AlphaSector Rotation (Class A: PWBAX), Short/Intermediate Bond (Class I: HIBIX ), Small-Cap Core (Class A: PKSAX), and Tax-Exempt Bond (Class A: HXBZX).(3)
  • Seven Virtus funds were ranked by Lipper as top-quartile funds for the three-year period ended December 31, 2011: Multi-Sector Short-Term Bond, Emerging Markets Opportunities, Foreign Opportunities, Multi-Sector Fixed Income (Class A: NAMFX), International Real Estate Securities (Class A: PXRAX), Small-Cap Sustainable Growth (Class A: PSGAX), and Mid-Cap Value (Class A: FMIVX).(1)

Balance Sheet, Liquidity and Capital Resources
Working capital increased by 6 percent to $45.9 million at December 31, 2011 from $43.4 million at September 30, 2011 as the capital generation of the business was partially offset by dividend payments related to converting the company's preferred stock, as noted below, and transaction consideration related to the closed-end fund adoption.

Cash and cash equivalents ended the fourth quarter at $45.3 million, an increase of 15 percent from $39.2 million at September 30, 2011. Marketable securities were $15.0 million at the end of the fourth quarter, an increase of 28 percent from $11.7 million at the end of the third quarter, benefiting from market appreciation in the fourth quarter.

In October, Virtus and BMO Bankcorp, the holder of the $35 million 8% Series B Convertible Preferred Stock, agreed to convert the preferred stock into 1,349,300 shares of Virtus common stock. Virtus paid BMO Bankcorp a dividend of $8.1 million in the quarter, representing accrued dividends through October 31, 2011 plus the present value of dividends it would have earned through October 31, 2014. The preferred shares were converted to common shares on January 6, 2012. As a result of the conversion, all of the preferred shares have been retired and Virtus now has 7.5 million common shares outstanding.


Balance Sheet Highlights (Unaudited)

(Dollars in thousands)


As of




As of




12/31/2011


12/31/2010


Change


9/30/2011


Change

Cash and cash equivalents

$    45,267


$    43,948


3%


$    39,225


15%

Marketable securities

$    14,995


$    10,273


46%


$    11,734


28%

Long-term debt

$    15,000


$    15,000


-


$    15,000


-

Convertible preferred stock (1)

$    35,217


$    35,921


(2)%


$    35,921


(2)%

Stockholders' equity (1)

$   183,155


$    48,270


N/M


$    47,502


N/M











Working capital (2)

$    45,938


$    44,206


4%


$    43,424


6%











(1) Does not reflect the January 6, 2012 conversion of 35,217 shares of Series B Convertible Preferred stock into 1,349,300 shares of common stock

(2) Working capital is defined as current assets less current liabilities.

N/M - Not Meaningful



Conference Call
Virtus Investment Partners management will host an investor conference call on Thursday, February 2 at 11 a.m. Eastern to discuss these financial results and related matters. The webcast of the call will be available live over the Internet in the Investor Relations section of www.virtus.com. The call can also be accessed by telephone at 866-730-5770 if calling from within the U.S. or 857-350-1594 if calling from outside the U.S. (Passcode: 21191893). A replay of the call will be available through February 24 in the Investor Relations section of www.virtus.com or by telephone at 888-286-8010 if calling from within the U.S. or 617-801-6888 if calling from outside the U.S. (Passcode: 18234501). The presentation that will be reviewed as part of the conference call will be available in the Investor Relations section of the company's Web site.