Washington, D.C. 20549
VIRTUS INVESTMENT PARTNERS, INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
VIRTUS INVESTMENT PARTNERS, INC.
Virtus Investment Partners, Inc.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
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| Permanent Equity | | Temporary Equity |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Attributed To Virtus Investment Partners, Inc. | | Non- controlling Interests | | Total Equity | | Redeemable Non- controlling Interests |
(in thousands, except per share data) | Shares | | Par Value | | | | | | Shares | | Amount | |
Balances at December 31, 2020 | 7,583,466 | | | $ | 118 | | | | | | | $ | 1,298,002 | | | $ | (135,259) | | | $ | 29 | | | 4,207,403 | | | $ | (451,749) | | | $ | 711,141 | | | $ | 9,799 | | | $ | 720,940 | | | $ | 115,513 | |
Net income (loss) | — | | | — | | | | | | | — | | | 36,588 | | | — | | | — | | | — | | | 36,588 | | | 75 | | | 36,663 | | | 15,551 | |
Foreign currency translation adjustments | — | | | — | | | | | | | — | | | — | | | 6 | | | — | | | — | | | 6 | | | — | | | 6 | | | — | |
Net subscriptions (redemptions) and other | — | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (557) | | | (557) | | | (18,582) | |
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Cash dividends declared ($0.82 per common share) | — | | | — | | | | | | | (6,696) | | | — | | | — | | | — | | | — | | | (6,696) | | | — | | | (6,696) | | | — | |
Repurchases of common shares | (19,912) | | | — | | | | | | | — | | | — | | | — | | | 19,912 | | | (4,999) | | | (4,999) | | | — | | | (4,999) | | | — | |
Issuance of common shares related to employee stock transactions | 86,125 | | | 1 | | | | | | | 65 | | | — | | | — | | | — | | | — | | | 66 | | | — | | | 66 | | | — | |
Taxes paid on stock-based compensation | — | | | — | | | | | | | (15,163) | | | — | | | — | | | — | | | — | | | (15,163) | | | — | | | (15,163) | | | — | |
Stock-based compensation | — | | | — | | | | | | | 8,435 | | | — | | | — | | | — | | | — | | | 8,435 | | | — | | | 8,435 | | | — | |
Balances at March 31, 2021 | 7,649,679 | | | $ | 119 | | | | | | | $ | 1,284,643 | | | $ | (98,671) | | | $ | 35 | | | 4,227,315 | | | $ | (456,748) | | | $ | 729,378 | | | $ | 9,317 | | | $ | 738,695 | | | $ | 112,482 | |
Balances at December 31, 2021 | 7,506,151 | | | $ | 119 | | | | | | | $ | 1,276,424 | | | $ | 60,962 | | | $ | 20 | | | 4,400,596 | | | $ | (509,248) | | | $ | 828,277 | | | $ | 8,350 | | | $ | 836,627 | | | $ | 138,965 | |
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Net income (loss) | — | | | — | | | | | | | — | | | 33,059 | | | — | | | — | | | — | | | 33,059 | | | (57) | | | 33,002 | | | 6,117 | |
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Foreign currency translation adjustments | — | | | — | | | | | | | — | | | — | | | (50) | | | — | | | — | | | (50) | | | — | | | (50) | | | — | |
Net subscriptions (redemptions) and other | — | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (487) | | | (487) | | | (6,344) | |
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Cash dividends declared ($1.50 per common share) | — | | | — | | | | | | | — | | | (12,238) | | | — | | | — | | | — | | | (12,238) | | | — | | | (12,238) | | | — | |
Repurchases of common shares | (125,452) | | | — | | | | | | | — | | | — | | | — | | | 125,452 | | | (30,000) | | | (30,000) | | | — | | | (30,000) | | | — | |
Issuance of common shares related to employee stock transactions | 92,130 | | | 1 | | | | | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Taxes paid on stock-based compensation | — | | | — | | | | | | | (13,414) | | | — | | | — | | | — | | | — | | | (13,414) | | | | | (13,414) | | | — | |
Stock-based compensation | — | | | — | | | | | | | 10,793 | | | — | | | — | | | — | | | — | | | 10,793 | | | — | | | 10,793 | | | — | |
Balances at March 31, 2022 | 7,472,829 | | | $ | 120 | | | | | | | $ | 1,273,802 | | | $ | 81,783 | | | $ | (30) | | | 4,526,048 | | | $ | (539,248) | | | $ | 816,427 | | | $ | 7,806 | | | $ | 824,233 | | | $ | 138,738 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Virtus Investment Partners, Inc. (“the Company,” “we,” “us,” “our,”(the "Company," "we," "us," "our" or “Virtus”"Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries.
The Company provides investment management and related services to individuals and institutions. The Company’s retail investment management services are provided to individuals through products consisting of U.S. 1940 Actof: mutual funds andregistered pursuant to the Investment Company Act of 1940 ("U.S. retail funds"), as amended; Undertaking for Collective Investment in Transferable Securities ("UCITS") (collectively, "open-end funds"and Qualifying Investor Funds ("QIFs"), closed-endcollectively "global funds" and collectively with mutual funds, exchange traded funds (“ETFs”("ETFs"), and variable insurance funds, the "open-end funds"; closed-end funds (collectively, with open-end funds, the "funds"); and retail separate accounts. Institutional investment management services are providedoffered through separate accounts and pooled or commingled structures to corporations, multi-employer retirement funds, employee retirement systems, foundations, endowments,a variety of institutional clients. The Company also provides subadvisory services to other investment advisers and serves as the collateral manager for structured products and as a subadviser to unaffiliated mutual funds.products.
On June 1, 2017, the Company completed the acquisition of RidgeWorth Investments ("RidgeWorth"), which provided investment management services through its affiliated managers to clients in North America, Europe and Asia. See Note 3 for further discussion of the RidgeWorth acquisition.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the ninethree months ended September 30, 2017March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022.
The Company has reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. Previously, the Company reported consolidated investment products and consolidated sponsored investment products separately. Currently, the Company combines these categories under the caption "consolidated investment products" and has accordingly reclassified prior presentations. Further, the Company has reclassified its prior net presentation of purchases and sales of investments by its consolidated sponsored investments products and its consolidated investment product in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 to conform with the current year presentation of showing such purchases and sales as separate line items within the cash flows from operating activities. The reclassifications had no impact on the net cash provided by or used in operating, investing or financing activities within the Condensed Consolidated Statement of Cash Flows, nor any impact on the other Condensed Consolidated Financial Statements.
These unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162021 ("2021 Annual Report on Form 10-K") filed with the Securities and Exchange Commission.Commission (the "SEC"). The Company’s significant accounting policies, which have been consistently applied, are summarized in its 20162021 Annual Report on Form 10-K.
New Accounting Standards Implemented
3. Revenues
The Company adopted Accounting Standards Update ("ASU") 2016-09, ImprovementsCompany's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to Employee Share-Based Payment Accounting ("ASU 2016-09")customers. Investment management fees, distribution and service fees, and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which these fees are calculated are variable in nature and subject to factors outside of the Company's control, such as additional investments, withdrawals and market performance. Because of this, these fees are considered constrained until the end of the contractual measurement period (monthly or quarterly), on January 1, 2017. This standard makes several modifications to the accounting for forfeitures and employer tax withholdings on share-based compensation as well as the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation of certain components of share-based awards. Upon adoption, the Company recorded a $1.1 million cumulative effect adjustment to retained earnings for excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable. which is when asset values are generally determinable.
Revenue Disaggregated by Source
The Company elected to adopt all provisions impacting the Condensed Consolidated Statements of Operations and Cash Flows prospectively.following table summarizes investment management fees by source:
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| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
Investment management fees | | | | | | | |
Open-end funds | $ | 97,377 | | | $ | 89,120 | | | | | |
Closed-end funds | 16,940 | | | 12,940 | | | | | |
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Retail separate accounts | 49,603 | | | 37,512 | | | | | |
Institutional accounts | 41,991 | | | 32,438 | | | | | |
Structured products | 906 | | | 1,259 | | | | | |
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Total investment management fees | $ | 206,817 | | | $ | 173,269 | | | | | |
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The Company adopted ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 232): Simplifying the Transition to the Equity Method of Accounting, on
4. Acquisitions
Stone Harbor Investment Partners
On January 1, 2017. This standard eliminates the requirement that, when an existing cost method investment qualifies for use of the equity method, a reporting entity must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income/(loss) would be recognized through earnings. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
New Accounting Standards Not Yet Implemented
In November 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning and ending cash on the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. A reporting entity is required to apply this standard on a retrospective basis as of the beginning of the fiscal year for which the standard is effective. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"),which clarifies the treatment of several cash flow activities. ASU 2016-15 also clarifies that when cash receipts and cash payments have aspects of more than one classification of cash flows and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year or for periods beginning after December 15, 2017. Adoption of the standard requires either a retrospective or a modified retrospective approach to adoption, and early adoption is permitted as of the original effective date. The core principle of the model is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. This update is effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company's implementation assessment includes the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts, and it is also evaluating the presentation of certain revenue-related costs on a gross versus net basis and related disclosures of revenue. Although the Company is still evaluating the impact of ASU 2014-09, it has not identified material changes in the timing of revenue recognition.
In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which amends the principal-versus-agent implementation guidance in ASU 2014-09, Revenue from Contracts with Customers, discussed above. The new guidance will impact whether an entity reports revenue on a gross or net basis. The Company is currently evaluating the potential impact of adopting this standard on its consolidated financial statements, which is effective for the Company in conjunction with the adoption of ASU 2014-09.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 with updated guidance on accounting for leases and requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet, whereas previous guidance did not require lease assets and liabilities to be recognized for most leases. Furthermore, this standard permits companies to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements but expects to record a right-of-use asset and a related lease obligation in the Company's consolidated balance sheet upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods therein. Early adoption is not permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements with respect to equity investments that currently report changes in fair value as a component of accumulated other comprehensive income in equity attributable to stockholders. Comprehensive income, net of tax, with respect to these equity investments was $0.2 million for the year ended December 31, 2016.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"). The standard clarifies the definition of a business and adds guidance to assist entities when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or as businesses. The standard provides a screen to determine whether a set of assets and activities qualifies as a business or as a set of assets. ASU 2017-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The standard requires a prospective approach to adoption, and early adoption is only permitted for specific transactions. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 requires that an entity perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2019. The amendments require a prospective approach to adoption, and early adoption is permitted for interim or annual goodwill impairment tests. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
3. Business Combination
On June 1, 2017,2022, the Company completed the acquisition of RidgeWorth (the "Acquisition" or the "Acquired Business"Stone Harbor Investment Partners, LLC ("Stone Harbor"), a multi-boutique asset manager with approximately $40.1 billion in assets under management, including $35.7 billion in long term assets under management and $4.4 billion in liquidity strategies. The Acquisition significantly increased assets under management, and provided a wider range of strategies for institutional and individual investors, and broader distribution and client service resources.
The total purchase price of the Acquisitionwhich was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. At the closing, the Company paid $471.4 million in cash, issued 213,669 shares of the Company's common stock with a value of $21.7 million based on a stock price of $101.76, and recorded $51.7 million in contingent consideration and $2.3 million in deferred cash consideration. The conditions for the $51.7 million of contingent consideration were met as of September 30, 2017, and the Company expects to pay this amount during the fourth quarter of 2017.
The Company accounted for the acquisition in accordance with ASC 805, Business Combinations. Accordingly, the purchase priceCombinations ("ASC 805"). The initial transaction consideration of $29.4 million was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values at the date of the Acquisition.
Given the timingacquisition, as well as goodwill of this transaction$8.8 million and complexitydefinite-lived intangible assets of $10.8 million. The Company expects $19.6 million of the purchase accounting, the Company's estimate of the fair value adjustment specificprice to the acquired intangible assets and final tax positions is preliminary. The Company intends to finalize the accounting for these items as soon as reasonably possible. The Company may adjust the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the closing date as it obtains more information as to facts and circumstances existing as of the acquisition date. During the quarter ended September 30, 2017, the Company recorded a measurement period adjustment of $1.0 million to increase deferred tax assets with a corresponding reduction to goodwill as a result of the finalization of certain tax analyses.
The excess purchase price over the estimated fair values of assets acquired and liabilities and non-controlling interests assumed of $163.4 million was recorded as goodwill. It is anticipated that this full amount will be tax deductible whenover 15 years. The transaction consideration allocation is based upon preliminary information and is subject to change if additional information becomes available. The final fair value of the additional $51.7net assets acquired may result in adjustments to certain assets and liabilities, including goodwill. The revenues and operating income of Stone Harbor were not material to the Company's results of operations for the three months ended March 31, 2022.
Transaction consideration consisted of $28.2 million ofin cash paid at closing and $1.2 million in contingent consideration is settled. In addition, $6.4 million in acquisition costsrecorded at fair value, which represents future potential earn-out payments based on pre-established performance metrics related to revenue retention and revenue growth rates. Future contingent consideration will be includedpaid, if earned, in 2023, 2026 and 2027. The contingent consideration has been accounted for as goodwill for taxes and deducted over 15 years.a liability within contingent consideration on the Company's Condensed Consolidated Balance Sheet.
The following table summarizes the initial estimate of amounts of identified acquired assets and liabilities assumed as of the Stone Harbor acquisition date:
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| January 1, 2022 |
| (in thousands) |
Assets: | |
Cash and cash equivalents | $ | 8,443 | |
Intangible assets | 10,800 | |
Goodwill | 8,846 | |
Other assets | 55,129 | |
Total Assets | 83,218 | |
Liabilities | |
Accounts payable and accrued liabilities | 53,802 | |
Total liabilities | 53,802 | |
Total Net Assets Acquired | $ | 29,416 | |
|
| | | |
| June 1, 2017 |
($ in thousands) | |
Assets: | |
Cash and cash equivalents | $ | 39,343 |
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Investments | 5,516 |
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Accounts receivable | 19,941 |
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Assets of consolidated investment products ("CIP") |
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Cash and cash equivalents of CIP | 38,261 |
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Investments of CIP | 902,493 |
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Other assets of CIP | 21,158 |
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Furniture, equipment and leasehold improvements | 5,505 |
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Intangible assets | 275,700 |
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Goodwill | 163,365 |
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Deferred taxes, net | 6,590 |
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Other assets | 3,003 |
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Total Assets | 1,480,875 |
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Liabilities |
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Accrued compensation and benefits | 18,263 |
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Accounts payable and accrued liabilities | 11,938 |
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Other liabilities | 2,601 |
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Liabilities of consolidated investment products ("CIP") | |
Notes payable of CIP | 770,160 |
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Securities purchased payable and other liabilities of CIP | 115,100 |
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Noncontrolling Interests of CIP | 15,731 |
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Total Liabilities & Noncontrolling Interests | 933,793 |
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Total Net Assets Acquired | $ | 547,082 |
|
Identifiable Intangible Assets Acquired
The Company identified and recorded the following intangible assets as a result of the Stone Harbor acquisition:
In connection | | | | | | | | | | | |
| January 1, 2022 |
| Approximate Fair Value (in thousands) | | Weighted Average of Useful Life (in years) |
Definite-lived intangible assets: | | | |
Investment management agreements | $ | 6,000 | | | 7.3 |
Trade names | 1,000 | | | 6.0 |
Software | 3,800 | | | 4.0 |
Total definite-lived intangible assets | $ | 10,800 | | | |
The fair value of investment management agreements was estimated using a discounted cash flow method, the fair value of the trade names was estimated using a royalty savings method, and the fair value of the software was estimated using a royalty savings method and replacement cost approach. The Stone Harbor fair value estimates were prepared with the allocationassistance of an independent valuation firm.
Westchester Capital Management
On October 1, 2021, the Company completed the acquisition of Westchester Capital Management, LLC ("Westchester"), which was accounted for in accordance with ASC 805. The total transaction consideration of $169.3 million was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. Goodwill of $23.0 million and intangible assets of $144.4 million were recorded as a result of the acquisition. The Company expects $155.6 million of the purchase price we identifiedto be tax deductible over 15 years. The revenues and operating income of Westchester were not material to the following intangible assets:
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| June 1, 2017 |
| Approximate Fair Value | | Weighted Average of Useful Life |
($ in thousands) | | |
|
Definite-lived intangible assets: | | |
|
Mutual fund investment contracts | $ | 189,200 |
| | 16.0 years |
Institutional and retail separate account investment contracts | 77,000 |
| | 10.4 years |
Trademarks/Trade names | 800 |
| | 10.0 years |
Total finite-lived intangible assets | 267,000 |
| | |
Indefinite-lived intangible assets: | | | |
Trade names | 8,700 |
| | N/A |
Total identifiable intangible assets | $ | 275,700 |
| | |
Acquired Business
Foroperations for the three and nine months ended September 30, 2017,March 31, 2022.
Transaction consideration consisted of $156.8 million in cash and contingent consideration accounted for as a liability on the Company's Condensed Consolidated Balance sheet, which represents future potential earn-out payments based on pre-established performance metrics related to revenue growth rates. Future contingent consideration payments will be made, if earned, in 2025 and 2026. As of March 31, 2022, the contingent consideration balance was $12.5 million.
AllianzGI Strategic Partnership
On February 1, 2021, the Company incurred $4.9 millionfinalized a strategic partnership with Allianz Global Investors U.S. LLC ("AllianzGI"), pursuant to which the Company became the investment adviser, distributor and/or administrator of certain of AllianzGI's open-end, closed-end and $22.9 million inretail separate account assets. This transaction was classified as an asset acquisition and integration costs associated withthe cost of the acquisition comprisedwas allocated to the assets acquired on the basis of $1.5 million and $10.1 million in severance and restructuring charges, $1.2 million and $8.5 million of other operating expenses, and $2.2 million and $4.3 million in employment expenses, respectively.
Incometheir relative fair values. Additionally, as part of the Acquired Business subsequentstrategic partnership, AllianzGI’s Dallas-based Value Equity team joined the Company as a newly established affiliated manager, NFJ Investment Group ("NFJ"). The addition of NFJ was classified as a business combination under ASC 805 and assets acquired were recorded at fair value. Assets acquired primarily consisted of definite-lived intangible assets representing investment contracts as well as indefinite-lived assets consisting of goodwill related to NFJ. The revenues and operating income of NFJ were not material to the effectiveCompany's results of operations for the three months ended March 31, 2022 or 2021.
Transaction consideration consists of variable cash payments based on a percentage of the investment management fees earned on certain open-end, closed-end and retail separate account assets from the transaction. Payments are to be made annually on the anniversary of the closing date of the Acquisitiontransactions over seven years. Contingent payment obligations related to the NFJ acquisition, which were accounted for in accordance with ASC 805 are remeasured at fair value as of June 1, 2017, foreach reporting period-end, with the change in fair value recorded within the Condensed Consolidated Statement of Operations. An estimate of these future payments has been recorded as a liability and included as contingent consideration on the Company's Condensed Consolidated Balance Sheet. A payment of $33.0 million was made in the first quarter of 2022. The estimated value of future revenue participation payments at March 31, 2022 was $117.0 million.
5. Goodwill and four months ended September 30, 2017,Intangible Assets, Net
Activity in goodwill was as follows:
| | | | | | | | |
| | (in thousands) |
Balance at December 31, 2021 | | $ | 338,406 | |
Acquisitions | | 9,017 | |
| | |
Balance at March 31, 2022 | | $ | 347,423 | |
Below is a summary of intangible assets, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Definite-Lived | | Indefinite-Lived | | Total |
(in thousands) | Gross Book Value | | Accumulated Amortization | | Net Book Value | | Net Book Value | | Net Book Value |
Balances of December 31, 2021 | $ | 755,576 | | | $ | (297,303) | | | $ | 458,273 | | | $ | 42,298 | | | $ | 500,571 | |
Additions | 10,800 | | | — | | | 10,800 | | | — | | | 10,800 | |
Intangible amortization | — | | | (14,662) | | | (14,662) | | | — | | | (14,662) | |
Balances of March 31, 2022 | $ | 766,376 | | | $ | (311,965) | | | $ | 454,411 | | | $ | 42,298 | | | $ | 496,709 | |
|
| | | | | | |
| Three Months Ended | Four Months Ended |
| September 30, 2017 | September 30, 2017 |
($ in thousands) | | |
Total Revenues | $ | 32,478 |
| $ | 44,014 |
|
Restructuring and severance | $ | 1,453 |
| $ | 9,849 |
|
All other operating expenses | $ | 23,685 |
| $ | 32,249 |
|
Operating Income (Loss) | $ | 1,648 |
| $ | (3,776 | ) |
Income (Loss) Before Income Taxes | $ | 5,446 |
| $ | 48 |
|
The following Unaudited Pro Forma Condensed Consolidated Results of Operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2016. The unaudited pro forma information also reflects adjustment for transaction and integration expenses as if the transaction had been consummated on January 1, 2016. This unaudited information should not be relied upon as being indicative of historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2016 | | 2017 | | 2016 |
($ in thousands, except per share amounts) | | | | | | |
Total Revenues | | $ | 118,010 |
| | $ | 361,070 |
| | $ | 349,091 |
|
Net Income Attributable to Common Stockholders | | $ | 13,696 |
| | $ | 29,975 |
| | $ | 19,759 |
|
| | | | | | |
Basic EPS | | $ | 1.74 |
| | $ | 3.42 |
| | $ | 2.39 |
|
Diluted EPS | | $ | 1.70 |
| | $ | 3.31 |
| | $ | 2.34 |
|
4. Intangible Assets, Net
Intangible assets, net are summarized as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
($ in thousands) | | | |
Definite-lived intangible assets: | | | |
Investment contracts | $ | 425,747 |
| | $ | 158,747 |
|
Accumulated amortization | (162,246 | ) | | (155,136 | ) |
Definite-lived intangible assets, net | 263,501 |
| | 3,611 |
|
Indefinite-lived intangible assets | 43,516 |
| | 34,816 |
|
Total intangible assets, net | $ | 307,017 |
| | $ | 38,427 |
|
Activity inDefinite-lived intangible assets, netasset amortization for the remainder of fiscal year 2022 and succeeding fiscal years is estimated as follows:
| | | | | | | | |
Fiscal Year | | Amount (in thousands) |
Remainder of 2022 | | $ | 43,842 | |
2023 | | 57,835 | |
2024 | | 52,194 | |
2025 | | 47,426 | |
2026 | | 46,446 | |
2027 and thereafter | | 206,668 | |
Total | | $ | 454,411 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
($ in thousands) | | | |
Intangible assets, net | | | |
Balance, beginning of period | $ | 38,427 |
| | $ | 40,887 |
|
Additions (1) | 275,700 |
| | — |
|
Amortization | (7,110 | ) | | (1,857 | ) |
Balance, end of period | $ | 307,017 |
| | $ | 39,030 |
|
(1) - See Note 3 for details on the acquired intangible assets related to the Acquisition.
5.6. Investments
At September 30, 2017 and December 31, 2016, the Company's investments were as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
($ in thousands) | | | |
Marketable securities | $ | 75,702 |
| | $ | 74,907 |
|
Equity method investments | 10,570 |
| | 7,731 |
|
Nonqualified retirement plan assets | 6,813 |
| | 5,808 |
|
Other investments | 3,667 |
| | 925 |
|
Total investments | $ | 96,752 |
| | $ | 89,371 |
|
Marketable Securities
Marketable securitiesInvestments consist primarily of investments in the Company's sponsored mutual funds,products. The Company's investments, excluding the investments inassets of consolidated investment products ("CIP") discussed in Note 15.16, at March 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Investment securities - fair value | $ | 88,421 | | | $ | 80,335 | |
| | | |
Equity method investments (1) | 13,495 | | | 13,038 | |
Nonqualified retirement plan assets | 12,701 | | | 13,321 | |
Other investments | 2,150 | | | 2,196 | |
Total investments | $ | 116,767 | | | $ | 108,890 | |
(1) The Company’s marketableCompany's equity method investments are valued on a three-month lag based upon the availability of financial information.
Investment Securities - fair value
Investment securities - fair value consist of both tradinginvestments in the Company's sponsored funds and available-for-sale securities.separately managed accounts. The composition of the Company’s marketableinvestment securities is summarized- fair value was as follows:
September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | Cost | | Fair Value | | Cost | | Fair Value |
Investment Securities - fair value | | | | | | | |
Sponsored funds | $ | 74,362 | | | $ | 75,722 | | | $ | 63,090 | | | $ | 66,326 | |
Equity securities | 10,676 | | | 12,699 | | | 10,659 | | | 14,009 | |
| | | | | | | |
Total investment securities - fair value | $ | 85,038 | | | $ | 88,421 | | | $ | 73,749 | | | $ | 80,335 | |
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Loss | | Unrealized Gain | | Fair Value |
($ in thousands) | | | | | | | |
Trading: | | | | | | | |
Sponsored funds | $ | 56,511 |
| | $ | (1,141 | ) | | $ | 1,204 |
| | $ | 56,574 |
|
Equity securities | 12,677 |
| | — |
| | 2,555 |
| | 15,232 |
|
Available-for-sale: | | | | | | | |
Sponsored closed-end funds | 3,694 |
| | (260 | ) | | 462 |
| | 3,896 |
|
Total marketable securities | $ | 72,882 |
| | $ | (1,401 | ) | | $ | 4,221 |
| | $ | 75,702 |
|
December 31, 2016
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Loss | | Unrealized Gain | | Fair Value |
($ in thousands) | | | | | | | |
Trading: | | | | | | | |
Sponsored funds | $ | 61,784 |
| | $ | (1,942 | ) | | $ | 177 |
| | $ | 60,019 |
|
Equity securities | 10,578 |
| | — |
| | 895 |
| | 11,473 |
|
Available-for-sale: | | | | | | | |
Sponsored closed-end funds | 3,500 |
| | (265 | ) | | 180 |
| | 3,415 |
|
Total marketable securities | $ | 75,862 |
| | $ | (2,207 | ) | | $ | 1,252 |
| | $ | 74,907 |
|
For the three and nine months ended September 30, 2017,March 31, 2022 and March 31, 2021, the Company recognized a net realized gain of $0.3 million and net realized loss of $1.6 million, respectively, on trading securities. For the three and nine months ended September 30, 2016, the Company recognized a net realized gaingains of $0.1 million and a net realized loss of $0.3$0.8 million, respectively, on trading securities.the sale of its investment securities - fair value.
6.
7. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of consolidated investment products, which are separatelyCIP discussed in Note 15,16, as of September 30, 2017March 31, 2022 and December 31, 20162021 by fair value hierarchy level were as follows:
September 30, 2017
March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 167,311 | | | $ | — | | | $ | — | | | $ | 167,311 | |
Investment securities - fair value | | | | | | | |
Sponsored funds | 75,722 | | | — | | | — | | | 75,722 | |
Equity securities | 12,699 | | | — | | | — | | | 12,699 | |
| | | | | | | |
| | | | | | | |
Nonqualified retirement plan assets | 12,701 | | | — | | | — | | | 12,701 | |
Total assets measured at fair value | $ | 268,433 | | | $ | — | | | $ | — | | | $ | 268,433 | |
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 70,080 | | | $ | 70,080 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 70,080 | | | $ | 70,080 | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
($ in thousands) | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 96,500 |
| | $ | — |
| | $ | — |
| | $ | 96,500 |
|
Marketable securities - trading: | | | | | | | |
Sponsored funds | 56,574 |
| | — |
| | — |
| | 56,574 |
|
Equity securities | 15,232 |
| | — |
| | — |
| | 15,232 |
|
Marketable securities - available-for-sale: | | | | | | | |
Sponsored closed-end funds | 3,896 |
| | — |
| | — |
| | 3,896 |
|
Other investments: | | | | | | | |
Investment in collateralized loan obligation | — |
| | — |
| | 2,741 |
| | 2,741 |
|
Nonqualified retirement plan assets | 6,813 |
| | — |
| | — |
| | 6,813 |
|
Total assets measured at fair value | $ | 179,015 |
| | $ | — |
| | $ | 2,741 |
| | $ | 181,756 |
|
December 31, 20162021
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 307,277 | | | $ | — | | | $ | — | | | $ | 307,277 | |
Investment securities - fair value | | | | | | | |
Sponsored funds | 66,326 | | | — | | | — | | | 66,326 | |
Equity securities | 14,009 | | | — | | | — | | | 14,009 | |
| | | | | | | |
| | | | | | | |
Nonqualified retirement plan assets | 13,321 | | | — | | | — | | | 13,321 | |
Total assets measured at fair value | $ | 400,933 | | | $ | — | | | $ | — | | | $ | 400,933 | |
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 88,400 | | | $ | 88,400 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 88,400 | | | $ | 88,400 | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
($ in thousands) | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 48,620 |
| | $ | — |
| | $ | — |
| | $ | 48,620 |
|
Marketable securities - trading: | | | | | | | |
Sponsored funds | 60,019 |
| | — |
| | — |
| | 60,019 |
|
Equity securities | 11,473 |
| | — |
| | — |
| | 11,473 |
|
Marketable securities - available-for-sale: | | | | | | | |
Sponsored closed-end funds | 3,415 |
| | — |
| | — |
| | 3,415 |
|
Other investments | | | | | | | |
Nonqualified retirement plan assets | 5,808 |
| | — |
| | — |
| | 5,808 |
|
Total assets measured at fair value | $ | 129,335 |
| | $ | — |
| | $ | — |
| | $ | 129,335 |
|
The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:
Cash equivalentsrepresent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Sponsored fundsrepresent investments in open-end mutualfunds, closed-end funds and closed-end fundsETFs for which the Company acts as the investment manager. The fair value of open-end mutual funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds and ETFs is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.
Equity securities include represent securities traded on active markets, and are valued at the official closing price (typically the last sale or bid) on the exchange on which theythe securities are primarily traded and are categorized as Level 1.
Investment in collateralized loan obligations is measured at fair value based on independent third party valuations and is categorized as Level 3.
Nonqualified retirement plan assetsrepresent open-end mutual funds within athe Company's nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Contingent consideration represents liabilities associated with the Company's business combinations. See Note 4 for a discussion of the transactions. The estimated fair values are measured using a simulation model using unobservable market data inputs prepared with the assistance of an independent valuation firm. These liabilities are categorized as Level 3.
Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.
Transfers into and out of levels are reflected when: (1) significant inputs used for the fair value measurement, including market inputs or performance attributes, become observable or unobservable; (2) when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a net asset value; or (3) if the book value no longer represents fair value. There were no transfers between levels during the three and nine months ended September 30, 2017 and 2016.
The following table ispresents a reconciliation of assets for Level 3 investments for which significant unobservable inputs were used to determinebeginning and ending balances of recurring fair value.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Level 3 Investments (a) | | | | | | | |
Balance at beginning of period | $ | 2,909 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Acquired in business combination |
| | — |
| | 2,916 |
| | — |
|
Change in unrealized (loss), net | (168 | ) | | — |
| | (175 | ) | | — |
|
Balance at end of period | $ | 2,741 |
| | $ | — |
| | $ | 2,741 |
| | $ | — |
|
(a) The investments that are categorizedvalue measurements classified as Level 3 were valued utilizing third-party pricing information without adjustment.3:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
Contingent consideration, beginning of period | $ | 88,400 | | | $ | — | | | | | |
Additions for acquisition | 1,200 | | | 63,500 | | | | | |
Reduction for payments made | (19,520) | | | — | | | | | |
| | | | | | | |
Contingent consideration, end of period | $ | 70,080 | | | $ | 63,500 | | | | | |
7.
8. Equity Transactions
During the nine months ended September 30, 2017, the Company issued 1,150,000 shares of 7.25% mandatory convertible preferred stock ("MCPS") in a public offering, which included the exercise of the underwriters' over-allotment option, for net proceeds of $111.0 million, after underwriting discounts, commissions and other offering expenses. During the same period, the Company also issued 1,260,169 shares of common stock consisting of: 1) 1,046,500 shares of common stock in a public offering, which included the exercise of the underwriters' over-allotment option, for net proceeds of $109.5 million, after underwriting discounts, commissions and other offering expenses; and 2) 213,669 shares of the Company's common stock as part of the consideration for the acquisition of RidgeWorth. See Note 3 for further discussion of the Acquisition.
The MCPS has a liquidation preference of $100.00 per share. Unless converted earlier, each share of MCPS will convert automatically on February 1, 2020 (the "mandatory conversion date") into between 0.7576 and 0.9091 shares of common stock, subject to customary anti-dilution adjustments. The number of shares of common stock issuable upon conversion will be determined based on the average volume-weighted price per share of the Company's common stock over the 20 consecutive trading day period beginning on, and including, the 22nd scheduled trading day immediately preceding the mandatory conversion date. Each share of MCPS can be converted prior to the mandatory conversion date, at the option of the holder, at the minimum conversion rate of 0.7576 or at a specified rate, in the event of a fundamental change as defined in the certificate of designations of the MCPS.
Dividends on the MCPS will be payable on a cumulative basis when, as and if declared by the Company's Board of Directors, at an annual rate of 7.25% on the liquidation preference of $100.00 per share. If declared, these dividends will be paid in cash, or, subject to certain limitations, in shares of common stock (or a combination thereof) on February 1, May 1, August 1, and November 1 of each year, continuing to, and including, February 1, 2020.
Declared
On August 16, 2017,February 23, 2022, the Company declared a quarterly cash dividend of $0.45$1.50 per common share to be paid on November 15, 2017May 13, 2022 to shareholdersstockholders of record at the close of business on October 31, 2017. The Company also declared a quarterly cash dividend of $1.8125 per share on the Company's 7.25% MCPS to be paid on November 1, 2017 to shareholders of record at the close of business on October 15, 2017.April 29, 2022.
Common Stock Repurchases
During the ninethree months ended September 30, 2017,March 31, 2022, the Company repurchased 66,244125,452 common shares, at a weighted average price of $113.21$239.10 per share, for a total cost, including fees and expenses, of approximately $7.5 million.$30.0 million, under its share repurchase program. As of September 30, 2017, there were 133,756March 31, 2022, 403,997 shares remained available to be repurchased of a total of 3,430,045 shares of Company common stock that had been approved by the Company's Board of Directors.for repurchase. Under the terms of the program, the Company may repurchase shares of its common stock from time to time at its discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time.
8.
9. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the ninethree months ended September 30, 2017March 31, 2022 and 20162021 were as follows:
| | | | | | | | | |
| | | Foreign Currency Translation Adjustments (in thousands) |
Balance at December 31, 2021 | | | $ | 20 | |
Net current-period other comprehensive income (loss) (1) | | | (50) | |
Balance at March 31, 2022 | | | $ | (30) | |
| | | |
| | | Foreign Currency Translation Adjustments (in thousands) |
Balance at December 31, 2020 | | | $ | 29 | |
Net current-period other comprehensive income (loss) (1) | | | 6 | |
Balance at March 31, 2021 | | | $ | 35 | |
foreign currency translation adjustments, net of tax of $73 and $— for the three months ended March 31, 2022 and 2021, respectively
|
| | | | | | | |
| Unrealized Net Gains and (Losses) on Securities Available-for- Sale | | Foreign Currency Translation Adjustments |
($ in thousands) | | | |
Balance December 31, 2016 | $ | (224 | ) | | $ | — |
|
Unrealized net gain (loss) on securities available-for-sale, net of tax of $(115) | 172 |
| | — |
|
Foreign currency translation adjustments | — |
| | 12 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
|
Net current-period other comprehensive income (loss) | 172 |
| | 12 |
|
Balance September 30, 2017 | $ | (52 | ) | | $ | 12 |
|
| | | |
| Unrealized Net Gains and (Losses) on Securities Available-for- Sale | | Foreign Currency Translation Adjustments |
($ in thousands) | | | |
Balance December 31, 2015 | $ | (465 | ) | | $ | (569 | ) |
Unrealized net gain (loss) on securities available-for-sale, net of tax of $(140) | 230 |
| | — |
|
Foreign currency translation adjustments, net of tax of $(348) | — |
| | 569 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
|
Net current-period other comprehensive income (loss) | 230 |
| | 569 |
|
Balance September 30, 2016 | $ | (235 | ) | | $ | — |
|
9.10. Stock-Based Compensation
ThePursuant to the Company's Amended and Restated Omnibus Incentive and Equity Plan (the “Plan”"Omnibus Plan") provides for the grant of, officers, employees and directors may be granted equity-based awards, including restricted stock units (“RSUs”("RSUs"), performance stock units ("PSUs"), stock options and unrestricted shares of common stock. As of September 30, 2017, a maximum of 2,400,000At March 31, 2022, 645,198 shares of common stock wereremain available for issuance of the 3,370,000 shares that are authorized for issuance under the Plan, and 496,870 shares remained available for issuance. Shares that are issued upon exerciseOmnibus Plan.
Stock-based compensation expense is summarized as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
Stock-based compensation expense | $ | 9,547 | | | $ | 7,995 | | | | | |
Restricted Stock Units
Each RSU entitles the holder to one1 share of common stock when the restriction expires. RSUs generally have a term of one to three years and may be time-vested or performance-contingent. The fair value of each RSUperformance-contingent (PSUs) that convert into RSUs after performance measurement is estimated usingcomplete and generally vest in one to three years. Shares that are issued upon vesting are newly issued shares from the intrinsic value method, which is based on the fair market value price on the date of grant unless it contains a performance metric that is considered a market condition. RSUs that contain a market conditionOmnibus Plan and are valued using a simulation valuation model. not issued from treasury stock.
RSU activity, inclusive of PSUs, for the ninethree months ended September 30, 2017March 31, 2022 is summarized as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2021 | 430,730 | | | $ | 138.01 | |
Granted | 162,541 | | | $ | 194.78 | |
Forfeited | (68) | | | $ | 222.45 | |
Settled | (153,989) | | | $ | 117.39 | |
Outstanding at March 31, 2022 | 439,214 | | | $ | 166.24 | |
|
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2016 | 302,824 |
| | $ | 111.56 |
|
Granted | 274,392 |
| | $ | 108.25 |
|
Forfeited | (29,134 | ) | | $ | 121.06 |
|
Settled | (78,423 | ) | | $ | 140.86 |
|
Outstanding at September 30, 2017 | 469,659 |
| | $ | 104.14 |
|
For the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, a total of 32,18661,859 and 19,45757,885 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $3.4$13.4 million and $1.5$15.2 million for the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, respectively, in minimum employee tax withholding obligations related to RSUs withheld.withheld for the net share settlements. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been otherwise issued as a result of the vesting.
During the ninethree months ended September 30, 2017,March 31, 2022, the Company granted 87,458 RSUs which30,516 PSUs that contain performance-based metrics in addition to a service condition (Performance Share Units or "PSUs").condition. Compensation expense for these PSUs is generally recognized over a three-year service period based upon the value determined using a combination of (i) the intrinsic value method, for awards that contain a performance metric that represents a "performance condition" in accordance with ASC 718, and (ii) the Monte Carlo simulation valuation model for awards under the performance metric that representscontain a "market condition" performance metric under ASC 718. Compensation expense for thePSU awards that contain a market condition is fixed at the date of grant and will not be adjusted in future periods based upon the achievement of the market condition. Compensation expense for thePSU awards with a performance condition is recorded each period based upon a probability assessment of the expected outcome of the performance metric with a final adjustment upon measurement at the final outcome. Forend of the nine months ended September 30, 2017, total stock-based compensation expense was $4.1 million for these PSUs.performance period.
On June 1, 2017, the Company also granted 35,148 PSUs and 65,561 RSUs to certain RidgeWorth employees in connection with the Acquisition in order to replace incentives that were in place prior to the Acquisition. The PSUs will vest if certain performance measures are met over a five-year period, with the ability for accelerated vesting if those same conditions are met by year four. The RSUs contain only a service condition and will vest over four years beginning with year two. For the nine months ended September 30, 2017, total stock-based compensation expense was $0.8 million for these PSUs and RSUs.
The Company recognized total stock compensation expense of $15.0 million and $9.1 million, for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017,March 31, 2022, unamortized stock-based compensation expense for unvested RSUs and PSUs was $32.4$41.1 million with a weighted-average remaining amortization period of two years.
Stock Options
Stock options generally cliff vest after three years and have a contractual life of 101.3 years. Stock options are granted with an exercise price equal to the fair market value of the shares at the date of grant.
Stock option activity for the nine months ended September 30, 2017 is summarized as follows:
|
| | | | | | |
| Number of Shares | | Weighted Average Exercise Price |
Outstanding at December 31, 2016 | 137,157 |
| | $ | 17.77 |
|
Granted | — |
| | $ | — |
|
Exercised | (26,749 | ) | | $ | 23.43 |
|
Forfeited | — |
| | $ | — |
|
Outstanding at September 30, 2017 | 110,408 |
| | $ | 16.40 |
|
10. Restructuring and Severance
During the three months ended September 30, 2017, the Company incurred $0.5 million in severance costs related to staff reductions in connection with the Acquisition and the Company's outsourcing activities and $1.0 million in restructuring costs related to future lease obligations and leasehold improvement write-offs for vacated office space. During the nine months ended September 30, 2017, the Company incurred $9.4 million in severance costs related to staff reductions in connection with the Acquisition and the Company's outsourcing activities and $1.0 million in restructuring costs related to future lease obligations and leasehold improvement write-offs for vacated office space. Total unpaid severance and related charges as of September 30, 2017 was $6.8 million, which the Company expects to pay over the next three years. The Company expects to incur additional severance costs in connection with the Acquisition of approximately $0.3 million related to one-time termination benefits that are being earned over a transition period.
11. Earnings per(Loss) Per Share
Basic earningsEarnings (loss) per share (“EPS”("EPS") is calculated in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing net income available(loss) attributable to common stockholdersVirtus Investment Partners, Inc. by the weighted-average number of common shares outstanding for the period, excluding dilution for potential common stock issuances. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, including: (1)including shares issuable upon the vesting of RSUs and common stock option exercises using the treasury stock method; and (2) shares issuable upon the conversion of the Company's MCPS,method, as determined under the if-converted method. For purposes
The computation of basic and diluted EPS is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands, except per share amounts) | 2022 | | 2021 | | | | |
Net Income (Loss) | $ | 39,119 | | | $ | 52,214 | | | | | |
Noncontrolling interests | (6,060) | | | (15,626) | | | | | |
| | | | | | | |
| | | | | | | |
Net Income (Loss) Attributable to Virtus Investment Partners, Inc. | $ | 33,059 | | | $ | 36,588 | | | | | |
Shares (in thousands): | | | | | | | |
Basic: Weighted-average number of shares outstanding | 7,546 | | | 7,633 | | | | | |
Plus: Incremental shares from assumed conversion of dilutive instruments | 293 | | | 419 | | | | | |
Diluted: Weighted-average number of shares outstanding | 7,839 | | | 8,052 | | | | | |
Earnings (Loss) per Share—Basic | $ | 4.38 | | | $ | 4.79 | | | | | |
Earnings (Loss) per Share—Diluted | $ | 4.22 | | | $ | 4.54 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
($ in thousands, except per share amounts) | | | | | | | |
Net Income (Loss) | $ | 20,523 |
| | $ | 16,276 |
| | $ | 34,296 |
| | $ | 36,846 |
|
Noncontrolling interests | (1,731 | ) | | (651 | ) | | (2,782 | ) | | (770 | ) |
Net Income (Loss) Attributable to Stockholders | 18,792 |
| | 15,625 |
| | 31,514 |
| | 36,076 |
|
Preferred stock dividends | (2,084 | ) | | — |
| | (6,252 | ) | | — |
|
Net Income (Loss) Attributable to Common Stockholders | $ | 16,708 |
| | $ | 15,625 |
| | $ | 25,262 |
| | $ | 36,076 |
|
Shares (in thousands): |
| |
| | | | |
Basic: Weighted-average number of shares outstanding | 7,212 |
| | 7,676 |
| | 6,942 |
| | 8,062 |
|
Plus: Incremental shares from assumed conversion of dilutive instruments | 1,280 |
| | 178 |
| | 226 |
| | 161 |
|
Diluted: Weighted-average number of shares outstanding | 8,492 |
| | 7,854 |
| | 7,168 |
| | 8,223 |
|
Earnings (Loss) per Share—Basic | $ | 2.32 |
| | $ | 2.04 |
| | $ | 3.64 |
| | $ | 4.47 |
|
Earnings (Loss) per Share—Diluted | $ | 2.21 |
| | $ | 1.99 |
| | $ | 3.52 |
| | $ | 4.39 |
|
The following table details the securities that have been excluded from the above computation of weighted-average number of shares for diluted EPS, because the effect would be anti-dilutive.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
Restricted stock units | 21 | | | 10 | | | | | |
| | | | | | | |
Total anti-dilutive securities | 21 | | | 10 | | | | | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(in thousands) | | | | | | | |
Restricted stock units and stock options | 4 |
| | 12 |
| | 4 |
| | 11 |
|
Preferred stock | — |
| | — |
| | 878 |
| | — |
|
Total anti-dilutive securities | 4 |
| | 12 |
| | 882 |
| | 11 |
|
12. Income Taxes
In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted, as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and at each interim period thereafter.
The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 31.7%30.0% and 35.8%22.5% for the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, respectively. The decrease in thecomparatively higher estimated effective tax rate for the three months ended March 31, 2022 was primarily due to changesvaluation allowances recorded in the valuation allowances related to market adjustmentscurrent year for the tax effects of unrealized losses on the Company’s marketable securities, as well as an increase in the valuation allowance associated with net operating losses that could expire before being utilized.certain Company investments.
13. Debt
Credit Agreement
Credit Agreement
On June 1, 2017, in connection with the Acquisition, the Company entered into a newThe Company's credit agreement, ("Creditas amended (the "Credit Agreement") comprised of (1) $260.0, comprises (i) a $275.0 million of seven-year term debt ("Termloan (the "Term Loan") expiring in September 2028, and (2)(ii) a $100.0$175.0 million five-year revolving credit facility ("Credit Facility"). Additionally, aswith a result of the Credit Agreement, the Company's previous revolving credit facility and December 16, 2016 debt financing commitment were terminated.five-year term expiring in September 2026. During the ninethree months ended September 30, 2017,March 31, 2022, the Company expensed approximately $1.1repaid $0.7 million of unamortized deferred financing costs related to the previous senior unsecured revolving credit facility.outstanding under its Term Loan. At September 30, 2017, $260.0March 31, 2022, $273.6 million was outstanding.
Amounts outstanding under the Credit Agreement for the Term Loan, and the Credit Facility bear interest at an annual rate equal to, atCompany had no outstanding borrowings under its revolving credit facility. In accordance with ASC 835, Interest, the option of the Company, either (i) LIBOR (adjusted for reserves) for interest periods of one, two, three or six months (or, solely in the case of the Credit Facility, if agreed to by each relevant Lender, twelve months or periods less than one month), subject to a “floor” of 0% for the Credit Facility and 0.75% for the Term Loan, or (ii) an alternate base rate, in either case plus an applicable margin. The applicable margins are set initially at 3.75%, in the case of LIBOR-based loans, and 2.75%, in the case of alternate base rate loans, and will range from 3.50% to 3.75%, in the case of LIBOR-based loans, and 2.50% to 2.75%, in the case of alternate base rate loans, based on the secured net leverage ratio of the Company as of the last day of the preceding fiscal quarter. Interest is payable on the last day of each interest period with respect to LIBOR-based loans, but at least at three-month intervals, and quarterly in arrears with respect to alternate base rate loans (but, in the case of LIBOR-based loans with an interest period of more than three months).
The obligations of the Company under the Credit Agreement are guaranteed by certain of its subsidiaries (the “Guarantors”) and secured by substantially all of the assets of the Company and the Guarantors, subject to customary exceptions. The Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, purchase shares of our common stock, make distributions and dividends and pre-payments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year, or modify its organizational documents, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains a financial maintenance covenant, requiring a maximum leverage ratio, as of the last day of each of the trailing four fiscal quarter periods, of no greater than the levels set forth in the Credit Agreement.
At any time, upon timely notice, the Company may terminate the Credit Agreement in full, reduce the commitment under the Credit Facility in minimum specified increments, or prepay the Term Loan in whole or in part, subject to the payment of breakage fees with respect to LIBOR-based loans and, in the case of any Term Loans that are prepaid in connection with a “repricing transaction” occurring within the six-month period following the closing date, a 1.00% premium.
Term Loan
The Term Loan, which was priced on March 2, 2017, had a delayed draw fee of $1.2 million between March 2, 2017 and the closing date of June 1, 2017. The Term Loan amortizes at the rate of 1.00% per annum payable in equal quarterly installments and will be mandatorily repaid with: (a) 50% of the Company’s excess cash flow, as defined in the Credit Agreement, on an annual basis, beginning with the fiscal year ended December 31, 2018, stepping down to 25% if the Company’s secured net leverage ratio declines below 1.0, and further stepping down to 0% if the Company’s secured net leverage ratio declines below 0.5; (b) the net proceeds of certain asset sales, casualty or condemnation events, subject to customary reinvestment rights; and (c) the proceeds of any indebtedness incurred other than indebtedness permitted to be incurred by the Credit Agreement.
Credit Facility
At September 30, 2017, no amounts were outstanding under the Credit Facility. The Company has the right, subject to customary conditions specifiedCompany's Term Loan are presented in the Credit Agreement, to request additional revolving credit facility commitments and additional term loans to be made under the Credit Agreement up to an aggregate amount equal to the sumCondensed Consolidated Balance Sheet net of (x) $75.0related debt issuance costs, which were $7.7 million and (y) an amount subject to a pro forma secured net leverage ratio of the Company of no greater than 1.75 to 1.00.
Under the terms of the Credit Agreement, the Company is required to pay a quarterly commitment fee on the average unused amount of the Credit Facility, which fee is initially set at 0.50% and will, following the first delivery of certain financial reports required under the Credit Agreement, range from 0.375% to 0.50%, based on the secured net leverage ratio of the Company as of the last day of the preceding fiscal quarter, as reflected in such financial reports.March 31, 2022.
14. Commitments and Contingencies
Legal Matters
The Company is regularly involved from time to time in litigation and arbitration, as well as examinations, inquiries and investigations by various regulatory bodies, including the Securities and Exchange Commission ("SEC"),SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve but are not limited to the Company’s
Company's activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.
The Company accrues forrecords a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Loss Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage, indemnities and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’sCompany's results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments, and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome, and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’sCompany's results of operations or cash flows in particular quarterly or annual periods.
In re Virtus Investment Partners, Inc. Securities Litigation; formerly Tom Cummins v. Virtus Investment Partners Inc.
et al
15. Redeemable Noncontrolling Interests
On February 20, 2015,Redeemable noncontrolling interests represent third-party investments in the Company's CIP and minority interests held in a putative class action complaint alleging violationsconsolidated affiliate. Minority interests held in the affiliate are subject to holder put rights and Company call rights at established multiples of earnings before interest, taxes, depreciation and amortization and, as such, are considered redeemable at other than fair value. The rights are exercisable at pre-established intervals (between four and seven years from their issuance) or upon certain provisionsconditions, such as retirement. The put and call rights are not legally detachable or separately exercisable and are deemed to be embedded in the related noncontrolling interests. The Company, in purchasing affiliate equity, has the option to settle in cash or shares of the federal securities laws was filed byCompany's common stock and is entitled to the cash flow associated with any purchased equity. Minority interests in an individual shareholder againstaffiliate are recorded at estimated redemption value within redeemable noncontrolling interests on the CompanyCompany's Condensed Consolidated Balance Sheets, and certain of the Company’s current officers (the “defendants”)any changes in the United States District Courtestimated redemption value are recorded on the Condensed Consolidated Statements of Operations within noncontrolling interests.
Redeemable noncontrolling interests for the Southern District of New York (the "Court"). On April 21, 2015, three plaintiffs, includingmonths ended March 31, 2022 included the original plaintiff, filed motionsfollowing amounts:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | CIP | | Affiliate Noncontrolling Interests | | Total |
Balances at December 31, 2021 | | $ | 12,416 | | | $ | 126,549 | | | $ | 138,965 | |
| | | | | | |
Net income (loss) attributable to noncontrolling interests | | (749) | | | 2,343 | | | 1,594 | |
Changes in redemption value (1) | | — | | | 4,523 | | | 4,523 | |
Total net income (loss) attributable to noncontrolling interests | | (749) | | | 6,866 | | | 6,117 | |
Net subscriptions (redemptions) and other | | (2,234) | | | (4,110) | | | (6,344) | |
| | | | | | |
Balances at March 31, 2022 | | $ | 9,433 | | | $ | 129,305 | | | $ | 138,738 | |
(1) Relates to be appointed lead plaintiffs and, on June 9, 2015, the Court appointed Arkansas Teachers Retirement System lead plaintiff. On August 21, 2015, the plaintiff filed a Consolidated Class Action Complaint (the “Consolidated Complaint”) amending the originally filed complaint, which was purportedly filed on behalf of all purchasers of the Company’s common stock between January 25, 2013 and May 11, 2015 (the “Class Period”). The Consolidated Complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed material adverse facts relating to certain funds formerly subadvised by F-Squared Investments Inc. ("F-Squared"). The Consolidated Complaint alleges claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5. The plaintiff seeks to recover unspecified damages. A motion to dismiss the Consolidated Complaint was filed on behalf of the Company and thenoncontrolling interests redeemable at other defendants on October 21, 2015. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss, narrowing Plaintiff's claims under Sections 10(b) and 20(a) of the Exchange Act and dismissing one of the defendants from the suit. The remaining defendants' Answer to the Consolidated Complaint was filed on August 5, 2016. Plaintiff's motion for class certification was granted on May 15, 2017. Discovery has since been completed. On October 6, 2017, defendants moved for summary judgment, and briefing on that motion is expected to be completed on December 21, 2017. The Company believes that the suit is without merit and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.than fair value.
Mark Youngers v. Virtus Investment Partners, Inc. et al
On May 8, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed in the United States District Court for the Central District of California (the "District Court") by an individual who alleges he is a former shareholder of one of the Virtus mutual funds formerly subadvised by F-Squared and formerly known as the AlphaSector Funds. The complaint alleges claims against the Company, certain of the Company’s officers and affiliates, and certain other parties (the “defendants”). The complaint was purportedly filed on behalf of purchasers of the AlphaSector Funds between May 8, 2010 and December 22, 2014, inclusive (the “Class Period”). The complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed or omitted material facts necessary to make the statements made not misleading. On June 7, 2015, a group of three individuals, including the original plaintiff, filed a motion to be appointed lead plaintiff, and on July 27, 2015, the District Court appointed movants as lead plaintiff. On October 1, 2015, the plaintiffs filed a First Amended Class Action Complaint which, among other things, added a derivative claim for breach of fiduciary duty on behalf of Virtus Opportunities Trust. On October 19, 2015, the District Court entered an order transferring the action to the Southern District of New York (the "Court"). On January 4, 2016, the Plaintiffs filed a Second Amended Complaint. A motion to dismiss was filed on behalf of the Company and affiliated defendants on February 1, 2016. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss. The Court dismissed four causes of action entirely and a fifth cause of action with respect to a portion of the Class Period. The Court also dismissed all claims against ten defendants named in the Complaint. The Court held that the Plaintiffs may pursue certain securities claims under Sections 10(b) and 20(a) of the Exchange Act and Section 12 of the Securities Act of 1933. The remaining defendants filed an Answer to the Second Amended Complaint on August 5, 2016. A Stipulation of Voluntary Dismissal of the claim under Section 12 of the Securities Act was filed on September 15, 2016. The defendants filed a motion to certify an interlocutory appeal of the July 1, 2016 order to the Court of Appeals for the Second Circuit on August 26, 2016. The motion was denied on January 6, 2017. Plaintiff's motion for class certification was denied on May 15, 2017. On July 28, 2017 Plaintiffs filed a motion seeking leave to amend their complaint to address deficiencies identified by the Court in its orders dismissing, in part, plaintiffs' Second Amended Complaint and denying class certification. Briefing on that motion was completed, and a hearing was held on September 7, 2017, where the court reserved decision. The Company believes that the suit has no basis in law or fact and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.
15.16. Consolidation
The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest, which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity.
The Company evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either: (a)either (i) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support; or (b)(ii) where as a group, the holders of the equity investment at risk do not possess: (i)possess (x) the power through voting or similar rights to direct the activities that most significantly impact the entity’s entity's
economic performance, (ii)(y) the obligation to absorb expected losses or the right to receive expected residual returns of the entity, or (iii)(z) proportionate voting and economic interests and where substantially all of the entity’sentity's activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’sVIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
In the normal course of its business, the Company sponsors various investment products, some of which are consolidated by the Company. Consolidated investment products includeCIP includes both VOEs, made up primarily of open-end funds in which the Company holds a controlling financial interest, and VIEs, which primarily consist of collateralized loan obligations ("CLOs")CLOs of which the Company is considered the primary beneficiary. The consolidation and deconsolidation of these investment products have no impact on net income (loss) attributable to stockholders.Virtus Investment Partners, Inc. The Company’sCompany's risk with respect to these investment products is limited to its beneficial interests in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products beyond the Company’sCompany's investments in, and fees generated from, these products.
The following table presents the balances of the consolidated investment productsCIP that, after intercompany eliminations, arewere reflected inon the Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2022 and December 31, 2016:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
| VOEs | | VIEs | | VOEs | | VIEs |
(in thousands) | | | CLOs | | Other | | | | CLOs | | Other |
Cash and cash equivalents | $ | 812 | | | $ | 108,396 | | | $ | 1,537 | | | $ | 787 | | | $ | 205,192 | | | $ | 1,245 | |
Investments | 15,639 | | | 2,043,030 | | | 59,939 | | | 21,544 | | | 2,055,107 | | | 63,587 | |
Other assets | 91 | | | 28,334 | | | 832 | | | 64 | | | 43,327 | | | 819 | |
Notes payable | — | | | (1,978,420) | | | — | | | — | | | (2,033,617) | | | — | |
Securities purchased payable and other liabilities | (500) | | | (120,336) | | | (510) | | | (558) | | | (184,214) | | | (296) | |
Noncontrolling interests | (2,186) | | | (7,806) | | | (7,247) | | | (4,935) | | | (8,350) | | | (7,481) | |
Net interests in CIP | $ | 13,856 | | | $ | 73,198 | | | $ | 54,551 | | | $ | 16,902 | | | $ | 77,445 | | | $ | 57,874 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
| | | VIEs | | | | VIEs |
| VOEs | | CLOs | | Other | | VOEs | | CLOs | | Other |
| | | | | | | | | | | |
($ in thousands) | | | | | | | | | | | |
Cash and cash equivalents | $ | 756 |
| | $ | 217,747 |
| | $ | 3,415 |
| | $ | 1,859 |
| | $ | 14,449 |
| | $ | 2,775 |
|
Investments | 33,053 |
| | 1,494,992 |
| | 67,682 |
| | 99,247 |
| | 346,967 |
| | 42,828 |
|
Other assets | 790 |
| | 34,847 |
| | 1,303 |
| | 2,211 |
| | 5,888 |
| | 1,059 |
|
Notes payable | — |
| | (1,455,932 | ) | | — |
| | — |
| | (328,761 | ) | | — |
|
Securities purchased payable and other liabilities | (1,422 | ) | | (188,270 | ) | | (1,620 | ) | | (2,310 | ) | | (12,534 | ) | | (1,799 | ) |
Noncontrolling interests | (3,821 | ) | | (16,487 | ) | | (63,406 | ) | | (12,505 | ) | | — |
| | (24,761 | ) |
The Company’s net interests in consolidated investment vehicles | $ | 29,356 |
| | $ | 86,897 |
| | $ | 7,374 |
| | $ | 88,502 |
| | $ | 26,009 |
| | $ | 20,102 |
|
Consolidated CLOs
The majority of the Company's consolidated investment productsCIP that are VIEs are CLOs. At September 30, 2017,March 31, 2022, the Company consolidated four6 CLOs. The financial information of certain CLOs is included inon the Company's condensed consolidated financial statements on a one-month lag based upon the availability of their financial information. Majority-ownedA majority-owned consolidated private funds,fund, whose primary purpose is to invest in CLOs for which the Company serves as the collateral manager, areis also included.
Investments of CLOs
The CLOs held investments of $1.5$2.0 billion at September 30, 2017 representMarch 31, 2022 consisting of bank loan investments, which comprise the majority of the CLOs' portfolio asset collateral and are senior secured corporate loans across a variety of industries. These bank loan investments mature at various dates between 20182022 and 20302029 and pay interest at LIBOR plus a spread of up to 9.5%10.0%. At September 30, 2017, the fair value of the senior bank loans exceeded the unpaid principal balance by approximately $6.2 million. At September 30, 2017, there were no collateral assets in default.
Notes Payable of CLOs
The CLOs hold notes payable with a total value, at par, of $1.7 billion, consisting of senior secured floating rate notes payable with a par value of $1.5 billion and subordinated notes with a par value of $139.8 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 1.0% to 8.75%. The principal amounts outstanding of the note obligations issued by the CLOs mature on dates ranging from April 2018 to October 2029. The CLOs may elect to reinvest any prepayments received on bank loan investments up until the periods between October 2019 and October 2021,2026, depending on the CLO. Generally, subsequent prepayments received after the reinvestment period must be used to pay down the note obligations. At March 31, 2022, the fair value of the senior bank loans was less than the unpaid principal balance by $52.4 million. At March 31, 2022, there were no material collateral assets in default.
Notes Payable of CLOs
The Company’sCLOs held notes payable with a total value, at par, of $2.2 billion at March 31, 2022, consisting of senior secured floating rate notes payable with a par value of $2.0 billion and subordinated notes with a par value of $233.7 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 0.8% to 8.9%. The principal amounts outstanding of these note obligations mature on dates ranging from October 2027 to October 2034.
The Company's beneficial interests and maximum exposure to loss related to these consolidated CLOs is limited to:to (i) ownership in the subordinated notes and (ii) accrued management fees. The secured notes of the consolidated CLOs have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial
interests are eliminated upon consolidation, the application of the measurement alternative as adopted on January 1, 2016, prescribed by ASU 2014-13,Consolidation (Topic 810) ("ASU 2014-13") results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at September 30, 2017,March 31, 2022, as shown in the table below:
| | | | | |
| |
| |
| |
| (in thousands) |
Subordinated notes | $ | 71,253 | |
Accrued investment management fees | 1,945 | |
Total Beneficial Interests | $ | 73,198 | |
|
| | | |
| As of |
| September 30, 2017 |
($ in thousands) | |
Subordinated notes | $ | 85,963 |
|
Accrued investment management fees | 934 |
|
Total Beneficial Interests | $ | 86,897 |
|
The following table represents income and expenses of the consolidated CLOs included inon the Company’s Condensed Consolidated Statements of Operations for the period indicated:
| | | | | |
| Three Months Ended March 31, 2022 |
| (in thousands) |
Income: | |
Realized and unrealized gain (loss), net | $ | (7,675) | |
Interest income | 19,380 | |
| |
Total Income | 11,705 | |
| |
Expenses: | |
Other operating expenses | 585 | |
Interest expense | 12,088 | |
Total Expense | 12,673 | |
Noncontrolling interests | 57 | |
Net Income (Loss) Attributable to CIP | $ | (911) | |
|
| | | |
| Nine Months Ended September 30, |
($ in thousands) | 2017 |
Income: | |
Realized and unrealized gain (loss), net | $ | 11,063 |
|
Interest income | 25,458 |
|
Other income | 542 |
|
Total Income | 37,063 |
|
| |
Expenses: | |
Other operating expenses | 6,404 |
|
Interest expense | 22,101 |
|
Total Expense | 28,505 |
|
Noncontrolling interest | (1,073 | ) |
Net Income (loss) attributable to CIPs | $ | 7,485 |
|
As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation:
| | | | | | | |
| Three Months Ended March 31, 2022 | | |
| (in thousands) | | |
Distributions received and unrealized gains (losses) on the subordinated notes held by the Company | $ | (3,042) | | | |
Investment management fees | 2,131 | | | |
| | | |
Total Economic Interests | $ | (911) | | | |
|
| | | |
| Nine Months Ended September 30, |
($ in thousands) | 2017 |
Distributions received and unrealized gains on the subordinated notes held by the Company | $ | 4,783 |
|
Investment management fees | 2,702 |
|
Total Economic Interests | $ | 7,485 |
|
Fair Value Measurements of Consolidated Investment Products
CIP
The assets and liabilities of the consolidated investment productsCIP measured at fair value on a recurring basis as of September 30, 2017March 31, 2022 and December 31, 20162021 by fair value hierarchy level were as follows:
As of September 30, 2017March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 108,396 | | | $ | — | | | $ | — | | | $ | 108,396 | |
Debt investments | 122 | | | 2,053,468 | | | 40,950 | | | 2,094,540 | |
Equity investments | 18,061 | | | 4,644 | | | 1,363 | | | 24,068 | |
| | | | | | | |
Total assets measured at fair value | $ | 126,579 | | | $ | 2,058,112 | | | $ | 42,313 | | | $ | 2,227,004 | |
Liabilities | | | | | | | |
Notes payable | $ | — | | | $ | 1,978,420 | | | $ | — | | | $ | 1,978,420 | |
| | | | | | | |
Short sales | 459 | | | — | | | — | | | 459 | |
Total liabilities measured at fair value | $ | 459 | | | $ | 1,978,420 | | | $ | — | | | $ | 1,978,879 | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
($ in thousands) | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 217,708 |
| | $ | — |
| | $ | — |
| | $ | 217,708 |
|
Debt investments | — |
| | 1,511,791 |
| | 48,760 |
| | 1,560,551 |
|
Equity investments | 34,614 |
| | — |
| | 562 |
| | 35,176 |
|
Total Assets Measured at Fair Value | $ | 252,322 |
| | $ | 1,511,791 |
| | $ | 49,322 |
| | $ | 1,813,435 |
|
Liabilities | | | | | | | |
Notes payable | $ | — |
| | $ | 1,455,932 |
| | $ | — |
| | $ | 1,455,932 |
|
Derivatives | 2 |
| | — |
| | — |
| | 2 |
|
Short sales | 751 |
| | — |
| | — |
| | 751 |
|
Total Liabilities Measured at Fair Value | $ | 753 |
| | $ | 1,455,932 |
| | $ | — |
| | $ | 1,456,685 |
|
As of December 31, 20162021
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 205,192 | | | $ | — | | | $ | — | | | $ | 205,192 | |
Debt investments | 273 | | | 2,107,736 | | | 2,695 | | | 2,110,704 | |
Equity investments | 26,111 | | | 2,961 | | | 462 | | | 29,534 | |
| | | | | | | |
Total assets measured at fair value | $ | 231,576 | | | $ | 2,110,697 | | | $ | 3,157 | | | $ | 2,345,430 | |
Liabilities | | | | | | | |
Notes payable | $ | — | | | $ | 2,033,617 | | | $ | — | | | $ | 2,033,617 | |
| | | | | | | |
Short sales | 515 | | | — | | | — | | | 515 | |
Total liabilities measured at fair value | $ | 515 | | | $ | 2,033,617 | | | $ | — | | | $ | 2,034,132 | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
($ in thousands) | | | | | | | |
Assets | | | | | | | |
Cash equivalents | $ | 14,449 |
| | $ | — |
| | $ | — |
| | $ | 14,449 |
|
Debt investments | — |
| | 448,477 |
| | 87 |
| | 448,564 |
|
Equity investments | 40,270 |
| | 208 |
| | — |
| | 40,478 |
|
Derivatives | 4 |
| | — |
| | — |
| | 4 |
|
Total Assets Measured at Fair Value | $ | 54,723 |
| | $ | 448,685 |
| | $ | 87 |
| | $ | 503,495 |
|
Liabilities | | | | | | | |
Notes payable | $ | — |
| | $ | 328,761 |
| | $ | — |
| | $ | 328,761 |
|
Derivatives | 3 |
| | 235 |
| | 62 |
| | 300 |
|
Short sales | 649 |
| | — |
| | — |
| | 649 |
|
Total Liabilities Measured at Fair Value | $ | 652 |
| | $ | 328,996 |
| | $ | 62 |
| | $ | 329,710 |
|
The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s CIPsCIP measured at fair value:
Cash equivalents represent investments in money marketmarket funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Debt and equity investments represent the underlying debt, equity and other securities held in consolidated investment products.CIP. Equity investments are valued at the official closing price on the exchange on which the securities are traded and are generally categorized within Level 1. Level 2 investments represent most debt securities, including bank loans and certain equity securities (including non-USnon-U.S. securities), for which closing prices are not readily available or are deemed to not reflect readilyreadily available market prices, and are valued using an independent pricing service. Debt investments are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Bank loan investments, which are included as debt investments, are generally priced at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs,
these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. Level 3 investments include debt and equity securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.
For the nine months ended September 30, 2017 and 2016, securities held by consolidated investment products with an end-of-period value of $0.0 million and $0.3 million, respectively, were transferred from Level 2 to Level 1 because an exchange price became available. For the nine months ended September 30, 2017 and 2016, securities held by consolidated investment products with an end-of-period value of $0.0 million and $0.5 million, respectively, were transferred from Level 1 to Level 2 because certain non-U.S. securities-quoted market prices were adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market.
Notes payable represent notes issued by consolidated investments products that areCIP CLOs and are measured using the measurement alternative in ASU 2014-13. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of: (a)of (i) the fair value of the beneficial interests held by the Company and (b)(ii) the carrying value of any beneficial interests that represent
compensation for services. The fair value of the beneficial interests held by the Company is based on third-party pricing information without adjustment.
Short Salessales are transactions in which a security is sold whichthat is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded inon the Condensed Consolidated Balance Sheets within other liabilities of CIPsCIP and are classified as levelLevel 1 based on the underlying equity security.
The securities purchase payable at September 30, 2017March 31, 2022 and December 31, 20162021 approximated fair value due to the short-term nature of the instruments.
The following table is a reconciliation of assets of consolidated investment productsCIP for Level 3 investments for which significant unobservable inputs were used to determine fair value.value:
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | |
Balance at beginning of period | $ | 3,157 | | | $ | 54,182 | | | |
Realized gains (losses), net | 4 | | | 40 | | | |
Change in unrealized gains (losses), net | (20) | | | 1,836 | | | |
| | | | | |
Purchases | — | | | 28 | | | |
| | | | | |
Amortization | 0 | | | 61 | | | |
Sales | (4) | | | (9,040) | | | |
Transfers to Level 2 | (1,626) | | | (35,985) | | | |
Transfers from Level 2 | 40,802 | | | 16,444 | | | |
Balance at end of period (1) | $ | 42,313 | | | $ | 27,566 | | | |
| | | | | |
|
| | | | | | | |
| Nine Months Ended September 30, |
($ in thousands) | 2017 | | 2016 |
Level 3 Debt securities (a) | | | |
Balance at beginning of period | $ | 25 |
| | $ | 1,397 |
|
Realized gains(losses,), net | (90 | ) | | (356 | ) |
Change in unrealized gains (losses), net | 87 |
| | 350 |
|
Acquired in business combination | 9,151 |
| | — |
|
Purchases | 1,212 |
| | 163 |
|
Paydowns | — |
| | (5 | ) |
Amortization | 12 |
| | — |
|
Sales | (765 | ) | | (1,461 | ) |
Transferred to Level 2 | 44,634 |
| | — |
|
Transfers from Level 2 | (4,944 | ) | | 58 |
|
Balance at end of period | $ | 49,322 |
| | $ | 146 |
|
(1)The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment. Transfers between Level 2 and Level 3 were due to trading activities at period end.
| |
(a) | The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment. All transfers are deemed to occur at the end of period. Transfers between Level 2 and Level 3 were due to a decrease in trading activities at period end. |
Nonconsolidated VIEs
The Company serves as the collateral manager for other collateralized loan and collateralized bond obligations (collectively, “CDOs”"CDOs") that are not consolidated. The assets and liabilities of these CDOs reside in bankruptcy remote, special purpose entities in which the Company has no ownership of, nor holds any notes issued by, the CDOs, and provides neither recourse nor guarantees. The Company has determined that the investment management fees it receives for serving as collateral manager for these CDOs did not represent a variable interest as: (1)since (i) the fees the Company earns are compensation for services provided and are
commensurate with the level of effort required to provide the investment management services; (2)services, (ii) the Company does not hold other interests in the CDOs that individually, or in the aggregate, would absorb more than an insignificant amount of the CDO'sCDOs' expected losses or receive more than an insignificant amount of the CDO'sCDOs' expected residual return;return, and (3)(iii) the investment management arrangement only includes terms, conditions and amounts that are customarily present in arrangements for similar services negotiated at arm's length.
The Company has interests in certain other entities that are VIEs that the Company does not consolidate as it is not the primary beneficiary of those entities. The Company is not the primary beneficiary assince its interest in these entities does not provide the Company with the power to direct the activities that most significantly impact the entities' economic performance. At September 30, 2017,March 31, 2022, the carrying value and maximum risk of loss related to the Company's interest in these VIEs was $14.7$31.3 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking"forward-looking statements." These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “intent,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” “predict,” “would,” “potential,” “future,” “forecast,” “guarantee,” “assume,” “likely,” “target”"expect," "estimate," "intent," "plan," "intend," "believe," "anticipate," "may," "will," "should," "could," "continue," "project," "opportunity," "predict," "would," "potential," "future," "forecast," "guarantee," "assume," "likely," "target" or similar statements or variations of such terms.
Our forward-looking statements are based on a series of expectations, assumptions and projections about ourthe Company and the markets in which we operate. Our financial statementsoperate, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net cashasset inflows and outflows, operating cash flows, business plans and future credit facilities,ability to borrow, for all future periods. All of ourforward-looking statements contained in this Quarterly Report on Form 10-Q are as of the date of this Quarterly Report on Form 10-Q only.
We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us whichthat modify or impact any of the forward-looking statements contained in or accompanying this Quarterly Report on Form 10-Q, such statements or disclosures will be deemed to modify or supersede such statements in this Quarterly Report.Report on Form 10-Q.
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors”"Risk Factors" and “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" in our 20162021 Annual Report on Form 10-K as well as the following risks and uncertainties: (a)this Quarterly Report on Form 10-Q, resulting from: (i) any reduction in our assets under management; (b)(ii) general domestic and global economic, political, and pandemic conditions; (iii) inability to achieve the expected benefits of our strategic transactions; (iv) the effects of the on-going COVID-19 pandemic and associated global economic disruptions; (v) withdrawal, renegotiation or termination of investment advisory agreements; (c)(vi) damage to our reputation; (d)(vii) inability to satisfy financial covenants and payments related to our indebtedness; (viii) inability to attract and retain key personnel; (ix) challenges from the competition we face in our business; (x) adverse developments related to unaffiliated subadvisers; (xi) negative changes in key distribution relationships; (xii) interruptions in or failure to provide critical technological service by us or third parties; (xiii) loss on our investments; (xiv) lack of sufficient capital on satisfactory terms; (xv) adverse regulatory and legal developments; (xvi) failure to comply with investment guidelines or other contractual requirements; (e) the inability to attract and retain key personnel; (f) challenges from the competition we face in our business; (g) adverse regulatory and legal developments; (h) unfavorable changes in tax laws or limitations; (i) adverse developments related to unaffiliated subadvisers; (j) negative implications of changes in key distribution relationships; (k) interruptions in or failure to provide service by third parties; (l) volatility associated with our common and preferred stock; (m)(xvii) adverse civil litigation and government investigations or proceedings; (n) the risk of loss on(xviii) unfavorable changes in tax laws or limitations; (xix) volatility associated with our investments; (o) thecommon stock; (xx) inability to make quarterly common stock dividends; (xxi) certain corporate governance provisions in our charter and preferred stock distributions; (p) the lack of sufficient capital on satisfactory terms; (q) liabilities andbylaws; (xxii) losses or costs not covered by insurance; (r) the inability to satisfy financial covenants; (s) the inability to achieve expected acquisition-related financial benefits and synergies,(xxiii) impairment of goodwill or intangible assets; and other risks and uncertainties. Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties describedreferred to above, in our 20162021 Annual Report on Form 10-K, or in any ofthis Quarterly Report on Form 10-Q and our filingsother periodic reports filed with the Securities and Exchange Commission (“SEC”(the "SEC"). could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.
Certain other factors whichthat may impact our continuing operations, prospects, financial results and liquidity, or whichthat may cause actual results to differ from such forward-looking statements, are discussed or included in the Company’s periodic reports filed with the SEC and are available on our website at www.virtus.com under “Investor"Investor Relations.”" You are urged to carefully consider all such factors.
Overview
Our Business
We are a provider ofprovide investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, and unaffiliated subadvisers, each having its own distinct investment style, autonomous investment process and individual brand.brand, as well as from select unaffiliated subadvisers. By offering a broad array of products, we believe we can appeal to a greater number of investors which allows us toand have offerings across market cycles and through changes in investor preferences. Our earnings are primarily driven by asset-based fees charged for services relating to these various products, including investment management, fund administration, distribution, and shareholder services.
We offer investment strategies for individual and institutional investors in different product structuresinvestment products and through multiple distribution channels. Our investment strategies are available in a diverse range of styles and disciplines, managed by
a collection of boutique differentiated investment managers, both affiliated and unaffiliated.managers. We have offerings in various asset classes (domestic and international equity,(equity, fixed income, multi-asset and alternative), in allgeographies (domestic, global, international and emerging), market capitalizations (large, mid and small), in different styles (growth, blendcore and value), and with various investment approaches (fundamental, quantitative and thematic)specialty). Our retail products include open-end funds, closed-end funds exchange traded funds (“ETFs”) and retail separate accounts. Our institutional products are offered through separate accounts and pooled or commingled structures to a variety of institutional clients. We also offer certain of ourprovide subadvisory services to other investment strategies to institutional clients.advisers and serve as the collateral manager for structured products.
We distribute our open-end funds and ETFs principally through financial intermediaries. We have broad distribution access in the US retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisors,advisers, banks and insurance companies. In many of these firms, we have a number of products that are on firms’ preferred “recommended”"recommended" lists and on fee-based advisory programs. Our sales efforts are supported by regional sales professionals, a national accountsaccount relationship group, and separate teams for ETFs and the retirement and insurance products.
channels. In addition, we leverage third-party distributors for global products sold in the US retail market as well as in certain international jurisdictions. Our retail separate accounts are distributed through financial intermediaries and directly to private clients by teams at one of ouran affiliated managers. manager.
Our institutional distribution strategy is an affiliate-centric and coordinated model. Throughservices are marketed through relationships with consultants our affiliatesas well as directly to clients. We target key market segments, including foundations and endowments, corporate, public and private pension plans, and unaffiliated subadvised mutual funds.subadvisory relationships.
Financial Highlights
▪Net earningsincome per diluted share was $2.21$4.22 in the thirdfirst quarter of 2017.2022, a decrease of $0.32, or 7.0%, as compared to net income per diluted share of $4.54 in the first quarter of 2021.
▪Total sales (inflows) were $4.6$9.4 billion in the thirdfirst quarter of 2017,2022, a decrease of $1.2 billion, or 11.1%, from $10.6 billion in the first quarter of 2021. Net flows were $(2.0) billion in the first quarter of 2022 compared to $2.5 billion in the first quarter of 2021.
▪Assets under management were $183.3 billion at March 31, 2022, an increase of $1.5$14.5 billion, or 48.3%8.6%, from $3.1March 31, 2021.
Stone Harbor Investment Partners
On January 1, 2022, the Company completed its acquisition of Stone Harbor Investment Partners LLC ("Stone Harbor"), a premier manager of emerging markets debt, multi-asset credit, global corporate, and other strategies with $14.7 billion in the third quarter of 2016. Net flows were $0.2 billion in the third quarter of 2017 compared to $0.5 billion in the third quarter of 2016.
Long-term assets under management were $87.1 billion at September 30, 2017, an increase of $40.6 billion from September 30, 2016.December 31, 2021.
Acquisition of RidgeWorth
Westchester Capital Management
On JuneOctober 1, 2017, we2021, the Company completed theits acquisition of RidgeWorth Investments (the "Acquisition" or the "Acquired Business"Westchester Capital Management ("Westchester"). RidgeWorth managed approximately $40.1, a recognized leader in global event-driven strategies with $5.1 billion inof assets under managementmanagement.
AllianzGI Strategic Partnership
On February 1, 2021, the Company finalized a strategic partnership with Allianz Global Investors U.S. LLC ("AllianzGI"), pursuant to which NFJ Investment Group ("NFJ") was established as a new affiliated investment manager, and the Company became the investment adviser, distributor and/or administrator for $29.5 billion of June 1, 2017, including $35.7 billion in long term assets under management and $4.4 billion in liquidity strategies. The Acquisition significantly increased our assets under management, and provided a wider range of strategies forAllianzGI's open-end, closed-end, institutional and individual investors,retail separate account assets (the "AGI Relationship", together with Westchester and broader distribution and client service resources.Stone Harbor, the "Transactions").
Total consideration for the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. At the closing, we paid $471.4 million in cash, issued 213,669 shares of our common stock with a value of $21.7 million based on a stock price of $101.76, and recorded $51.7 million in contingent consideration and $2.3 million in deferred cash consideration. The conditions for the $51.7 million of contingent consideration were met as of September 30, 2017, and we expect to pay this amount during the fourth quarter of 2017.
Assets Under Management
At September 30, 2017,March 31, 2022, total assets under management were $90.6$183.3 billion, representing an increase of $44.0$14.5 billion, or 94.6%8.6%, from September 30, 2016March 31, 2021, and an increasea decrease of $45.2$3.8 billion, or 99.6%2.1%, from December 31, 2016.2021. The increase in assets under managementfrom March 31, 2021 included $19.8 billion from the addition of Stone Harbor and Westchester, partially offset by $1.8 billion of negative market performance and $1.0 billion of net outflows. The decrease from December 31, 20162021 was primarily due to $16.5 billion in negative market performance and $2.0 billion of net outflows, partially offset by $14.7 billion from Stone Harbor.
Other Fee Earning Assets
Other fee earning assets include assets for which we provide services for an asset-based fee but do not serve as the Acquired Business which added $40.1 billion as of June 1, 2017, market appreciation of $6.2 billion, and positive flows of $0.6 billion.
Average long-terminvestment adviser. Other fee earning assets are not included in our assets under management, which represent the majoritymanagement. At December 31, 2021, we had $3.5 billion of our fee-earning asset levels, were $64.3 billion for the nine months ended September 30, 2017, an increase of $19.0 billion, or 41.9%, from $45.3 billion for the nine months ended September 30, 2016. The increase in long-term average assets under management compared to September 30, 2016 was primarily due to the Acquisition and the cumulative impact of market appreciation.other fee earning assets.
Operating Results
In the thirdfirst quarter of 2017,2022, total revenues increased 50.2%16.4% to $123.7$252.4 million from $82.3$216.9 million in the thirdfirst quarter of 2016,2021, primarily as a result of $32.5 millionhigher average assets under management as a result of additional revenuesthe assets from the Acquired Business.Transactions. Operating income was relatively flat at $16.8increased $3.4 million to $65.6 million in the thirdfirst quarter of 20172022 compared to $16.5$62.1 million in the thirdfirst quarter of 2016. The third quarter of 2017 included $4.9 million and $4.9 million, respectively, in higher amortization of intangible assets and other operating expenses related2021, primarily due to acquisition and integration costs.the same factors previously mentioned.
Assets Under Management by Product
The following table summarizes our assets under management by product: | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, | | Change |
(in millions) | 2022 | | 2021 | | $ | | % |
Open-End Funds (1) | $ | 73,149 | | | $ | 73,185 | | | $ | (36) | | | 0.0 | % |
Closed-End Funds | 12,060 | | | 11,664 | | | 396 | | | 3.4 | % |
Retail Separate Accounts | 40,824 | | | 37,244 | | | 3,580 | | | 9.6 | % |
Institutional Accounts (2) | 57,309 | | | 46,787 | | | 10,522 | | | 22.5 | % |
| | | | | | | |
| | | | | | | |
Total | $ | 183,342 | | | $ | 168,880 | | | $ | 14,462 | | | 8.6 | % |
Average Assets Under Management (3) | $ | 190,106 | | | $ | 154,344 | | | $ | 35,762 | | | 23.2 | % |
(1)Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds.
(2)Represents assets under management of institutional separate and commingled accounts including structured products. |
| | | | | | | | | | | | | | |
| As of September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
($ in millions) | | | | | | | |
Open-End Funds (1) | $ | 42,397.7 |
| | $ | 25,266.4 |
| | $ | 17,131.3 |
| | 67.8 | % |
Closed-End Funds | 6,735.4 |
| | 6,887.3 |
| | (151.9 | ) | | (2.2 | )% |
Exchange Traded Funds | 955.7 |
| | 460.6 |
| | 495.1 |
| | 107.5 | % |
Retail Separate Accounts | 13,057.2 |
| | 7,924.8 |
| | 5,132.4 |
| | 64.8 | % |
Institutional Accounts | 20,630.5 |
| | 5,376.6 |
| | 15,253.9 |
| | 283.7 | % |
Structured Products | 3,360.0 |
| | 623.8 |
| | 2,736.2 |
| | 438.6 | % |
Total Long-Term | 87,136.5 |
| | 46,539.5 |
| | 40,597.0 |
| | 87.2 | % |
Liquidity (3) | 3,431.4 |
| | — |
| | 3,431.4 |
| | — |
|
Total | $ | 90,567.9 |
| | $ | 46,539.5 |
| | $ | 44,028.4 |
| | 94.6 | % |
Average Assets Under Management (2) | $ | 65,898.5 |
| | $ | 45,335.0 |
| | $ | 20,563.5 |
| | 45.4 | % |
Average Long-Term Assets Under Management (2) | $ | 64,345.3 |
| | $ | 45,335.0 |
| | $ | 19,010.3 |
| | 41.9 | % |
(3)Averages are calculated as follows: | |
(1) | Represents assets under management of U.S. 1940 Act mutual funds and Undertakings for Collective Investments in Transferable Securities ("UCITS") |
| |
(2) | Averages are calculated as follows: |
- –Funds - average daily or weekly balances
- –Retail Separate Accounts - prior quarterprior-quarter ending balance or average of month-end balances in quarter
- –Institutional Accounts - average of month-end balances in quarter
(3) Represents assets under management in liquidity strategies, including open-end funds and institutional accounts
Asset Flows by Product
The following table summarizes asset flows by product: | | | | | | | | | | | | Three Months Ended March 31, | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
($ in millions) | 2017 | | 2016 | | 2017 | | 2016 | |
(in millions) | | (in millions) | 2022 | | 2021 | |
Open-End Funds (1) | | | | | | | | Open-End Funds (1) | | | | |
Beginning balance | $ | 41,452.8 |
| | $ | 24,813.8 |
| | $ | 23,432.8 |
| | $ | 28,882.1 |
| Beginning balance | $ | 78,706 | | | $ | 51,608 | | |
Inflows | 2,842.5 |
| | 1,882.5 |
| | 7,129.1 |
| | 5,427.8 |
| Inflows | 4,956 | | | 6,028 | | |
Outflows | (2,872.7 | ) | | (2,139.4 | ) | | (7,286.0 | ) | | (10,733.5 | ) | Outflows | (8,378) | | | (5,335) | | |
Net flows | (30.2 | ) | | (256.9 | ) | | (156.9 | ) | | (5,305.7 | ) | Net flows | (3,422) | | | 693 | | |
Market performance | 1,040.7 |
| | 736.5 |
| | 3,697.5 |
| | 1,919.9 |
| Market performance | (6,907) | | | 1,228 | | |
Other (2) | (65.6 | ) | | (27.0 | ) | | 15,424.3 |
| | (229.9 | ) | Other (2) | 4,772 | | | 19,656 | | |
Ending balance | $ | 42,397.7 |
| | $ | 25,266.4 |
| | $ | 42,397.7 |
| | $ | 25,266.4 |
| Ending balance | $ | 73,149 | | | $ | 73,185 | | |
| Closed-End Funds | | | | | | | | Closed-End Funds | | | | |
Beginning balance | $ | 6,707.2 |
| | $ | 6,959.6 |
| | $ | 6,757.4 |
| | $ | 6,222.3 |
| Beginning balance | $ | 12,068 | | | $ | 5,914 | | |
Inflows | — |
| | — |
| | — |
| | — |
| Inflows | 8 | | | — | | |
Outflows | — |
| | — |
| | (112.8 | ) | | (103.3 | ) | Outflows | — | | | — | | |
Net flows | — |
| | — |
| | (112.8 | ) | | (103.3 | ) | Net flows | 8 | | | — | | |
Market performance | 124.4 |
| | (63.3 | ) | | 421.6 |
| | 839.7 |
| Market performance | (196) | | | 105 | | |
Other (2) | (96.2 | ) | | (9.0 | ) | | (330.8 | ) | | (71.4 | ) | Other (2) | 180 | | | 5,645 | | |
Ending balance | $ | 6,735.4 |
| | $ | 6,887.3 |
| | $ | 6,735.4 |
| | $ | 6,887.3 |
| Ending balance | $ | 12,060 | | | $ | 11,664 | | |
Exchange Traded Funds | | | | | | | | |
Beginning balance | $ | 968.8 |
| | $ | 399.4 |
| | $ | 596.8 |
| | $ | 340.8 |
| |
Inflows | 104.1 |
| | 66.9 |
| | 554.9 |
| | 182 |
| |
Outflows | (28.9 | ) | | (19.6 | ) | | (103.2 | ) | | (74.2 | ) | |
Net flows | 75.2 |
| | 47.3 |
| | 451.7 |
| | 107.8 |
| |
Market performance | 4.2 |
| | 19.4 |
| | 30.3 |
| | 23.2 |
| |
Other (2) | (92.5 | ) | | (5.5 | ) | | (123.1 | ) | | (11.2 | ) | |
Ending balance | $ | 955.7 |
| | $ | 460.6 |
| | $ | 955.7 |
| | $ | 460.6 |
| |
| Retail Separate Accounts | | | | | | | | Retail Separate Accounts | | | | |
Beginning balance | $ | 12,351.1 |
| | $ | 7,407.2 |
| | $ | 8,473.5 |
| | $ | 6,784.4 |
| Beginning balance | $ | 44,538 | | | $ | 29,751 | | |
Inflows | 704.4 |
| | 516.1 |
| | 2,049.8 |
| | 1,359.5 |
| Inflows | 2,022 | | | 2,699 | | |
Outflows | (480.1 | ) | | (182.0 | ) | | (1,233.7 | ) | | (860.9 | ) | Outflows | (1,394) | | | (896) | | |
Net flows | 224.3 |
| | 334.1 |
| | 816.1 |
| | 498.6 |
| Net flows | 628 | | | 1,803 | | |
Market performance | 478.3 |
| | 189.9 |
| | 1,273.7 |
| | 647.2 |
| Market performance | (4,342) | | | 2,141 | | |
Other (2) | 3.5 |
| | (6.4 | ) | | 2,493.9 |
| | (5.4 | ) | Other (2) | — | | | 3,549 | | |
Ending balance | $ | 13,057.2 |
| | $ | 7,924.8 |
| | $ | 13,057.2 |
| | $ | 7,924.8 |
| Ending balance | $ | 40,824 | | | $ | 37,244 | | |
Institutional Accounts | | | | | | | | |
Beginning balance | $ | 20,639.1 |
| | $ | 4,920.0 |
| | $ | 5,492.7 |
| | $ | 4,799.7 |
| |
Inflows | 439.9 |
| | 612.5 |
| | 1,074.7 |
| | 1,023.6 |
| |
Outflows | (893.7 | ) | | (207.2 | ) | | (1,697.7 | ) | | (775.8 | ) | |
Net flows | (453.8 | ) | | 405.3 |
| | (623.0 | ) | | 247.8 |
| |
Market performance | 451.1 |
| | 56.4 |
| | 757.5 |
| | 348.9 |
| |
Other (2) | (5.9 | ) | | (5.1 | ) | | 15,003.3 |
| | (19.8 | ) | |
Ending balance | $ | 20,630.5 |
| | $ | 5,376.6 |
| | $ | 20,630.5 |
| | $ | 5,376.6 |
| |
Structured Products | | | | | | | | |
| Institutional Accounts (3) | | Institutional Accounts (3) | | | | |
Beginning balance | $ | 2,899.8 |
| | $ | 669.7 |
| | $ | 613.1 |
| | $ | 356.0 |
| Beginning balance | $ | 51,874 | | | $ | 44,921 | | |
Inflows | 474.3 |
| | — |
| | 474.3 |
| | 316.3 |
| Inflows | 2,449 | | | 1,884 | | |
Outflows | (55.6 | ) | | (45.2 | ) | | (296.3 | ) | | (58.7 | ) | Outflows | (1,623) | | | (1,868) | | |
Net flows | 418.7 |
| | (45.2 | ) | | 178.0 |
| | 257.6 |
| Net flows | 826 | | | 16 | | |
Market performance | 37.1 |
| | 3.9 |
| | 60.9 |
| | 13.4 |
| Market performance | (5,012) | | | 1,216 | | |
Other (2) | 4.4 |
| | (4.6 | ) | | 2,508.0 |
| | (3.2 | ) | Other (2) | 9,621 | | | 634 | | |
Ending balance | $ | 3,360.0 |
| | $ | 623.8 |
| | $ | 3,360.0 |
| | $ | 623.8 |
| Ending balance | $ | 57,309 | | | $ | 46,787 | | |
| | | | | | | | |
| Total | | Total | | | | |
Beginning balance | | Beginning balance | $ | 187,186 | | | $ | 132,194 | | |
Inflows | | Inflows | 9,435 | | | 10,611 | | |
Outflows | | Outflows | (11,395) | | | (8,099) | | |
Net flows | | Net flows | (1,960) | | | 2,512 | | |
Market performance | | Market performance | (16,457) | | | 4,690 | | |
Other (2) | | Other (2) | 14,573 | | | 29,484 | | |
Ending balance | | Ending balance | $ | 183,342 | | | $ | 168,880 | | |
(1)Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds.
(2)Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from cash management strategies, and the impact of non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), current income or capital returned by structured products and the use of leverage.
(3)Represents assets under management of institutional separate and commingled accounts including structured products.
Assets Under Management by Asset Class
|
| | | | | | | | | | | | | | | |
Total Long-Term | | | | | | | |
Beginning balance | $ | 85,018.8 |
| | $ | 45,169.7 |
| | $ | 45,366.3 |
| | $ | 47,385.3 |
|
Inflows | 4,565.2 |
| | 3,078.0 |
| | 11,282.8 |
| | 8,309.2 |
|
Outflows | (4,331.0 | ) | | (2,593.4 | ) | | (10,729.7 | ) | | (12,606.4 | ) |
Net flows | 234.2 |
| | 484.6 |
| | 553.1 |
| | (4,297.2 | ) |
Market performance | 2,135.8 |
| | 942.8 |
| | 6,241.5 |
| | 3,792.3 |
|
Other (2) | (252.3 | ) | | (57.6 | ) | | 34,975.6 |
| | (340.9 | ) |
Ending balance | $ | 87,136.5 |
| | $ | 46,539.5 |
| | $ | 87,136.5 |
| | $ | 46,539.5 |
|
Liquidity | | | | | | | |
Beginning balance | $ | 3,570.6 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Other (2) | (139.2 | ) | | — |
| | 3,431.4 |
| | — |
|
Ending balance | $ | 3,431.4 |
| | $ | — |
| | $ | 3,431.4 |
| | $ | — |
|
Total | | | | | | | |
Beginning balance | $ | 88,589.4 |
| | $ | 45,169.7 |
| | $ | 45,366.3 |
| | $ | 47,385.3 |
|
Inflows | 4,565.2 |
| | 3,078.0 |
| | 11,282.8 |
| | 8,309.2 |
|
Outflows | (4,331.0 | ) | | (2,593.4 | ) | | (10,729.7 | ) | | (12,606.4 | ) |
Net flows | 234.2 |
| | 484.6 |
| | 553.1 |
| | (4,297.2 | ) |
Market performance | 2,135.8 |
| | 942.8 |
| | 6,241.5 |
| | 3,792.3 |
|
Other (2) | (391.5 | ) | | (57.6 | ) | | 38,407.0 |
| | (340.9 | ) |
Ending balance | $ | 90,567.9 |
| | $ | 46,539.5 |
| | $ | 90,567.9 |
| | $ | 46,539.5 |
|
| |
(1) | Includes assets under management of U.S. 1940 Act mutual funds and Undertakings for Collective Investments in Transferable Securities ("UCITS") |
| |
(2) | Represents open-end and closed-end mutual fund distributions, net of reinvestments, net flows from non-sales related activities such as asset acquisitions/(dispositions), marketable securities investments/(withdrawals), the impact on assets from the use of leverage, and the net change in assets for liquidity strategies |
The following table summarizes our assets under management by asset class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, | | Change | | % of Total |
(in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 |
Asset Class | | | | | | | | | | | |
Equity | $ | 102,989 | | | $ | 106,183 | | | $ | (3,194) | | | (3.0) | % | | 56.2 | % | | 62.9 | % |
Fixed income | 45,418 | | | 35,069 | | | 10,349 | | | 29.5 | % | | 24.8 | % | | 20.8 | % |
Multi-asset (1) | 23,415 | | | 22,498 | | | 917 | | | 4.1 | % | | 12.8 | % | | 13.3 | % |
Alternatives (2) | 11,520 | | | 5,130 | | | 6,390 | | | 124.6 | % | | 6.2 | % | | 3.0 | % |
Total | $ | 183,342 | | | $ | 168,880 | | | $ | 14,462 | | | 8.6 | % | | 100.0 | % | | 100.0 | % |
(1) Includes strategies with substantial holdings in at least two of the following asset classes: equity, fixed income, and alternatives. |
| | | | | | | | | | | | | | | | | | | | |
| As of September 30, | | Change | | % of Total |
| 2017 | | 2016 | | $ | | % | | 2017 | | 2016 |
($ in millions) | | | | | | | | | | | |
Asset Class | | | | | | | | | | | |
Equity | $ | 43,147.9 |
| | $ | 26,669.5 |
| | $ | 16,478.4 |
| | 61.8 | % | | 47.6 | % | | 57.3 | % |
Fixed income | 39,741.7 |
| | 15,756.8 |
| | 23,984.9 |
| | 152.2 | % | | 43.9 | % | | 33.9 | % |
Alternatives (1) | 4,246.9 |
| | 4,113.2 |
| | 133.7 |
| | 3.3 | % | | 4.7 | % | | 8.8 | % |
Liquidity (2) | 3,431.4 |
| | — |
| | 3,431.4 |
| | 100.0 | % | | 3.8 | % | | — | % |
Total | $ | 90,567.9 |
| | $ | 46,539.5 |
| | $ | 44,028.4 |
| | 94.6 | % | | 100.0 | % | | 100.0 | % |
(2) Consists of event-driven, real estate securities, infrastructure, long/short and other strategies. | |
(1) | Consists of real estate securities, master-limited partnerships, option strategies and other |
| |
(2) | Represents assets under management in liquidity strategies, including open-end funds and institutional accounts |
Average Assets Under Management and Average Basis PointsFees Earned
The following table summarizes the average management fees earned in basis points and average assets under management: |
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
($ in millions, except average fee earned data which is in basis points) | Average Fees Earned
| | Average Assets Under Management (2)
|
| 2017 | | 2016 | | 2017 | | 2016 |
Products | | | | | |
Open-End Funds (1) | 47.9 |
| | 50.1 |
| | $ | 42,080.9 |
| | $ | 25,149.9 |
|
Closed-End Funds | 66.0 |
| | 65.9 |
| | 6,758.1 |
| | 6,853.4 |
|
Exchange Traded Funds | 27.0 |
| | 32.4 |
| | 945.0 |
| | 426.0 |
|
Retail Separate Accounts | 46.6 |
| | 53.2 |
| | 12,345.5 |
| | 7,413.6 |
|
Institutional Accounts | 31.0 |
| | 37.0 |
| | 20,728.6 |
| | 5,044.2 |
|
Structured Products | 47.1 |
| | 76.3 |
| | 3,111.1 |
| | 643.4 |
|
All Long-Term Products | 44.8 |
| | 51.8 |
| | 85,969.2 |
| | 45,530.5 |
|
Liquidity (3) | 6.0 |
| | — |
| | 3,331.1 |
| | — |
|
All Products | 43.4 |
| | 51.8 |
| | $ | 89,300.3 |
| | $ | 45,530.5 |
|
| | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, |
| Average Fees Earned
| | Average Assets Under Management (2)
|
| 2017 | | 2016 | | 2017 | | 2016 |
Products | | | | | |
Open-End Funds (1) | 49.5 |
| | 48.9 |
| | $ | 32,296.7 |
| | $ | 25,994.5 |
|
Closed-End Funds | 66.0 |
| | 65.6 |
| | 6,784.6 |
| | 6,555.2 |
|
Exchange Traded Funds | 28.4 |
| | 34.3 |
| | 868.3 |
| | 378.3 |
|
Retail Separate Accounts | 49.7 |
| | 54.8 |
| | 10,317.6 |
| | 7,065.7 |
|
Institutional Accounts | 32.6 |
| | 37.2 |
| | 12,375.6 |
| | 4,878.9 |
|
Structured Products | 42.1 |
| | 49.2 |
| | 1,702.5 |
| | 462.4 |
|
All Long-Term Products | 47.6 |
| | 50.9 |
| | 64,345.3 |
| | 45,335.0 |
|
Liquidity (3) | 7.6 |
| | — |
| | 1,553.2 |
| | — |
|
All Products | 46.6 |
| | 50.9 |
| | $ | 65,898.5 |
| | $ | 45,335.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| Average Fee Earned (expressed in basis points) | | Average Assets Under Management (in millions) (3) |
| 2022 | | 2021 | | 2022 | | 2021 |
Products | | | | | | | |
Open-End Funds (1) | 46.5 | | | 47.5 | | | $ | 75,537 | | | $ | 67,137 | |
Closed-End Funds | 58.4 | | | 56.2 | | | 11,762 | | | 9,340 | |
Retail Separate Accounts | 43.6 | | | 45.7 | | | 44,538 | | | 32,118 | |
Institutional Accounts (2) | 31.5 | | | 32.1 | | | 58,269 | | | 45,749 | |
| | | | | | | |
| | | | | | | |
All Products | 41.9 | | | 43.1 | | | $ | 190,106 | | | $ | 154,344 | |
| | | | | | | |
| | | | | | | |
| |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1)Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds.
| |
(1) | Represents assets under management of U.S. 1940 Act mutual funds and Undertakings for Collective Investments in Transferable Securities ("UCITS") |
| |
(2) | Averages are calculated as follows: |
- (2)Represents assets under management of institutional separate and commingled accounts including structured products.
(3)Averages are calculated as follows:
–Funds - average daily or weekly balances
- –Retail Separate Accounts - prior quarterprior-quarter ending balance or average of month-end balances in quarter
- –Institutional Accounts - average of month-end balances in quarter
(3) Represents assets under management in liquidity strategies, including open-end funds and institutional accounts
Average fees earned represent investment management fees, net of fees paid to third-party service providers for investment management related services and investment management fees earned from consolidated investment products,revenue-related adjustments, divided by average net assets. Open-end mutual fund, closed end fundassets, excluding the impact of consolidation of investment products ("CIP"). Revenue-related adjustments are based on specific agreements and exchange traded fundreflect the portion of investment management fees passed-through to third-party client intermediaries for services to investors in sponsored investment products. Fund fees are calculated based on average daily or weekly net assets. Retail separate account fees are calculated based on the end of the preceding or current quarter’s asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances, oran average of current quarter’s asset values. Structured products fees are calculated basedvalues or on a combination of the underlying cash flows and the principal value of the product. Average fees earned will vary based on several factors, including the asset mix and expense reimbursements to the funds.
The average fee rate earned on all products for the three and nine months ended September 30, 2017March 31, 2022 decreased by 8.4 and 4.31.2 basis points respectively, compared to the same periodsperiod in the prior year primarily due to the impactlower fee rates earned on the average fees earned as a result of the assets under management acquired from the Acquired Business having a lower blended fee rate. The product categories most impacted were institutional accountsAGI Relationship and retail separate accounts, where the additional assets were primarily in fixed income strategies. For the nine months ended September 30, 2017, the increase in average fees earned on open-end funds was primarily attributable to market appreciation and positive net flows in higher fee equity products.Stone Harbor.
Results of Operations
Summary Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | 2022 vs. 2021 | | % | | | | | | | | |
Investment management fees | $ | 206,817 | | | $ | 173,269 | | | $ | 33,548 | | | 19.4 | % | | | | | | | | |
Other revenue | 45,623 | | | 43,628 | | | 1,995 | | | 4.6 | % | | | | | | | | |
Total revenues | 252,440 | | | 216,897 | | | 35,543 | | | 16.4 | % | | | | | | | | |
Total operating expenses | 186,888 | | | 154,755 | | | 32,133 | | | 20.8 | % | | | | | | | | |
Operating income (loss) | 65,552 | | | 62,142 | | | 3,410 | | | 5.5 | % | | | | | | | | |
Other income (expense), net | (16,039) | | | (2,025) | | | (14,014) | | | 692.0 | % | | | | | | | | |
Interest income (expense), net | 6,341 | | | 7,250 | | | (909) | | | (12.5) | % | | | | | | | | |
Income (loss) before income taxes | 55,854 | | | 67,367 | | | (11,513) | | | (17.1) | % | | | | | | | | |
Income tax expense (benefit) | 16,735 | | | 15,153 | | | 1,582 | | | 10.4 | % | | | | | | | | |
Net income (loss) | 39,119 | | | 52,214 | | | (13,095) | | | (25.1) | % | | | | | | | | |
Noncontrolling interests | (6,060) | | | (15,626) | | | 9,566 | | | (61.2) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Income (Loss) Attributable to Virtus Investment Partners, Inc. | $ | 33,059 | | | $ | 36,588 | | | $ | (3,529) | | | (9.6) | % | | | | | | | | |
Earnings (loss) per share-diluted | $ | 4.22 | | | $ | 4.54 | | | $ | (0.32) | | | (7.0) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 vs. 2016 | | % | | 2017 | | 2016 | | 2017 vs. 2016 | | % |
($ in thousands) | | | | | | | | | | | | | | | |
Results of Operations | | | | | | | | | | | | | | | |
Investment management fees | $ | 97,295 |
| | $ | 60,398 |
| | $ | 36,897 |
| | 61.1 | % | | $ | 230,628 |
| | $ | 176,234 |
| | $ | 54,394 |
| | 30.9 | % |
Other revenues | 26,380 |
| | 21,926 |
| | 4,454 |
| | 20.3 | % | | 66,955 |
| | 66,470 |
| | 485 |
| | 0.7 | % |
Total revenues | 123,675 |
| | 82,324 |
| | 41,351 |
| | 50.2 | % | | 297,583 |
| | 242,704 |
| | 54,879 |
| | 22.6 | % |
Total operating expenses | 106,886 |
| | 65,786 |
| | 41,100 |
| | 62.5 | % | | 267,563 |
| | 204,673 |
| | 62,890 |
| | 30.7 | % |
Operating income (loss) | 16,789 |
| | 16,538 |
| | 251 |
| | 1.5 | % | | 30,020 |
| | 38,031 |
| | (8,011 | ) | | (21.1 | )% |
Other income (expense), net | 15,268 |
| | 4,891 |
| | 10,377 |
| | 212.2 | % | | 20,565 |
| | 13,935 |
| | 6,630 |
| | 47.6 | % |
Interest income (expense), net | (1,908 | ) | | 1,716 |
| | (3,624 | ) | | (211.2 | )% | | (350 | ) | | 5,392 |
| | (5,742 | ) | | (106.5 | )% |
Income (loss) before income taxes | 30,149 |
| | 23,145 |
| | 7,004 |
| | 30.3 | % | | 50,235 |
| | 57,358 |
| | (7,123 | ) | | (12.4 | )% |
Income tax expense (benefit) | 9,626 |
| | 6,869 |
| | 2,757 |
| | 40.1 | % | | 15,939 |
| | 20,512 |
| | (4,573 | ) | | (22.3 | )% |
Net income (loss) | 20,523 |
| | 16,276 |
| | 4,247 |
| | 26.1 | % | | 34,296 |
| | 36,846 |
| | (2,550 | ) | | (6.9 | )% |
Noncontrolling interests | (1,731 | ) | | (651 | ) | | (1,080 | ) | | (165.9 | )% | | (2,782 | ) | | (770 | ) | | (2,012 | ) | | (261.3 | )% |
Net Income (Loss) Attributable to Stockholders | 18,792 |
| | 15,625 |
| | 3,167 |
| | 20.3 | % | | 31,514 |
| | 36,076 |
| | (4,562 | ) | | (12.6 | )% |
Preferred stockholder dividends | (2,084 | ) | | — |
| | (2,084 | ) | | (100.0 | )% | | (6,252 | ) | | — |
| | (6,252 | ) | | (100.0 | )% |
Net Income (Loss) Attributable to Common Stockholders | $ | 16,708 |
| | $ | 15,625 |
| | $ | 1,083 |
| | 6.9 | % | | $ | 25,262 |
| | $ | 36,076 |
| | $ | (10,814 | ) | | (30.0 | )% |
Revenues
Revenues by source were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | 2022 vs. 2021 | | % | | | | | | | | |
Investment management fees | | | | | | | | | | | | | | | |
Open-end funds | $ | 97,377 | | | $ | 89,120 | | | $ | 8,257 | | | 9.3 | % | | | | | | | | |
Closed-end funds | 16,940 | | | 12,940 | | | 4,000 | | | 30.9 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
Retail separate accounts | 49,603 | | | 37,512 | | | 12,091 | | | 32.2 | % | | | | | | | | |
Institutional accounts | 41,991 | | | 32,438 | | | 9,553 | | | 29.5 | % | | | | | | | | |
Structured products | 906 | | | 1,259 | | | (353) | | | (28.0) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total investment management fees | 206,817 | | | 173,269 | | | 33,548 | | | 19.4 | % | | | | | | | | |
Distribution and service fees | 20,007 | | | 20,348 | | | (341) | | | (1.7) | % | | | | | | | | |
Administration and shareholder service fees | 24,344 | | | 22,560 | | | 1,784 | | | 7.9 | % | | | | | | | | |
Other income and fees | 1,272 | | | 720 | | | 552 | | | 76.7 | % | | | | | | | | |
Total revenues | $ | 252,440 | | | $ | 216,897 | | | $ | 35,543 | | | 16.4 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 vs. 2016 | | % | | | 2017 | | 2016 | | 2017 vs. 2016 | | % |
($ in thousands) | | | | | | | | | | | | |
Investment management fees | | | | | | | | | | | | |
Funds | $ | 63,075 |
| | $ | 44,204 |
| | $ | 18,871 |
| | 42.7 | % | | | $ | 156,245 |
| | $ | 131,467 |
| | $ | 24,778 |
| | 18.8 | % |
Retail separate accounts | 14,686 |
| | 10,267 |
| | 4,419 |
| | 43.0 | % | | | 38,879 |
| | 29,470 |
| | 9,409 |
| | 31.9 | % |
Institutional accounts | 19,030 |
| | 5,927 |
| | 13,103 |
| | 221.1 | % | | | 34,623 |
| | 15,297 |
| | 19,326 |
| | 126.3 | % |
Liquidity | 504 |
| | — |
| | 504 |
| | 100.0 | % | | | 881 |
| | — |
| | 881 |
| | 100.0 | % |
Total investment management fees | 97,295 |
| | 60,398 |
| | 36,897 |
| | 61.1 | % | | | 230,628 |
| | 176,234 |
| | 54,394 |
| | 30.9 | % |
Distribution and service fees | 11,482 |
| | 12,116 |
| | (634 | ) | | (5.2 | )% | | | 32,704 |
| | 36,761 |
| | (4,057 | ) | | (11.0 | )% |
Administration and transfer agent fees | 14,699 |
| | 9,588 |
| | 5,111 |
| | 53.3 | % | | | 33,156 |
| | 29,085 |
| | 4,071 |
| | 14.0 | % |
Other income and fees | 199 |
| | 222 |
| | (23 | ) | | (10.4 | )% | | | 1,095 |
| | 624 |
| | 471 |
| | 75.5 | % |
Total revenues | $ | 123,675 |
| | $ | 82,324 |
| | $ | 41,351 |
| | 50.2 | % | | | $ | 297,583 |
| | $ | 242,704 |
| | $ | 54,879 |
| | 22.6 | % |
Investment Management Fees
Investment management fees are earned based on a percentage of assets under management and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments. Investment management fees increased by $36.9$33.5 million, or 61.1%, and $54.4 million, or 30.9%19.4%, for the three and nine months ended September 30, 2017, respectively,March 31, 2022, compared to the same periodsperiod in the prior year primarilyyear. The increase in investment management fees was due to an increase in average assets under management of $38.5$35.8 billion, and $15.0 billion, respectively, primarilyor 23.2% as a result of the Acquisition. Also contributing to the increase was positive market performance over the trailing four quarters. The third quarter of 2017 included approximately $32.5 million of investment management fee revenues related to the full quarter impact of the additional assets managed as a result of the Acquisition.Transactions.
Distribution and Service Fees
Distribution and service fees which are sales- and asset-based fees earned from open-end funds for marketing and distribution services,services. Distribution and service fees decreased by $0.6$0.3 million, or 5.2%, and $4.1 million, or 11.0%1.7%, for the three and nine months ended September 30, 2017, respectively,March 31, 2022, compared to the same periodsperiod in the prior year, due primarily to lower averagesales for open-end assets under managementfunds in share classes that have distribution and service fees.fees primarily as a result of market performance and net outflows.
Administration and Transfer AgentShareholder Service Fees
Administration and transfer agentshareholder service fees represent fees earned for fund administration and shareholder services from our open-end mutual funds, ETFs, and certain of our closed-end funds. Fund administration and transfer agentshareholder service fees increased by $5.1$1.8 million, or 53.3%7.9%, for the three months ended June 30, 2017 and $4.1 million, or 14.0%, for the nine months ended September 30, 2017March 31, 2022, compared to the same periodsperiod in the prior year primarily due to $4.5 millionthe increase in additional administrationaverage assets under management for our open-end and transfer agent feesclosed-end funds during the period, predominantly as a result of the fund reorganization following the Acquisition, which were largely offset by higher fund expense reimbursements included in net investment management fees.Transactions.
Other Income and Fees
Other income and fees primarily represent fees related to other fee-earning assets and contingent sales charges earned from investor redemptions of certain shares sold without a front-end sales charge. Other income and fees were relatively flatincreased by $0.6 million, or 76.7%, for the three months ended September 30, 2017, compared to the same period in the prior year. Other income and fees increased $0.5 million, or 75.5%, for the nine months ended September 30, 2017,March 31, 2022, compared to the same period in the prior year primarily due to $0.5 million in other income related to the recovery of costs from a third-party service provider during the firstfull quarter of 2017.fees associated with other fee-earning assets as a result of the AGI Relationship.
Operating Expenses
Operating expenses by category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | 2022 vs. 2021 | | % | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | |
Employment expenses | $ | 105,993 | | | $ | 91,759 | | | $ | 14,234 | | | 15.5 | % | | | | | | | | |
Distribution and other asset-based expenses | 32,846 | | | 32,294 | | | 552 | | | 1.7 | % | | | | | | | | |
Other operating expenses | 31,712 | | | 19,580 | | | 12,132 | | | 62.0 | % | | | | | | | | |
Other operating expenses of CIP | 740 | | | 559 | | | 181 | | | 32.4 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Depreciation expense | 935 | | | 1,098 | | | (163) | | | (14.8) | % | | | | | | | | |
Amortization expense | 14,662 | | | 9,465 | | | 5,197 | | | 54.9 | % | | | | | | | | |
Total operating expenses | $ | 186,888 | | | $ | 154,755 | | | $ | 32,133 | | | 20.8 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 vs. 2016 | | % | | | 2017 | | 2016 | | 2017 vs. 2016 | | % |
($ in thousands) | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Employment expenses | $ | 54,159 |
| | $ | 33,142 |
| | $ | 21,017 |
| | 63.4 | % | | | $ | 136,792 |
| | $ | 102,184 |
| | $ | 34,608 |
| | 33.9 | % |
Distribution and other asset-based expenses | 20,552 |
| | 17,380 |
| | 3,172 |
| | 18.3 | % | | | 51,639 |
| | 52,913 |
| | (1,274 | ) | | (2.4 | )% |
Other operating expenses | 24,490 |
| | 12,027 |
| | 12,463 |
| | 103.6 | % | | | 59,067 |
| | 41,056 |
| | 18,011 |
| | 43.9 | % |
Restructuring and severance | 1,584 |
| | 1,879 |
| | (295 | ) | | (15.7 | )% | | | 10,478 |
| | 4,270 |
| | 6,208 |
| | 145.4 | % |
Depreciation and amortization expense | 6,101 |
| | 1,358 |
| | 4,743 |
| | 349.3 | % | | | 9,587 |
| | 4,250 |
| | 5,337 |
| | 125.6 | % |
Total operating expenses | $ | 106,886 |
| | $ | 65,786 |
| | $ | 41,100 |
| | 62.5 | % | | | $ | 267,563 |
| | $ | 204,673 |
| | $ | 62,890 |
| | 30.7 | % |
Employment Expenses
Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three months ended September 30, 2017March 31, 2022 were $54.2$106.0 million, which represented an increase of $21.0$14.2 million, or 63.4%15.5%, compared to the same period in the prior year. The increase reflected $13.6 million of employment expenses as a result of the June 1, 2017 addition of employees from the Acquisition, higher sales-based and profit-based compensation,was primarily due to a 48.3% increase in total sales and increased profits at our affiliates, and $2.3 million in incremental incentive compensation primarily related to efforts associated with the Acquisition.
Employment expenses for the nine months ended September 30, 2017 were $136.8 million, which represented an increase of $34.6 million, or 33.9%, compared to the same period in the prior year. The increase reflected $18.0 million of employment expenses as a result of the addition of employees from the Acquisition, higher sales-basedStone Harbor and profit-based compensation, due to a 35.8% increase in total sales and increased profits at our affiliates, and $4.3 million of incremental incentive compensation primarily related to efforts associated with the Acquisition.Westchester.
Distribution and Other Asset-Based Expenses
Distribution and other asset-based expenses consist primarily of payments to third-party distribution partnersclient intermediaries for providing services to investors in our funds and payments to third-party service providers forsponsored investment management-related services.products. These payments are primarily based on percentages of assets under management or revenues. Theseon a percentage of sales. Distribution and other asset-based expenses also include the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge to shareholders. The deferred sales commissions are amortized on a straight linestraight-line basis over the periods in whichperiod commissions are generally recovered from distribution fee revenues and contingent sales charges received from shareholders of the funds upon redemption of their shares. Distribution and other asset-based expenses increased by $3.2$0.6 million or 18.3%1.7%, in the three months ended September 30, 2017 as compared to the same period in the prior year primarily due increased asset based sub-transfer agent expenses related to services provided to mutual funds from the Acquisition. Distribution and other asset-based expenses decreased $1.3 million, or 2.4%, for the nine months ended September 30, 2017 compared to the same periodan increase in the prior year, primarily due to lower average open-end fund assets under management andas a result of the Transactions partially offset by a lower percentage of sales and assets under management in share classes where we paythat have distribution and other asset-based expenses.
Other Operating Expenses
Other operating expenses primarily consist of investment research and technology costs, professional fees, travel and distribution related costs, rent and occupancy expenses, operating expenses of our consolidated investment products and other miscellaneousbusiness costs. Other operating expenses for the three months ended September 30, 2017March 31, 2022 increased by $12.5$12.1 million, or 103.6%62.0%, as compared to the same period in the prior year primarily due to $6.8 million in operating expensesdiscrete business initiative professional fees and the Transactions.
Other Operating Expenses of our consolidated investment products, consisting of expenses related to the issuance of a CLO in the quarter, $4.5 million of additional other operating expenses of the Acquired Business, and $1.2 million of acquisition and integration expenses, primarily comprised of professional fees.
CIP
Other operating expenses forof CIP remained consistent during the ninethree months ended September 30, 2017 increased by $18.0 million, or 43.9%, asMarch 31, 2022, compared to the same period in the prior year, primarily due to $8.5 million of acquisition and integration expenses, primarily comprised of professional fees, and $6.0 million in other operating expenses of the Acquired Business. Other operating expenses for the nine months ended September 30, 2017 also included $1.4 million in higher operating expenses of our consolidated investment products, primarily attributable to the addition of four consolidated investment products as a result of the Acquisition as compared to the corresponding prior year period.
Restructuring and Severance Expense
During the three months ended September 30, 2017, we incurred $1.6 million of restructuring and severance expenses comprised of $0.5 million in severance costs related to staff reductions in connection with the Acquisition and outsourcing activities, and $1.0 million in restructuring costs, related to the payment of future lease obligations and leasehold improvements write-offs for vacated office space related to the Acquisition.
During the nine months ended September 30, 2017, we incurred $10.5 million of restructuring and severance expenses, primarily comprised of $9.0 million in severance costs related to staff reductions in connection with the Acquisition and $0.4 million in severance costs related to outsourcing activities. We also incurred $1.0 million in restructuring costs related to future lease obligations and leasehold improvements write-offs for vacated office space related to the Acquisition.year.
Depreciation and Amortization Expense
Depreciation and amortization expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements, as well asimprovements. Depreciation expense remained consistent during the three months ended March 31, 2022, compared to the same period in the prior year.
Amortization Expense
Amortization expense consists of the amortization of acquired investment advisory contracts, recorded as definite-lived intangible assets both over their estimated useful lives. Depreciation and amortizationAmortization expense increased by $4.7$5.2 million, and $5.3 millionor 54.9%, for the three and nine months ended September 30, 2017, respectively,March 31, 2022, compared to the same periodsperiod in the prior year, primarily due an increase in definite lived intangible assets as a result ofto the Acquisition.additional amortization associated with the Transactions.
Other Income (Expense)
Other Income (Expense), net
Other Income, net by category waswere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | 2022 vs. 2021 | | % | | | | | | | | |
Other Income (Expense) | | | | | | | | | | | | | | | |
Realized and unrealized gain (loss) on investments, net | $ | (2,982) | | | $ | 891 | | | $ | (3,873) | | | (434.7) | % | | | | | | | | |
Realized and unrealized gain (loss) of CIP, net | (13,344) | | | (4,687) | | | (8,657) | | | 184.7 | % | | | | | | | | |
Other income (expense), net | 287 | | | 1,771 | | | (1,484) | | | (83.8) | % | | | | | | | | |
Total Other Income (Expense), net | $ | (16,039) | | | $ | (2,025) | | | $ | (14,014) | | | 692.0 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 vs. 2016 | | % | | 2017 | | 2016 | | 2017 vs. 2016 | | % |
($ in thousands) | | | | | | | | | | | | | | | |
Other Income (Expense) | | | | | | | | | | | | | | | |
Realized and unrealized gain (loss) on investments, net | $ | 1,367 |
| | $ | 961 |
| | $ | 406 |
| | 42.2 | % |
| $ | 2,951 |
| | $ | 3,584 |
| | $ | (633 | ) | | (17.7 | )% |
Realized and unrealized gain (loss) of consolidated investment products, net | 13,465 |
| | 3,680 |
| | 9,785 |
| | 265.9 | % | | 16,485 |
| | 9,888 |
| | 6,597 |
| | 66.7 | % |
Other income (expense), net | 436 |
| | 250 |
| | 186 |
| | 74.4 | % | | 1,129 |
| | 463 |
| | 666 |
| | 143.8 | % |
Total Other Income (Expense), net | $ | 15,268 |
| | $ | 4,891 |
| | $ | 10,377 |
| | 212.2 | % | | $ | 20,565 |
| | $ | 13,935 |
| | $ | 6,630 |
| | 47.6 | % |
Realized and unrealized gain (loss) on investments, net
Realized and unrealized gain (loss) on investments, net increasedchanged during the three months ended September 30, 2017March 31, 2022 by $0.4$(3.9) million, or 42.2%, as compared to the same period in the prior year. The increase was primarily due to unrealized gains related to marketable securities in domestic equity strategies.
Realized and unrealized gain on investments, net decreased during the nine months ended September 30, 2017 by $0.6 million, or 17.7%, as compared to the same period in the prior year. The realized and unrealized gains on investments, netand losses during the ninethree months ended September 30, 2017 was primarily attributable to unrealized gains on our domestic equity strategies. The realized and unrealized gains on investments, netMarch 31, 2022 reflected changes in overall market conditions experienced during the nine months ended September 30, 2016 primarily consisted of a realized gain of approximately $2.9 million on the sale of one of our equity method investments.periods.
Realized and unrealized gain (loss) of consolidated investment products,CIP, net
Realized and unrealized gains,gain (loss) of CIP, net of our CIPs, were $13.5changed $(8.7) million, during the three months ended September 30, 2017, whichMarch 31, 2022, compared to the same period in the prior year. The change for the three months ended March 31, 2022 consisted primarily consisted of $14.5an increase in unrealized losses of $54.4 million, due to changes in changes on the note payable as a resultmarket values of applying the measurement alternative of ASU 2014-13leveraged loans, partially offset by $1.0 millionchanges in realized and unrealized losses on the investments of our CIPs.
Realized and unrealized gains of $45.7 million related to the value of the notes payable.
Other income (expense), net
Other income (expense), net of our CIPs, were $16.5changed $(1.5) million during the ninethree months ended September 30, 2017, whichMarch 31, 2022, compared to the same period in the prior year. The change during the three-month period was primarily consisted of $16.5 million in changes ondue to decreased earnings from equity method investments during the note payable as a result of applying the measurement alternative of ASU 2014-13.current year period.
Interest Income (Expense), net
Interest income (expense)Income (Expense), net by category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | 2022 vs. 2021 | | % | | | | | | | | |
Interest Income (Expense) | | | | | | | | | | | | | | | |
Interest expense | $ | (2,279) | | | $ | (2,314) | | | $ | 35 | | | (1.5) | % | | | | | | | | |
Interest and dividend income | 328 | | | 136 | | | 192 | | | 141.2 | % | | | | | | | | |
Interest and dividend income of investments of CIP | 20,380 | | | 23,876 | | | (3,496) | | | (14.6) | % | | | | | | | | |
Interest expense of CIP | (12,088) | | | (14,448) | | | 2,360 | | | (16.3) | % | | | | | | | | |
Total Interest Income (Expense), net | $ | 6,341 | | | $ | 7,250 | | | $ | (909) | | | (12.5) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 vs. 2016 | | % | | 2017 | | 2016 | | 2017 vs. 2016 | | % |
($ in thousands) | | | | | | | | | | | | | | | |
Interest Income (Expense) | | | | | | | | | | | | | | | |
Interest expense | $ | (4,116 | ) | | $ | (128 | ) | | $ | (3,988 | ) | | N/M |
| | $ | (8,098 | ) | | $ | (389 | ) | | $ | (7,709 | ) | | N/M |
|
Interest and dividend income | 679 |
| | 221 |
| | 458 |
| | 207.2 | % | | 1,313 |
| | 1,113 |
| | 200 |
| | 18.0 | % |
Interest and dividend income of investments of consolidated investment products | 17,778 |
| | 5,411 |
| | 12,367 |
| | 228.6 | % | | 28,536 |
| | 14,856 |
| | 13,680 |
| | 92.1 | % |
Interest expense of consolidated investment products | (16,249 | ) | | (3,788 | ) | | (12,461 | ) | | 329.0 | % | | (22,101 | ) | | (10,188 | ) | | (11,913 | ) | | 116.9 | % |
Total Interest Income (Expense), net | $ | (1,908 | ) | | $ | 1,716 |
| | $ | (3,624 | ) | | (211.2 | )% | | $ | (350 | ) | | $ | 5,392 |
| | $ | (5,742 | ) | | (106.5 | )% |
Interest Expense
Interest expense increased $4.0 million and $7.7 million forremained consistent during the three and nine months ended September 30, 2017, respectively,March 31, 2022, compared to the same periods in the prior year. The increases were due to the write-off of $1.1 million in unamortized deferred financing costs as a result of the termination of our prior credit facility, $1.2 million in delayed draw fees associated with our new credit agreement, and a higher average level of debt outstanding compared to the same periodsperiod in the prior year.
Interest and Dividend Income
Interest and dividend income increased $0.5 million or 207.2% and $0.2 million or 18.0% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in the prior year. The increases were primarily due to a higher dividend paying marketable securitiesremained consistent during the three months ended September 30, 2017,March 31, 2022, compared to the same periodsperiod in the prior year.
Interest and Dividend Income of Investments of Consolidated Investment Products
CIP
Interest and dividend income of investments of CIPs increased $12.4CIP decreased $3.5 million, and $13.7 millionor 14.6%, for the three and nine months ended September 30, 2017, respectively,March 31, 2022, compared to the same periodsperiod in the prior year. The increases weredecrease was primarily due to a higher balance ofdecrease in interest earned from our investments of CIPs during the three and nine months ended September 30, 2017 compared to the same periods in the prior year.consolidated CLOs.
Interest Expense of Consolidated Investment Products
CIP
Interest expense of CIPsCIP represents interest expense on the notes payable of the CIPs.CIP. Interest expense of CIPs increased by $12.5CIP decreased $2.4 million, or 329.0%, and $11.9 million, or 116.9%16.3%, for the three and six months ended September 30, 2017, respectively, primarily due to higher average debt balances for our consolidated investment products for the three and nine months ended September 30, 2017 asMarch 31, 2022, compared to the same periodsperiod in the prior year. The decrease during the three months ended March 31, 2022 was primarily due to lower average debt balances of CIP during the current year period.
Income Tax Expense (Benefit)
The provision for income taxes reflectsreflected U.S. federal, state and local taxes at an estimated effective tax rate of 31.7%30.0% and 35.8%22.5% for the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, respectively. The decrease in thecomparatively higher estimated effective tax rate for the three months ended March 31, 2022 was primarily due to a decreasevaluation allowances recorded in the valuation allowances related to market adjustmentscurrent year for the tax effects of unrealized losses on the Company's marketable securities, as well as an increase in the valuation allowance associated with net operating losses that could expire before being utilized.certain Company investments.
Liquidity and Capital Resources
Certain Financial Data
The following table summarizes certain inancialfinancial data relating to our liquidity and capital resources:
| | | | | | | | | | | | March 31, 2022 | | December 31, 2021 | | Change |
| September 30, 2017 | | December 31, 2016 | | Change | |
| 2017 vs. 2016 | | % | |
($ in thousands) | | | | | | | | |
(in thousands) | | (in thousands) | March 31, 2022 | | December 31, 2021 | | 2022 vs. 2021 | | % |
Balance Sheet Data | | | | | | | | Balance Sheet Data | | | |
Cash and cash equivalents | $ | 164,867 |
| | $ | 64,588 |
| | $ | 100,279 |
| | 155.3 | % | Cash and cash equivalents | $ | 225,217 | | | $ | 378,921 | | | $ | (153,704) | | | (40.6) | % |
Investments | 96,752 |
| | 89,371 |
| | 7,381 |
| | 8.3 | % | Investments | 116,767 | | | 108,890 | | | 7,877 | | | 7.2 | % |
Contingent consideration | 51,690 |
| | — |
| | 51,690 |
| | 100.0 | % | Contingent consideration | 130,728 | | | 162,564 | | | (31,836) | | | (19.6) | % |
Debt | 248,540 |
| | 30,000 |
| | 218,540 |
| | 728.5 | % | Debt | 265,954 | | | 266,346 | | | (392) | | | (0.1) | % |
Redeemable noncontrolling interests | | Redeemable noncontrolling interests | 138,738 | | | 138,965 | | | (227) | | | (0.2) | % |
Total equity | 584,187 |
| | 321,673 |
| | 262,514 |
| | 81.6 | % | Total equity | 824,233 | | | 836,627 | | | (12,394) | | | (1.5) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
(in thousands) | 2022 | | 2021 | | 2022 vs. 2021 | | % | | |
Cash Flow Data | | | | | | | | | |
Provided by (Used in): | | | | | | | | | |
Operating activities | $ | (81,775) | | | $ | 150,151 | | | $ | (231,926) | | | (154.5) | % | | |
Investing activities | (22,575) | | | (2,608) | | | (19,967) | | | 765.6 | % | | |
Financing activities | (145,777) | | | (87,673) | | | (58,104) | | | 66.3 | % | | |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | 2017 vs. 2016 | | % |
($ in thousands) | | | | | | | |
Cash Flow Data | | | | | | | |
Provided by (Used In): | | | | | | | |
Operating Activities | $ | (103,783 | ) | | $ | (1,130 | ) | | $ | (102,653 | ) | | 9,084.3 | % |
Investing Activities | (389,417 | ) | | 4,609 |
| | (394,026 | ) | | (8,549.1 | )% |
Financing Activities | 796,576 |
| | 78,410 |
| | 718,166 |
| | 915.9 | % |
Overview
At September 30, 2017,March 31, 2022, we had $164.9$225.2 million of cash and cash equivalents and $75.7$116.8 million of investments, in marketablewhich included $88.4 million of investment securities, compared to $64.6$378.9 million of cash and $74.9cash equivalents and $108.9 million respectively,of investments, which included $80.3 million of investment securities, at December 31, 2016. At September 30, 2017, we had $260.0 million oustanding under our seven-year term debt ("Term Loan") and no outstanding borrowings under our $100.0 million revolving credit facility (the "Credit Facility"). Our credit agreement contains a net leverage ratio covenant, defined as net debt divided by EBITDA, set at 2.5:1, as of September 30, 2017 with scheduled reductions to 1.75:1 through December 31, 2018 and thereafter. As of September 30, 2017, we had $146.8 million of net debt, when including the $51.7 million of contingent consideration, which resulted in a net leverage ratio of 0.9:1.0 as of September 30, 2017.2021.
During the nine months ended September 30, 2017, we issued 1,046,500 shares of common stock and 1,150,000 shares of 7.25% mandatory convertible preferred stock ("MCPS") in public offerings for net proceeds of $220.5 million, after underwriting discounts, commissions and other offering expenses. We used the net proceeds of these offerings, together with cash on hand, 213,699 shares of our common stock, proceeds from the sale of investments and net borrowings of approximately $244.1 million from the new credit agreement, as described below, to finance the Acquisition and pay related fees and expenses.
Uses of Capital
Our main uses of capital related to operating activities comprise employee compensation and related benefit costs, which include payments of annual incentive compensation, income tax payments and other operating expenses, which primarily consist of investment research, and
technology costs, professional fees, distribution and occupancy costs.costs; interest on our indebtedness; and income taxes. Annual incentive compensation, which is one of the largest annual operating cash expenditures, is typically paid in the first quarter of the year. In the first quarterquarters of 20172022 and 2016,2021, we paid approximately $39.7$151.6 million and $42.5$96.9 million, respectively, in incentive compensation earned during the years ended December 31, 20162021 and 2015,2020, respectively.
In addition to the capital used for operating activities, other uses of cash will includecould include: (i) investments in organic growth, including seeding or launching new products and expanding distribution; (ii) debt principal payments through scheduled amortization, excess cash flow payment requirements or additional paydowns; (iii) dividend payments to common stockholders; (iv) repurchases of contingent consideration, (ii) integration costs, including severance, related toour common stock, or withholding obligations for the Acquisition, (iii)net settlement of employee share transactions; (v) investments in our organic growth, including our distribution efforts and launches of new products, (iv) seeding of new investments, including sponsoring CLO issuances from our affiliated managers, (v) interest and principal payments on debt outstanding,infrastructure; (vi) dividend payments to
preferred and common stockholders, (vii) investments in our infrastructure and (viii) investments in inorganic growth opportunities as they arise. Although we continuously monitor working capitalthat may require upfront and/or future payments; (vii) integration costs, including restructuring and severance, related to ensure adequate resources are available for near-term liquidity requirements, our liquidity could be impacted by contingencies, as described in Note 14acquisitions, if any; and (viii) purchases of our consolidated financial statements.affiliate noncontrolling interests.
Capital and Reserve Requirements
We operate twoan SEC registered broker-dealer subsidiaries registered with the SEC which aresubsidiary that is subject to certain rules regarding minimum net capital. The broker-dealers arebroker-dealer is required to maintain a ratio of “aggregate indebtedness”"aggregate indebtedness" to “net"net capital,”" as defined, which may not exceed 15 to 1 and must also maintain a minimum amount of net capital. Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital, or interruption of our business. At both September 30, 2017 and DecemberMarch 31, 2016,2022, the ratio of aggregate indebtedness to net capital of our broker-dealersbroker-dealer was below the maximum allowed, and net capital was significantly greater than the required minimum.
Balance Sheet
Cash and cash equivalents consist of cash in banks and money market fund investments. Investments consist primarily of investments in our affiliated mutualsponsored funds. Consolidated investment products primarilyCIP represent investment products for which we provide investment management services and where we either have either a controlling financial interest or we are considered the primarilyprimary beneficiary of an investment product that is a considered a variable interest entity.
Operating Cash Flow
Net cash used in operating activities of $103.8$81.8 million for the ninethree months ended September 30, 2017 increasedMarch 31, 2022 changed by $102.7$231.9 million from net cash usedprovided by operating activities of $1.1$150.2 million for the same period in the prior year primaryprimarily due to an increasea $192.7 million reduction in net purchasessales of investments of our consolidated investment products.by CIP and increased compensation and benefit payments during the current-year period compared to the prior-year period.
Investing Cash Flow
Net cash used inCash flows from investing activities consistsconsist primarily of capital expenditures and other investing activities related to our investing activities.business operations. Net cash used in investing activities of $389.4was $22.6 million for the ninethree months ended September 30, 2017 increased by $394.0 million fromMarch 31, 2022 compared to net cash provided byused in investing activities of $4.6$2.6 million in the same period for the prior year. The primary investing activity during the three months ended March 31, 2022 related to cash paid for Stone Harbor. The primary investing activities for the ninethree months ended September 30, 2017 was $393.4March 31, 2021 were $2.6 million of net cash used for the Acquisition.capital expenditures and other asset purchases.
Financing Cash Flow
Cash flows provided byfrom financing activities consist primarily of the issuance of common and preferred stock, return of capital through repurchases of common shares, dividends, withholding obligations for the net share settlement of employee share transactions and contributions to noncontrolling interests related to our consolidated investment products.common shares, issuance and repayment of debt by us and our CIP, payments of contingent consideration and changes to noncontrolling interests. Net cash provided byused in financing activities increased $718.2by $58.1 million to $796.6$145.8 million for the ninethree months ended September 30, 2017 as compared to $78.4March 31, 2022 from $87.7 million for the ninethree months ended September 30, 2016.March 31, 2021. The primary reason for the increasenet change was primarily due to cash raisedcontingent consideration payments of $220.5$33.0 million related toduring the issuancecurrent-year period not in the prior-year period, along with an increase of preferred stock and common stock, net of issuance costs paid, $244.1 million in term loan borrowings, net of issuance costs paid, and $369.0$16.7 million in net borrowings of our consolidated investment products. These financing cash inflows were partially offset byCIP during the repayments of $30.0 million on our terminated credit facility.three months ended March 31, 2022 compared to the prior year period.
CreditCredit Agreement
On June 1, 2017, in a connection with the Acquisition, the Company entered into a newThe Company's credit agreement, ("Creditas amended (the "Credit Agreement") comprised of (1) $260.0, comprises (i) a $275.0 million ofterm loan with a seven-year term debt ("Term(the "Term Loan") expiring in September 2028, and (2)(ii) a $100.0$175.0 million five-year revolving credit facility ("Credit Facility"). Additionally, aswith a result of the Credit Agreement, the Company's previous revolving credit facility and December 16, 2016 debt financing commitment were terminated.five-year term expiring in September 2026. During the ninethree months ended September 30, 2017,March 31, 2022, the Company expensed approximately $1.1repaid $0.7 million of unamortized deferred financing costs related to the previous senior unsecured revolving credit facility. The Company borrowed the full $260.0 millionoutstanding under theits Term Loan on June 1, 2017 to fund a portion of the purchase price of the Acquisition, and at September 30, 2017, $260.0Loan. At March 31, 2022, $273.6 million was outstanding.
Amounts outstanding under the Credit Agreement for the Term Loan, and the Credit Facility bear interest at an annual rate equal to, atCompany had no outstanding borrowings under its revolving credit facility. In accordance with ASC 835, Interest, the option of the Company, either (i) LIBOR (adjusted for reserves) for interest periods of one, two, three or six months (or, solely in the case of the Credit Facility, if agreed to by each relevant Lender, twelve months or periods less than one month), subject to a “floor” of 0% for the Credit Facility and 0.75% for the Term Loan, or (ii) an alternate base rate, in either case plus an applicable margin. The applicable margins are set initially at 3.75%, in the case of LIBOR-based loans, and 2.75%, in the case of alternate base rate loans, and will range from 3.50% to 3.75%, in the case of LIBOR-based loans, and 2.50% to 2.75%, in the case of alternate base rate loans, based on the secured net leverage ratio of the Company as of the last day of the preceding fiscal quarter. Interest is payable on the last day of each interest period with respect to LIBOR-based loans, but at least at three-month intervals, and quarterly in arrears with respect to alternate base rate loans (but, in the case of LIBOR-based loans with an interest period of more than three months).
The obligations of the Company under the Credit Agreement are guaranteed by certain of its subsidiaries (the “Guarantors”) and secured by substantially all of the assets of the Company and the Guarantors, subject to customary exceptions. The Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, purchase of shares of our common stock, make distributions and dividends and pre-payments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year, or modify its organizational documents, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains a financial maintenance covenant, requiring a maximum leverage ratio, as of the last day of each of the trailing four fiscal quarter periods, of no greater than the levels set forth in the Credit Agreement.
At any time, upon timely notice, the Company may terminate the Credit Agreement in full, reduce the commitment under the Credit Facility in minimum specified increments, or prepay the Term Loan in whole or in part, subject to the payment of breakage fees with respect to LIBOR-based loans and, in the case of any Term Loans that are prepaid in connection with a “repricing transaction” occurring within the six-month period following the closing date, a 1.00% premium.
Term Loan
The Term Loan, which was priced on March 2, 2017, had a delayed draw fee of $1.2 million between March 2, 2017 and the closing date of June 1, 2017. The Term Loan amortizes at the rate of 1.00% per annum payable in equal quarterly installments and will be mandatorily repaid with: (a) 50% of the Company’s excess cash flow on an annual basis, beginning with the fiscal year ended December 31, 2018, stepping down to 25% if the Company’s secured net leverage ratio declines below 1.0, and further stepping down to 0% if the Company’s secured net leverage ratio declines below 0.5; (b) the net proceeds of certain asset sales, casualty or condemnation events, subject to customary reinvestment rights; and (c) the proceeds of any indebtedness incurred other than indebtedness permitted to be incurred by the Credit Agreement.
Credit Facility
At September 30, 2017, no amounts were outstanding under the Credit Facility. The Company has the right, subject to customary conditions specifiedCompany's Term Loan are presented in the Credit Agreement, to request additional revolving credit facility commitments and additional term loans to be made under the Credit Agreement up to an aggregate amount equal to the sumCondensed Consolidated Balance Sheet net of (x) $75.0 million and (y) an amount subject to a pro forma secured net leverage ratio of the Company of no greater than 1.75 to 1.00.
Under the terms of the Credit Agreement, the Company is required to pay a quarterly commitment fee on the average unused amount of the Credit Facility, which fee is initially set at 0.50% and will, following the first delivery of certain financial reports required under the Credit Agreement, range from 0.375% to 0.50%, based on the secured net leverage ratio of the Company as of the last day of the preceding fiscal quarter, as reflected in such financial reports.
Contractual Obligations
Except for borrowings under our Credit Agreement and notes payable of consolidated investment products acquired as part of the Acquisition as previously discussed in our Form 10-Q for the quarterly period ended June 30, 2017, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2016 as disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2016.
related debt
issuance costs, which were $7.7 million as of March 31, 2022.
Critical Accounting Policies and Estimates
Our financial statements and the accompanying notes are prepared in accordance with generally accepted accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20162021 Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our 20162021 Annual Report on Form 10-K. There were no material changes in our critical accounting policies and estimates in the three months ended September 30, 2017.March 31, 2022.
Recently Issued Accounting Pronouncements
For a discussion of accounting standards, see Note 2 withinin our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Substantially all of our revenues are derived from investment management, distribution and service, and administration and transfer agent fees, which are based on the market value of assets under management. Accordingly, a decline in the prices of securities would cause our revenues and income to decline due to a decrease in the value of the assets under management. In addition, a decline in security prices could cause our clients to withdraw their investments in favor of other investments offering higher returns or lower risk, which would cause our revenues and income to decline.
We are also subjectThe Company is primarily exposed to market risk due to a decline in the market value of our investments, which consist of marketable securities, other investments and the Company’s net interests in consolidated investment products. The following table summarizes the impact of a 10% increase or decrease in the fair values of these financial instruments:
|
| | | | | | | |
| September 30, 2017 |
$ in thousands | Fair Value | | 10% Change |
| | | |
Marketable Securities - Available for Sale (a) | $ | 3,896 |
| | $ | 390 |
|
Marketable Securities - Trading (b) | 71,806 |
| | 7,181 |
|
Other Investments (b) | 2,741 |
| | 274 |
|
Company's net interests in Consolidated Investment Products (c) | 123,629 |
| | 12,363 |
|
Total Investments subject to Market Risk | $ | 202,072 |
| | $ | 20,208 |
|
| |
(a) | Any gains or losses arising from changes in the fair value of available-for-sale investments are recognized in accumulated other comprehensive income, net of tax, until the investment is sold or otherwise disposed of, or if the investment is determined to be other-than-temporarily impaired, at which time the cumulative gain or loss previously reported in equity is included in income. The Company evaluates the carrying value of investments for impairment on a quarterly basis. In its impairment analysis, the Company takes into consideration numerous criteria, including the duration and extent of any decline in fair value and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value. If the decline in value is determined to be other-than-temporary, the carrying value of the security is generally written down to fair value through the Condensed Consolidated Statement of Operations. If such a 10% increase or decrease in fair value were to occur, it would not result in an other-than-temporary impairment charge that would be material to the Company's pre-tax earnings. |
| |
(b) | If such a 10% increase or decrease in fair values were to occur, the change of these investments would result in a corresponding increase or decrease in our pre-tax earnings. |
| |
(c) | These represent the Company's direct investments in investment products that are consolidated. Upon consolidation, these direct investments are eliminated, and the assets and liabilities of consolidated investment products are consolidated in the Condensed Consolidated Balance Sheet, together with a noncontrolling interest balance representing the portion of the consolidated investment products owned by third parties. If a 10% increase or decrease in the fair values of the Company's direct investments in consolidated investment products were to occur, it would result in a corresponding increase or decrease in the Company's pre-tax earnings. |
Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. At September 30, 2017, we were exposed to interest rate risk as a result of approximately $157.0 million in investments we have in fixed and floating rate income funds/products in which we have invested and which includes our net interests in consolidated investment products. We considered a hypothetical 100 basis point changeassociated with unfavorable movements in interest rates and determined thatsecurities prices. During the fair value of our fixed income investments could change by an estimated $1.1 million.
At September 30, 2017, we had $260.0 million outstanding under our Term Loan andthree months ended March 31, 2022, there were no amounts outstanding under our Credit Facility. Amounts outstanding undermaterial changes to the Credit Agreement bear interest at an annual rate equal to, at the optioninformation contained in Part II, Item 7A of the Company, either LIBOR (adjusted for reserves) for interest periods of one, two, three or six months (or, solely in the case of the revolving credit facility, if agreed to by each relevant Lender, twelve months or periods less than one month) (subject to a “floor” of 0% in the case of the revolving credit facility and 0.75% in the case of the term loan) or an alternate base rate, in either case plus an applicable margin. The applicable margins are initially set at 3.75%, in the case of LIBOR-based loans, and 2.75%, in the case of alternate base rate loans and will, following the first delivery of certain financial reports required under the credit agreement, range from 3.50% to 3.75%, in the case of LIBOR-based loans, and 2.50% to 2.75%, in the case of alternate base rate loans, basedCompany's 2020 Annual Report on the secured net leverage ratio of the Company as of the last day of the preceding fiscal quarter, as reflected in such financial reports.Form 10-K.
At September 30, 2017, we had $1,455.9 million outstanding of notes payable of our consolidated investment products. The notes bear interest at annual rates equal to the average LIBOR rate for interest periods of three months and six months plus, in each case, an applicable margin, that ranges from 1.00% to 8.75%.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management is excluding an assessment of such internal controls of RidgeWorth acquired by the Company on June 1, 2017, from its evaluation of the effectiveness of the Company's disclosure controls and procedures. RidgeWorth represented approximately 69.3% of the Company's consolidated total assets and 26.3% of the Company's consolidated total revenues as of and for the quarter ended September 30, 2017.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017,March 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal ControlsControl over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As mentioned above, the Company acquired RidgeWorth on June 1, 2017. The Company is in the process of reviewing the internal control structure of RidgeWorth and, if necessary, will make appropriate changes as it integrates RidgeWorth into the Company's overall internal control over financial reporting process.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Legal Matters
The Companyinformation set forth in response to Item 103 of Regulation S-K under "Legal Proceedings" is regularly involved in litigationincorporated by reference from Part I, Financial Information Item 1. "Financial Statements" Note 14 "Commitments and arbitration as well as examinations, inquiries and investigations by various regulatory bodies, including the Securities and Exchange Commission ("SEC"), involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory mattersContingencies" of this nature involve or may involve but are not limited to the Company’s activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.Quarterly Report on Form 10-Q.
The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Loss Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage, indemnities and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
In re Virtus Investment Partners, Inc. Securities Litigation; formerly Tom Cummins v. Virtus Investment Partners Inc.
et al
On February 20, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed by an individual shareholder against the Company and certain of the Company’s current officers (the “defendants”) in the United States District Court for the Southern District of New York (the "Court"). On April 21, 2015, three plaintiffs, including the original plaintiff, filed motions to be appointed lead plaintiffs and, on June 9, 2015, the Court appointed Arkansas Teachers Retirement System lead plaintiff. On August 21, 2015, the plaintiff filed a Consolidated Class Action Complaint (the “Consolidated Complaint”) amending the originally filed complaint, which was purportedly filed on behalf of all purchasers of the Company’s common stock between January 25, 2013 and May 11, 2015 (the “Class Period”). The Consolidated Complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed material adverse facts relating to certain funds formerly subadvised by F-Squared Investments Inc. ("F-Squared"). The Consolidated Complaint alleges claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5. The plaintiff seeks to recover unspecified damages. A motion to dismiss the Consolidated Complaint was filed on behalf of the Company and the other defendants on October 21, 2015. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss, narrowing Plaintiff's claims under Sections 10(b) and 20(a) of the Exchange Act and dismissing one of the defendants from the suit. The remaining defendants' Answer to the Consolidated Complaint was filed on August 5, 2016. Plaintiff's motion for class certification was granted on May 15, 2017. Discovery has since been completed. On October 6, 2017, defendants moved for summary judgment, and briefing on that motion is expected to be completed on December 21, 2017. The Company believes that the suit is without merit and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.
Mark Youngers v. Virtus Investment Partners, Inc. et al
On May 8, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed in the United States District Court for the Central District of California (the "District Court") by an individual who alleges he is a former shareholder of one of the Virtus mutual funds formerly subadvised by F-Squared and formerly known as the AlphaSector Funds. The complaint alleges claims against the Company, certain of the Company’s officers and
affiliates, and certain other parties (the “defendants”). The complaint was purportedly filed on behalf of purchasers of the AlphaSector Funds between May 8, 2010 and December 22, 2014, inclusive (the “Class Period”). The complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed or omitted material facts necessary to make the statements made not misleading. On June 7, 2015, a group of three individuals, including the original plaintiff, filed a motion to be appointed lead plaintiff, and on July 27, 2015, the District Court appointed movants as lead plaintiff. On October 1, 2015, the plaintiffs filed a First Amended Class Action Complaint which, among other things, added a derivative claim for breach of fiduciary duty on behalf of Virtus Opportunities Trust. On October 19, 2015, the District Court entered an order transferring the action to the Southern District of New York (the "Court"). On January 4, 2016, the Plaintiffs filed a Second Amended Complaint. A motion to dismiss was filed on behalf of the Company and affiliated defendants on February 1, 2016. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss. The Court dismissed four causes of action entirely and a fifth cause of action with respect to a portion of the Class Period. The Court also dismissed all claims against ten defendants named in the Complaint. The Court held that the Plaintiffs may pursue certain securities claims under Sections 10(b) and 20(a) of the Exchange Act and Section 12 of the Securities Act of 1933. The remaining defendants filed an Answer to the Second Amended Complaint on August 5, 2016. A Stipulation of Voluntary Dismissal of the claim under Section 12 of the Securities Act was filed on September 15, 2016. The defendants filed a motion to certify an interlocutory appeal of the July 1, 2016 order to the Court of Appeals for the Second Circuit on August 26, 2016. The motion was denied on January 6, 2017. Plaintiff's motion for class certification was denied on May 15, 2017. On July 28, 2017 Plaintiffs filed a motion seeking leave to amend their complaint to address deficiencies identified by the Court in its orders dismissing, in part, plaintiffs' Second Amended Complaint and denying class certification. Briefing on that motion was completed, and a hearing was held on September 7, 2017, where the court reserved decision. The Company believes that the suit has no basis in law or fact and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.
Item 1A. Risk Factors
The reader should carefully consider, in connection with the other information in this report,There have been no material changes to the Company’s risk factors from those previously reported in our 20162021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
AsAn aggregate of September 30, 2017, 3,430,0454,930,045 shares of our common stock havehad been authorized to be repurchased under athe share repurchase program originally approved by our Board of Directors in 2010, and 133,756as of March 31, 2022, 403,997 shares remainremained available for repurchase. Under the terms of the program, we may repurchase shares of our common stock from time to time at
our discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time.
The following table sets forth information regarding our share repurchases in each month during the quarter ended September 30, 2017:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total number of shares purchased | | Average price paid per share (1) | | Total number of shares purchased as part of publicly announced plans or programs (2) | | Maximum number of shares that may yet be purchased under the plans or programs (2) |
January 1-31, 2022 | — | | | $ | — | | | — | | | 529,449 | |
February 1-28, 2022 | 52,895 | | | $ | 255.08 | | | 52,895 | | | 476,554 | |
March 1-31, 2022 | 72,557 | | | $ | 227.46 | | | 72,557 | | | 403,997 | |
Total | 125,452 | | | | | 125,452 | | | |
|
| | | | | | | | | | | | |
Month | Total number of shares repurchased | | Average price paid per share (1) | | Total number of shares repurchased as part of publicly announced plans or programs (2) | | Maximum number of shares that may yet be repurchased under the plans or programs (2) |
July 1-31, 2017 | — |
| | — |
| | — |
| | 200,000 |
|
August 1-31, 2017 | — |
| | — |
| | — |
| | 200,000 |
|
September 1-30, 2017 | 66,244 |
| | $ | 113.21 |
| | 66,244 |
| | 133,756 |
|
Total | 66,244 |
| | | | 66,244 |
| | |
(1)Average price paid per share is calculated on a settlement basis and excludes commissions.
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(2) | The share repurchases above were completed pursuant to a program announced in the fourth quarter of 2010 and most recently expanded in October 2015. This repurchase program is not subject to an expiration date. |
(2)The share repurchases above were completed pursuant to a program announced in the fourth quarter of 2010 and most recently expanded in May 2020. This repurchase program is not subject to an expiration date.
There were no unregistered sales of equity securities during the period covered by this Quarterly Report. Shares of our common stock purchased by participants in our Employee Stock Purchase Plan were delivered to participant accounts via open market purchases at fair value by the third-party administrator under the plan. We do not reserve shares for this plan or discount the purchase price of the shares.
Item 6. Exhibits
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| | | | | | | |
Exhibit Number | | Description |
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| | Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the Registrant’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101 | | The following information is formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2017March 31, 2022 and December 31, 2016,2021, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the ninethree months ended September 30, 2017March 31, 2022 and 20162021 and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). |
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104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 6, 2017
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| VIRTUS INVESTMENT PARTNERS, INC. |
| (Registrant) |
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| VIRTUS INVESTMENT PARTNERS, INC. |
By: | (Registrant) |
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| By: | /s/ Michael A. Angerthal |
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| Michael A. Angerthal |
| | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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