Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
 
 
 
FORM 10-Q
 
 
 
 
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-10994
 
 
 
 
 
 
virtuslogo2018.jpg
VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 

 
 
 
Delaware
 
26-3962811
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Pearl St., Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)

 
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
 ¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
The number of shares outstanding of the registrant’s common stock was 7,217,443 as of April 27, 2018.
 
 
 
 
 

Table of Contents

VIRTUS INVESTMENT PARTNERS, INC.
INDEX
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
"We," "us," "our," "the Company," and "Virtus" as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.


Table of Contents

PART I – FINANCIAL INFORMATION
 
Item 1.    Financial Statements
Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
March 31,
2018
 
December 31,
2017
($ in thousands, except share data)
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$
80,764

 
$
132,150

Investments
125,348

 
108,492

Accounts receivable, net
62,636

 
65,648

Assets of consolidated investment products ("CIP")
 
 
 
Cash and cash equivalents of CIP
54,836

 
101,315

Cash pledged or on deposit of CIP
899

 
817

Investments of CIP
1,634,085

 
1,597,752

Other assets of CIP
32,522

 
33,486

Furniture, equipment and leasehold improvements, net
11,396

 
10,833

Intangible assets, net
296,918

 
301,954

Goodwill
170,153

 
170,153

Deferred taxes, net
31,875

 
32,428

Other assets
36,777

 
35,771

Total assets
$
2,538,209

 
$
2,590,799

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accrued compensation and benefits
$
27,471

 
$
86,658

Accounts payable and accrued liabilities
28,214

 
29,607

Dividends payable
6,479

 
6,528

Debt
245,402

 
248,320

Other liabilities
48,477

 
39,895

Liabilities of CIP
 
 
 
Notes payable of CIP
1,460,177

 
1,457,435

Securities purchased payable and other liabilities of CIP
92,421

 
112,954

Total liabilities
1,908,641

 
1,981,397

Commitments and Contingencies (Note 14)

 

Redeemable noncontrolling interests of CIP
4,162

 
4,178

Equity:
 
 
 
Equity attributable to stockholders:
 
 
 
Series D mandatory convertible preferred stock, $0.01 par value, 1,150,000 shares authorized, issued and outstanding at March 31, 2018 and December 31, 2017
110,843

 
110,843

Common stock, $0.01 par value, 1,000,000,000 shares authorized; 10,513,732 shares issued and 7,217,443 shares outstanding at March 31, 2018 and 10,455,934 shares issued and 7,159,645 shares outstanding at December 31, 2017
105

 
105

Additional paid-in capital
1,213,342

 
1,216,173

Accumulated deficit
(363,094
)
 
(386,216
)
Accumulated other comprehensive income (loss)
(661
)
 
(600
)
Treasury stock, at cost, 3,296,289 shares at March 31, 2018 and December 31, 2017, respectively
(351,748
)
 
(351,748
)
Total equity attributable to stockholders
608,787

 
588,557

Noncontrolling interests of CIP
16,619

 
16,667

Total equity
625,406

 
605,224

Total liabilities and equity
$
2,538,209

 
$
2,590,799


The accompanying notes are an integral part of these condensed consolidated financial statements.

1
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
($ in thousands, except per share data)
 
 
 
Revenues
 
 
 
Investment management fees
$
100,476

 
$
59,271

Distribution and service fees
12,607

 
10,783

Administration and shareholder service fees
15,738

 
8,981

Other income and fees
207

 
741

Total revenues
129,028

 
79,776

Operating Expenses
 
 
 
Employment expenses
60,696

 
39,641

Distribution and other asset-based expenses
22,291

 
15,323

Other operating expenses
16,862

 
13,226

Operating expenses of consolidated investment products ("CIP")
511

 
642

Depreciation and other amortization
1,015

 
664

Amortization expense
5,036

 
233

Total operating expenses
106,411

 
69,729

Operating Income (Loss)
22,617

 
10,047

Other Income (Expense)
 
 
 
Realized and unrealized gain (loss) on investments, net
438

 
297

Realized and unrealized gain (loss) of CIP, net
2,259

 
4,444

Other income (expense), net
1,319

 
646

Total other income (expense), net
4,016

 
5,387

Interest Income (Expense)
 
 
 
Interest expense
(3,858
)
 
(243
)
Interest and dividend income
721

 
188

Interest and dividend income of investments of CIP
21,403

 
5,656

Interest expense of CIP
(14,549
)
 
(2,857
)
Total interest income (expense), net
3,717

 
2,744

Income (Loss) Before Income Taxes
30,350

 
18,178

Income tax expense (benefit)
6,523

 
4,433

Net Income (Loss)
23,827

 
13,745

Noncontrolling interests
(527
)
 
(718
)
Net Income (Loss) Attributable to Stockholders
23,300

 
13,027

Preferred stockholder dividends
(2,084
)
 
(2,084
)
Net Income (Loss) Attributable to Common Stockholders
$
21,216

 
$
10,943

Earnings (Loss) per Share—Basic
$
2.95

 
$
1.67

Earnings (Loss) per Share—Diluted
$
2.77

 
$
1.62

Cash Dividends Declared per Preferred Share
$
1.81

 
$
1.81

Cash Dividends Declared per Common Share
$
0.45

 
$
0.45

Weighted Average Shares Outstanding—Basic (in thousands)
7,197

 
6,542

Weighted Average Shares Outstanding—Diluted (in thousands)
8,411

 
6,773


The accompanying notes are an integral part of these condensed consolidated financial statements.

2
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
March 31,
 
2018
 
2017
($ in thousands)
 
 
 
Net Income (Loss)
$
23,827

 
$
13,745

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment, net of tax of ($4) for the three months ended March 31, 2018
10

 
—

Unrealized gain (loss) on available-for-sale securities, net of tax of $97 and $(54) for the three months ended March 31, 2018 and 2017, respectively
(249
)
 
88

Other comprehensive income (loss)
(239
)
 
88

Comprehensive income (loss)
23,588

 
13,833

Comprehensive (income) loss attributable to noncontrolling interests
(527
)
 
(718
)
Comprehensive Income (Loss) Attributable to Stockholders
$
23,061

 
$
13,115

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents



Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
($ in thousands)
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
23,827

 
$
13,745

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense, intangible asset and other amortization
6,819

 
960

Stock-based compensation
5,909

 
3,491

Amortization of deferred commissions
737

 
516

Payments of deferred commissions
(1,075
)
 
(671
)
Equity in earnings of equity method investments
(1,322
)
 
(629
)
Realized and unrealized (gains) losses on trading securities, net
(333
)
 
(297
)
Sales (purchases) of trading securities, net
4,718

 
2,396

Deferred taxes, net
646

 
2,817

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net and other assets
2,629

 
(13,013
)
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
(51,148
)
 
(24,305
)
Operating activities of consolidated investment products ("CIP"):
 
 
 
Realized and unrealized (gains) losses on investments of CIP, net
(2,382
)
 
(4,857
)
Purchases of investments by CIP
(264,398
)
 
(92,478
)
Sales of investments by CIP
217,564

 
98,191

Net purchases of short term investments by CIP
(177
)
 
(1,735
)
Sales (purchases) of securities sold short by CIP, net
190

 
(20
)
Change in other assets of CIP
(492
)
 
535

Change in liabilities of CIP
(3,467
)
 
172

Net cash provided by (used in) operating activities
(61,755
)
 
(15,182
)
Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(1,275
)
 
(369
)
Change in cash and cash equivalents of CIP due to consolidation, net
—

 
5,615

Purchases of available-for-sale securities
(20,302
)
 
(66
)
Net cash provided by (used in) investing activities
(21,577
)
 
5,180

Cash Flows from Financing Activities:
 
 
 
Repayments on debt
(650
)
 
(30,000
)
Payment of deferred financing costs
(3,400
)
 
(61
)
Proceeds from issuance of mandatory convertible preferred stock, net of issuance costs
—

 
111,280

Proceeds from issuance of common stock, net of issuance costs
—

 
109,762

Common stock dividends paid
(3,412
)
 
(2,894
)
Preferred stock dividends paid
(2,084
)
 
—

Stock options exercised
698

 
86

Taxes paid related to net share settlement of restricted stock units
(5,014
)
 
(2,464
)
Contributions (redemptions) of noncontrolling interests, net
(589
)
 
(6,091
)
Financing activities of CIP:
 
 
 
Borrowings (Payments) on borrowings by CIP
—

 
73

Proceeds from issuance of notes payable by CIP
350,000

 
—

Repayment of notes payable by CIP
(350,000
)
 
(500
)
Net cash provided by (used in) financing activities
(14,451
)
 
179,191

Net increase (decrease) in cash and cash equivalents
(97,783
)
 
169,189

Cash and cash equivalents, beginning of period
234,282

 
83,671

Cash and Cash Equivalent, End of Period
$
136,499

 
$
252,860

Non-Cash Investing Activities:
 
 
 
Change in accrual for capital expenditures
$
(375
)
 
$
(166
)
Non-Cash Financing Activities:
 
 
 
Increase (decrease) to noncontrolling interest due to consolidation (deconsolidation) of CIP, net
$
—

 
$
13,083

Common stock dividends payable
$
3,248

 
$
3,145

Preferred stock dividends payable
$
2,084

 
$
2,084

Accrued stock issuance costs
$
—

 
$
886


 
March 31, 2018
 
December 31, 2017
($ in thousands)
 
 
 
Reconciliation of cash and cash equivalents
 
 
 
Cash and cash equivalents
$
80,764

 
$
132,150

Cash of consolidated investment products
54,836

 
101,315

Cash pledged or on deposit of consolidated investment products
899

 
817

Cash and cash equivalents at end of period
$
136,499

 
$
234,282









The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
Common Stock
 
Preferred Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
Attributed To
Stockholders
 
Non-
controlling
Interests
 
Total
Equity
 
Redeemable
Non-
controlling
Interests
($ in thousands, except per share data)
Shares
 
Par Value
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at December 31, 2016
5,889,013

 
$
91

 
—

 
$
—

 
$
1,090,331

 
$
(424,279
)
 
$
(224
)
 
3,230,045

 
$
(344,246
)
 
$
321,673

 
$
—

 
$
321,673

 
$
37,266

Adjustment for adoption of ASU 2016-09
—

 
—

 
—

 
—

 
—

 
1,052

 
—

 
—

 
—

 
1,052

 
—

 
1,052

 
—

Net income (loss)
—

 
—

 
—

 
—

 
—

 
13,027

 
—

 
—

 
—

 
13,027

 
—

 
13,027

 
718

Net unrealized gain (loss) on securities available-for-sale
—

 
—

 
—

 
—

 
—

 
—

 
88

 
—

 
—

 
88

 
—

 
88

 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,992

Issuance of mandatory convertible preferred stock, net of offering costs
—

 
—

 
1,150,000

 
110,837

 
—

 
—

 
—

 
—

 
—

 
110,837

 
—

 
110,837

 
—

Cash dividends declared ($1.8125 per preferred share)
—

 
—

 
—

 
—

 
(2,084
)
 
—

 
—

 
—

 
—

 
(2,084
)
 
—

 
(2,084
)
 
—

Issuance of common stock, net of offering costs
1,046,500

 
10

 
—

 
—

 
109,310

 
—

 
—

 
—

 
—

 
109,320

 
—

 
109,320

 
—

Cash dividends declared ($0.45 per common share)
—

 
—

 
—

 
—

 
(3,322
)
 
—

 
—

 
—

 
—

 
(3,322
)
 
—

 
(3,322
)
 
—

Issuance of common shares related to employee stock transactions
53,631

 
1

 
—

 
—

 
85

 
—

 
—

 
—

 
—

 
86

 
—

 
86

 
—

Taxes paid on stock-based compensation
—

 
—

 
—

 
—

 
(2,464
)
 
—

 
—

 
—

 
—

 
(2,464
)
 
—

 
(2,464
)
 
—

Stock-based compensation
—

 
—

 
—

 
—

 
4,175

 
—

 
—

 
—

 
—

 
4,175

 
—

 
4,175

 
—

Balances at March 31, 2017
6,989,144

 
$
102

 
1,150,000

 
$
110,837

 
$
1,196,031

 
$
(410,200
)
 
$
(136
)
 
3,230,045

 
$
(344,246
)
 
$
552,388

 
$
—

 
$
552,388

 
$
44,976

Balances at December 31, 2017
7,159,645

 
$
105

 
1,150,000

 
$
110,843

 
$
1,216,173

 
$
(386,216
)
 
$
(600
)
 
3,296,289

 
$
(351,748
)
 
$
588,557

 
$
16,667

 
$
605,224

 
$
4,178

Adjustment for adoption of ASU 2016-01
—

 
—

 
—

 
—

 
—

 
(178
)
 
178

 
—

 
—

 
—

 
—

 
—

 
—

Net income (loss)
—

 
—

 
—

 
—

 
—

 
23,300

 
—

 
—

 
—

 
23,300

 
672

 
23,972

 
(145
)
Net unrealized gain (loss) on securities available-for-sale
—

 
—

 
—

 
—

 
—

 
—

 
(249
)
 
—

 
—

 
(249
)
 
—

 
(249
)
 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
—

 
10

 
—

 
—

 
10

 
—

 
10

 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(720
)
 
(720
)
 
129

Cash dividends declared ($1.8125 per preferred share)
—

 
—

 
—

 
—

 
(2,084
)
 
—

 
—

 
—

 
—

 
(2,084
)
 
—

 
(2,084
)
 
—

Cash dividends declared ($0.45 per common share)
—

 
—

 
—

 
—

 
(3,394
)
 
—

 
—

 
—

 
—

 
(3,394
)
 
—

 
(3,394
)
 
—

Issuance of common shares related to employee stock transactions
57,798

 
—

 
—

 
—

 
698

 
—

 
—

 
—

 
—

 
698

 
—

 
698

 
—

Taxes paid on stock-based compensation
—

 
—

 
—

 
—

 
(5,014
)
 
—

 
—

 
—

 
—

 
(5,014
)
 
 
 
(5,014
)
 
—

Stock-based compensation
—

 
—

 
—

 
—

 
6,963

 
—

 
—

 
—

 
—

 
6,963

 
—

 
6,963

 
—

Balances at March 31, 2018
7,217,443

 
$
105

 
1,150,000

 
$
110,843

 
$
1,213,342

 
$
(363,094
)
 
$
(661
)
 
3,296,289

 
$
(351,748
)
 
$
608,787

 
$
16,619

 
$
625,406

 
$
4,162

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business

Virtus Investment Partners, Inc. ("the Company," "we," "us," "our," or "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 Act mutual funds and Undertaking for Collective Investment in Transferable Securities ("UCITS") (collectively, "open-end funds"), closed-end funds, exchange traded funds ("ETFs") and retail separate accounts. Institutional investment management services are provided to corporations, multi-employer retirement funds, employee retirement systems, foundations, endowments, structured products and as a subadviser to unaffiliated mutual funds.



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") 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 three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
These unaudited condensed 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, 2017 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2017 Annual Report on Form 10-K.

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. The reclassifications were not material to the condensed consolidated financial statements.

New Accounting Standards Implemented

Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. On January 1, 2018, the Company adopted the new Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), and all the related amendments ("the new revenue standard") using the modified retrospective approach. The core principle of the new revenue standard 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. Based on the revised criteria in the new revenue standard for determining whether the Company is acting as a principal or agent, certain costs that were previously presented on a net of revenue basis are now presented on a gross basis. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. No cumulative-effect adjustment to the balance sheet was necessary upon the adoption of ASC 606. The Company has determined that the adoption of the new revenue standard did not have a material impact the Company's condensed consolidated financial statements.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). On January 1, 2018, the Company adopted amendments to ASC 825 - Financial Instruments ("ASC 825) pursuant to ASU 2016-01. This standard 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. The Company recorded a $0.2 million cumulative-effect adjustment to the balance sheet upon adoption.


6
Table of Contents

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). On January 1, 2018, the Company adopted amendments to ASC 230 - Statement of Cash Flows ("ASC 230") on a retrospective basis pursuant to ASU 2016-15. This standard 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. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). On January 1, 2018, the Company adopted amendments to ASC 230 on a retrospective basis pursuant to ASU 2016-18. This standard requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning and ending cash on the statement of cash flows. Restricted cash includes cash pledged or on deposit with brokers of consolidated investment products. Cash, cash equivalents and restricted cash reported on the condensed consolidated statements of cash flows now includes $0.8 million, $1.1 million and $1.0 million of cash pledged or on deposit of consolidated investment products as of December 31, 2017, March 31, 2017, and December 31, 2016, respectively, as well as previously reported cash and cash equivalents. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). On January 1, 2018, the Company adopted amendments to ASC 805 - Business Combinations ("ASC 805") and will apply the standard prospectively pursuant to ASU 2017-01. This standard provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The impact of ASU 2017-01 on the Company’s condensed consolidated financial statements will depend on acquisitions (or disposals) of assets or businesses by the Company in periods following adoption.

ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). On January 1, 2018, the Company adopted amendments to ASC 350 - Intangibles Goodwill and Other and will apply the standard prospectively for all future annual and interim goodwill impairment tests pursuant to ASU 2017-04. Under ASU 2017-04, a goodwill impairment is defined to be the amount by which a reporting unit’s carrying value exceeds its fair value. The impact of the new standard on the Company’s condensed consolidated financial statements will depend on the outcomes of future goodwill impairment tests.

ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). In March 2018, the Company adopted the amendments to ASC 740 - Income Taxes pursuant to ASU 2018-05. The standard adds various Securities and Exchange Commission ("SEC") paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. We have accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects and have recorded provisional amounts in our condensed consolidated financial statements as of March 31, 2018 and December 31, 2017.

New Accounting Standards Not Yet Implemented
    
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The standard provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.        

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 - Leases 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

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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 condensed consolidated financial statements but expects to record a right-of-use asset and a related lease obligation in the Company's condensed consolidated balance sheet upon adoption.
        
    

3. Revenues

Adoption of ASC 606, Revenue from Contracts with Customers

The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to 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 investment management fees, distribution and service fees and administration and shareholder service fees are calculated, are variable in nature, and subject to factors outside of the Company's control such as deposits, withdrawals and market performance. Because of this, they are considered constrained until the end of the contractual measurement period (monthly or quarterly) which is when asset values are generally determinable.

Revenue Disaggregated
The following table summarizes revenue by source:
 
Three Months Ended March 31,
 
2018
 
2017 (1)
($ in thousands)
 
 
 
Investment management fees
 
 
 
Open-end funds
$
54,361

 
$
30,526

Closed-end funds
10,378

 
11,079

Retail separate accounts
16,529

 
11,434

Institutional accounts
15,818

 
5,141

Structured products
2,326

 
498

Other products
1,064

 
593

Total investment management fees
100,476

 
59,271

Distribution and service fees
12,607

 
10,783

Administration and shareholder service fees
15,738

 
8,981

Other income and fees
207

 
741

Total revenues
$
129,028

 
$
79,776

(1)
Prior period amounts have not been adjusted and are reported in accordance with historical accounting under ASC 605, Revenue Recognition.

    
Investment Management Fees

The Company provides investment management services pursuant to investment management agreements through its affiliated investment advisers (each an "Adviser"). Investment management services represent a series of distinct daily service periods which are performed over time. With respect to the Company's funds, the Company earns fees based on each fund’s average daily or weekly net assets which are generally received and calculated on a monthly basis. The Company has recorded its management fees net of investment management fees paid to unaffiliated subadvisers, as the Company considers itself an agent of the fund as it relates to the day-to-day investment management services performed by unaffiliated subadvisers. With respect to services performed by the unaffiliated subadviser, the Company's performance obligation is to arrange for the provision of that service and it does not control the specified service before that service is performed. Amounts paid to unaffiliated subadvisers for the three months ended March 31, 2018 were $12.9 million.

Retail separate account fees are calculated based on the end of the preceding or current quarters asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances or current quarter’s asset values. Fees for structured finance products, for which the Company acts as the collateral manager, consist of senior, subordinated and, in certain instances, incentive management fees. Senior and subordinated management fees are

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calculated at a contractual fee rate applied against the end of the preceding quarter par value of the total collateral being managed with subordinated fees being recognized only after certain portfolio criteria are met. Incentive fees on certain of the Company's CLOs are typically 20% of the excess cash flows available to holders of the subordinated notes, above a threshold level internal rate of return.

Distribution and Service Fees

Distribution and service fees are asset-based fees earned from open-end funds for distribution services. Depending on the fund type or share class, these fees primarily consist of an asset-based fee (12b-1 fee) that is charged to the fund over a period of years to cover allowable sales and marketing expenses for the fund or front-end sales charges which are based on a percentage of the offering price. Asset-based distribution and service fees are primarily based on percentages of the average daily net assets value and are paid monthly pursuant to the terms of the respective distribution and service fee contracts.

Distribution and service fees represent two performance obligations comprised of distribution and distribution related shareholder servicing activities. Distribution services are generally satisfied upon the sale of a fund share. Distribution related shareholder servicing activities are generally services satisfied over time.

The Company distributes its open-end funds through unaffiliated financial intermediaries that comprise national and regional broker dealers. These unaffiliated financial intermediaries provide distribution and distribution related shareholder service activities on behalf of the Company. The Company passes related distribution and service fees to these unaffiliated financial intermediaries for these services and considers itself the principal in these arrangements as it has control of the services prior to the services being transferred to the customer. These payments are classified within distribution and other asset-based expenses.

Administration & Shareholder Service Fees

The Company provides administrative fund services to its open-end funds and certain of its closed-end funds and shareholder services to its open-end funds. Administration and shareholder services are performed over time. The Company earns fees based on each fund’s average daily or weekly net assets which are calculated and paid monthly. Administrative fund services include: record keeping, preparing and filing documents required to comply with securities laws, legal administration and compliance services, customer service, supervision of the activities of the funds’ service providers, tax services and treasury services as well as providing office space, equipment and personnel that may be necessary for managing and administering the business affairs of the funds. Shareholder services include maintaining shareholder accounts, processing shareholder transactions, preparing filings and performing necessary reporting, among other things.

Financial Statement Impact of the Adoption of ASC 606    

The adoption of ASC 606 resulted in a change from the Company’s treatment under ASC 605 whereby front-end sales charges earned for the sale execution of certain share classes were presented net of the amounts retained by unaffiliated third-party dealers and banks. These front-end sales charges earned are now presented on a gross basis under ASC 606.

The impact of adoption of ASC 606 on the Company's condensed consolidated statement of operations was as follows:
 
Three Months Ended March 31, 2018
($ in Thousands)
As
Reported
 
Balance
Under
Prior
ASC 605
 
Effect of
Change
Higher/(Lower)
Revenues
 
 
 
 
 
Distribution and service fees
$
12,607

 
$
11,371

 
$
1,236

 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
Distribution and other asset-based expenses
22,291

 
21,055

 
1,236


    


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4. Business Combinations

RidgeWorth Investments

On June 1, 2017, the Company acquired RidgeWorth Investments (the "Acquisition" or the "Acquired Business"), 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 total purchase price of the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments.

The Company accounted for the acquisition in accordance with ASC 805. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the Acquisition. 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. No incremental measurement period adjustments were recorded in the three months ended March 31, 2018.

The following table summarizes the initial estimate of amounts of identified acquired assets and liabilities assumed as of the acquisition date:
 
June 1, 2017
($ in thousands)
 
Assets:
 
Cash and cash equivalents
$
39,343

Investments
5,516

Accounts receivable
20,311

Assets of consolidated investment products ("CIP")
 
Cash and cash equivalents of CIP
38,261

Investments of CIP
899,274

Other assets of CIP
19,158

Furniture, equipment and leasehold improvements
5,505

Intangible assets
275,700

Goodwill
163,365

Deferred taxes, net
6,590

Other assets
3,003

Total Assets
1,476,026

Liabilities
 
Accrued compensation and benefits
18,263

Accounts payable and accrued liabilities
11,858

Other liabilities
2,601

Liabilities of consolidated investment products ("CIP")
 
Notes payable of CIP
770,160

Securities purchased payable and other liabilities of CIP
109,881

Noncontrolling Interests of CIP
16,181

Total Liabilities & Noncontrolling Interests
928,944

Total Net Assets Acquired
$
547,082



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Identifiable Intangible Assets Acquired

In connection with the allocation of the purchase price, we identified the following intangible assets:
 
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

 
 

Sustainable Growth Advisers, LP
    
On February 1, 2018, the Company entered into an agreement (the "Purchase Agreement") to acquire a majority interest in Sustainable Growth Advisers, LP ("SGA"), an investment manager specializing in U.S. and global growth equity portfolios (the "Transaction"). The purchase price payable by the Company at the closing will be $129.5 million, subject to certain potential adjustments. The Transaction is expected to close in mid-2018, subject to customary closing conditions and client approvals. The Purchase Agreement contains customary termination rights for the Company and SGA, including in the event the Transaction is not consummated on or before September 30, 2018. The Purchase Agreement also contains customary representations, warranties, covenants and indemnification and escrow provisions.



5. Intangible Assets, Net

Intangible assets, net are summarized as follows: 
 
March 31, 2018
 
December 31, 2017
($ in thousands)
 
 
 
Definite-lived intangible assets:
 
 
 
Investment contracts
$
425,747

 
$
425,747

Accumulated amortization
(172,345
)
 
(167,309
)
Definite-lived intangible assets, net
253,402

 
258,438

Indefinite-lived intangible assets
43,516

 
43,516

Total intangible assets, net
$
296,918

 
$
301,954


Activity in intangible assets, net is as follows: 
 
Three Months Ended March 31,
 
2018
 
2017
($ in thousands)
 
 
 
Intangible assets, net
 
 
 
Balance, beginning of period
$
301,954

 
$
38,427

Amortization
(5,036
)
 
(233
)
Balance, end of period
$
296,918

 
$
38,194



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Estimated amortization expense of intangible assets for the remainder of fiscal year 2018 and succeeding fiscal years is as follows:
($ in thousands)
 
 
Fiscal Year
 
Amount
2018
 
$
15,073

2019
 
20,043

2020
 
19,878

2021
 
19,867

2022
 
19,742

2023 and thereafter
 
158,799

 
 
$
253,402




6. Investments
At March 31, 2018 and December 31, 2017, the Company's investments were as follows:
 
March 31, 2018
 
December 31, 2017
($ in thousands)
 
 
 
Marketable securities
$
62,039

 
$
66,424

Equity method investments
12,420

 
11,098

Nonqualified retirement plan assets
6,669

 
6,706

Investments in collateralized loan obligations
43,295

 
23,339

Other investments
925

 
925

Total investments
$
125,348

 
$
108,492

Marketable Securities
Marketable securities consist primarily of investments in the Company's sponsored mutual funds, excluding the investments in consolidated investment products discussed in Note 15. The composition of the Company’s marketable securities is summarized as follows:
March 31, 2018
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
$
41,463

 
$
(928
)
 
$
1,380

 
$
41,915

Equity securities
13,621

 
(11
)
 
2,939

 
16,549

Sponsored closed-end funds
3,770

 
(382
)
 
187

 
3,575

Total marketable securities
$
58,854

 
$
(1,321
)
 
$
4,506

 
$
62,039



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December 31, 2017
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
$
47,084

 
$
(1,294
)
 
$
1,059

 
$
46,849

Equity securities
13,141

 
(2
)
 
2,671

 
15,810

Sponsored closed-end funds
3,761

 
(302
)
 
306

 
3,765

Total marketable securities
$
63,986

 
$
(1,598
)
 
$
4,036

 
$
66,424


For the three months ended March 31, 2018, the Company recognized a net realized loss of $0.4 million on marketable securities. For the three months ended March 31, 2017, the Company recognized a net realized gain of $0.6 million on marketable securities.



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 separately discussed in Note 15, as of March 31, 2018 and December 31, 2017 by fair value hierarchy level were as follows:
March 31, 2018  
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
43,715

 
$
—

 
$
—

 
$
43,715

Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
41,915

 
—

 
—

 
41,915

Equity securities
16,549

 
—

 
—

 
16,549

Sponsored closed-end funds
3,575

 
—

 
—

 
3,575

Other investments:
 
 
 
 
 
 
 
Investments in collateralized loan obligations
—

 
37,763

 
5,532

 
43,295

Nonqualified retirement plan assets
6,669

 
—

 
—

 
6,669

Total assets measured at fair value
$
112,423

 
$
37,763

 
$
5,532

 
$
155,718


December 31, 2017  
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
72,993

 
$
—

 
$
—

 
$
72,993

Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
46,849

 
—

 
—

 
46,849

Equity securities
15,810

 
—

 
—

 
15,810

Sponsored closed-end funds
3,765

 
—

 
—

 
3,765

Other investments
 
 
 
 
 
 
 
Investment in collateralized loan obligations
—

 
18,900

 
4,439

 
23,339

Nonqualified retirement plan assets
6,706

 
—

 
—

 
6,706

Total assets measured at fair value
$
146,123

 
$
18,900

 
$
4,439

 
$
169,462

The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:

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Cash equivalents represent 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 funds represent investments in open-end mutual funds, closed-end funds and ETF's 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 ETF's are determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.
Equity securities include securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Investments in collateralized loan obligations represent investments in CLOs for which the Company provides investment management services. The investments in collateralized loan obligations are measured at fair value based on independent third-party valuations and are categorized as Level 2 and Level 3.

Nonqualified retirement plan assets represent open-end mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.

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; or (2) if the book value no longer represents fair value. There were no transfers between levels during the three months ended March 31, 2018 and 2017.

The following table is a reconciliation of assets for Level 3 investments for which significant unobservable inputs were used to determine fair value.
 
Three Months Ended March 31,
 ($ in thousands)
2018
 
2017
Level 3 Investments (a)
 
 
 
Balance at beginning of period
$
4,439

 
$
—

Acquired in period
1,326

 
—

Change in unrealized (loss), net
(233
)
 
—

Balance at end of period
$
5,532

 
$
—

(a)
The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment.



8. Equity Transactions

On February 14, 2018, the Company declared a quarterly cash dividend of $0.45 per common share to be paid on May 15, 2018 to shareholders of record at the close of business on April 30, 2018. The Company also declared a quarterly cash dividend of $1.8125 per share on the Company's 7.25% mandatory convertible preferred stock ("MCPS") to be paid on May 1, 2018 to shareholders of record at the close of business on April 16, 2018.

As of March 31, 2018, there were 883,756 shares available to be repurchased from a total of 4,180,045 shares of Company common stock that had been approved by the Company's Board of Directors. 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. During the three months ended March 31, 2018, the Company repurchased no common shares.



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9. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2018 and 2017 were as follows:
 
Unrealized Net
Gains and (Losses)
on Securities
Available-for-Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2017
$
(612
)
 
$
12

Unrealized net gain (loss) on securities available-for-sale, net of tax of $97
(249
)
 
—

Foreign currency translation adjustments, net of tax of $(4)
—

 
10

Amounts reclassified from accumulated other comprehensive income (loss), net of tax of ($61) (1)
178

 
—

Net current-period other comprehensive income (loss)
(71
)
 
10

Balance March 31, 2018
$
(683
)
 
$
22

 
 
 
 
 
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 $(54)
88

 
—

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

Net current-period other comprehensive income (loss)
88

 
—

Balance March 31, 2017
$
(136
)
 
$
—


(1) On January 1, 2018, the Company adopted amendments to ASC 825 pursuant to ASU 2016-01. This standard 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.



10. Stock-Based Compensation

The Company's Amended and Restated Omnibus Incentive and Equity Plan (the "Plan") provides for the grant of equity-based awards, including restricted stock units ("RSUs"), stock options and unrestricted shares of common stock. As of March 31, 2018, a maximum of 2,400,000 shares of common stock were authorized for issuance under the Plan, and 389,415 shares remained available for issuance. Shares that are issued upon exercise of stock options and vesting of RSUs are newly issued shares from the Plan and are not issued from treasury stock. The Company recognized total stock compensation expense of $5.9 million and $3.5 million for the three months ended March 31, 2018 and 2017, respectively.

Restricted Stock Units

Each RSU entitles the holder to one 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 RSU is estimated using 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 condition are valued using a simulation valuation model.


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RSU activity for the three months ended March 31, 2018 is summarized as follows: 
 
Number
of Shares
 
Weighted Average
Grant Date
Fair Value
Outstanding at December 31, 2017
483,021

 
$
104.16

Granted
92,681

 
$
139.49

Settled
(75,142
)
 
$
109.85

Outstanding at March 31, 2018
500,560

 
$
109.95

For the three months ended March 31, 2018 and 2017, a total of 28,851 and 22,977 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $5.0 million and $2.5 million for the three months ended March 31, 2018 and 2017, respectively, in minimum employee tax withholding obligations related to RSUs withheld. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting.
During the three months ended March 31, 2018, the Company granted 23,356 performance based stock awards ("PSUs") which contain performance-based metrics in addition to a service condition. Compensation expense for these PSUs is recognized over a three-year service period based upon the value determined using a combination of the intrinsic value method, for awards that contain a performance metric that represents a "performance condition" in accordance with ASC 718, and the Monte Carlo simulation valuation model, for awards under the performance metric that represents a "market condition" under ASC 718. Compensation expense for the 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 the 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 the final outcome. For the three months ended March 31, 2018, total stock-based compensation expense for PSUs was $2.4 million.
As of March 31, 2018, unamortized stock-based compensation expense for unvested RSUs and PSUs was $36.9 million, with a weighted-average remaining amortization period of 1.8 years.

Stock Options

Stock options generally cliff vest after three years and have a contractual life of 10 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 three months ended March 31, 2018 is summarized as follows: 
 
Number
of Shares
 
Weighted
Average
Exercise Price
Outstanding at December 31, 2017
109,808

 
$
16.44

Exercised
(22,245
)
 
$
31.38

Outstanding at March 31, 2018
87,563

 
$
12.64




11. Earnings per Share
Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders 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) 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, as determined under the if-converted method. For purposes of calculating diluted EPS, preferred stock dividends have been subtracted from net income (loss) in periods in which utilizing the if-converted method would be anti-dilutive.

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The computation of basic and diluted EPS is as follows: 
 
Three Months Ended March 31,
 
2018
 
2017
($ in thousands, except per share amounts)
 
 
 
Net Income (Loss)
$
23,827

 
$
13,745

Noncontrolling interests
(527
)
 
(718
)
Net Income (Loss) Attributable to Stockholders
23,300

 
13,027

Preferred stock dividends
(2,084
)
 
(2,084
)
Net Income (Loss) Attributable to Common Stockholders
$
21,216

 
$
10,943

Shares (in thousands):
 
 
 
Basic: Weighted-average number of common shares outstanding
7,197

 
6,542

Plus: Incremental shares from assumed conversion of dilutive instruments
1,214

 
231

Diluted: Weighted-average number of common shares outstanding
8,411

 
6,773

Earnings (Loss) per Share—Basic
$
2.95

 
$
1.67

Earnings (Loss) per Share—Diluted
$
2.77

 
$
1.62


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,
 
2018
 
2017
(in thousands)
 
 
 
Restricted stock units and stock options
15

 
—

Preferred stock
—

 
674

Total anti-dilutive securities
15

 
674




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 21.5% and 24.4% for the three months ended March 31, 2018 and 2017, respectively. The decrease in the estimated effective tax rate was primarily due to the Tax Cuts and Jobs Act enacted on December 22, 2017 which included a reduction of the statutory federal corporate income tax rate to 21% from 35%. This decrease in tax rates was partially offset by a decrease in the tax benefit associated with valuation allowance changes related to the Company's investments.



13. Debt

Credit Agreement

On February 15, 2018 (the "Effective Date") the Company entered into Amendment No. 1 (the "Amendment") to the Credit Agreement, dated as of June 1, 2017, (the Credit Agreement as amended by the Amendment is hereinafter referred to as the "Credit Agreement"). The Amendment provided commitments for an additional $105.0 million of term loans ("Additional Term Loan Commitments") which are subject to, among other customary conditions, the substantially concurrent

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consummation of the Company’s previously announced agreement to acquire (i) 70% of the outstanding limited partnership interests of SGA and (ii) 100% of the outstanding membership interests of SGIA, LLC, the general partner of SGA (the "Transaction").
  
The applicable margin on amounts outstanding under the Credit Agreement, commencing as of the Effective Date, is 2.50%, in the case of LIBOR-based loans, and 1.50% in the case of alternate base rate loans, in each case subject to a 25 basis point reduction based on the secured net leverage ratio (as defined in the Credit Agreement) of the Company as of the last day of the preceding fiscal quarter being not greater than 1.00 to 1.00, as reflected in certain financial reports required under the Credit Agreement. The Additional Term Loan Commitments are subject to a delayed draw fee accruing for the period (i) from the date which is 31 days after the Effective Date to the date which is 60 days after the Effective Date, at 1.25% per annum and (ii) thereafter, at 2.50% per annum until the earlier of the funding or termination of the Additional Term Loan Commitments, in each case, calculated in respect of the aggregate amount of the Additional Term Commitments during such period.

The Amendment also eliminated a maximum Total Net Leverage Ratio (as defined in the Credit Agreement) financial maintenance covenant as applied to term loans under the Credit Agreement. The Credit Agreement includes, for the benefit of revolving lenders, a financial maintenance covenant that the Company will not permit the Total Net Leverage Ratio to exceed 2.50:1.00 as of the last day of any fiscal quarter; provided that this covenant will apply only if on such day the aggregate principal amount of outstanding revolving loans and letters of credit exceeds 30% of the aggregate revolving commitments as of such day.    

At March 31, 2018, $258.7 million was outstanding under the Term Loan, and no amounts were outstanding under our $100 million revolving credit facility.



14. Commitments and Contingencies
Legal Matters

The Company is regularly involved in litigation 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 matters 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.

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.


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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 plaintiff and, on June 9, 2015, the Court appointed Arkansas Teachers Retirement System lead plaintiff. On August 21, 2015, the plaintiffs 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 plaintiffs seek 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 plaintiffs' 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. Plaintiffs' motion for class certification was granted on May 15, 2017. Discovery has since been completed. On October 6, 2017, defendants moved for summary judgment. Briefing on the motion for summary judgment was completed on December 22, 2017, and oral argument was held on January 18, 2018, where the Court reserved decision. The Company believes that the suit is without merit, nonetheless, on February 6, 2018, it reached an agreement in principle with the plaintiffs, subject to Court approval, settling all claims in the litigation, in order to avoid the cost, distraction, disruption, and inherent litigation uncertainty. Upon approval by the Court, which the Company believes is likely, the resolution of this matter will not have a material impact on the Company’s results of operations, cash flows or its consolidated financial condition.



15. 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 also 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) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support; or (b) where as a group, the holders of the equity investment at risk do not possess: (i) the power through voting or similar rights to direct the activities that most significantly impact the entity’s economic performance, (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity or (iii) proportionate voting and economic interests and where substantially all of the entity’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’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 include 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") 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. The Company’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’s investments in, and fees generated from, these products.


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Table of Contents

The following table presents the balances of the consolidated investment products that, after intercompany eliminations, are reflected in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017:
 
As of
 
March 31, 2018
 
December 31, 2017
 
 
 
VIEs
 
 
 
VIEs
 
VOEs
 
CLOs
 
Other
 
VOEs
 
CLOs
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
978

 
$
54,757

 
$
—

 
$
820

 
$
82,823

 
$
18,489

Investments
36,702

 
1,572,898

 
24,485

 
34,623

 
1,555,879

 
7,250

Other assets
499

 
31,709

 
314

 
767

 
32,671

 
48

Notes payable
—

 
(1,460,177
)
 
—

 
—

 
(1,457,435
)
 
—

Securities purchased payable and other liabilities
(1,145
)
 
(90,920
)
 
(356
)
 
(1,319
)
 
(110,871
)
 
(764
)
Noncontrolling interests
(4,123
)
 
(16,619
)
 
(39
)
 
(4,178
)
 
(16,667
)
 
—

The Company’s net interests in consolidated investment vehicles
$
32,911

 
$
91,648

 
$
24,404

 
$
30,713

 
$
86,400

 
$
25,023


Consolidated CLOs

The majority of the Company's consolidated investment products that are VIEs are CLOs. At March 31, 2018, the Company consolidated four CLOs. The financial information of certain CLOs is included in the Company's condensed consolidated financial statements on a one-month lag based upon the availability of financial information. Majority-owned consolidated private funds, whose primary purpose is to invest in CLOs for which the Company serves as the collateral manager, are also included.

Investments of CLOs

The CLOs investments of $1.6 billion at March 31, 2018 represent 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 2018 and 2030 and pay interest at LIBOR plus a spread of up to 10.0%. At March 31, 2018, the fair value of the senior bank loans exceeded the unpaid principal balance by approximately $3.9 million. At March 31, 2018, there were no collateral assets in default.

Notes Payable of CLOs

The CLOs have issued notes payable with a total value, at par, of $1.6 billion, consisting of senior secured floating rate notes payable with a par value of $1.4 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 0.8% 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 between October 2019 and October 2021, depending on the CLO. Generally, subsequent prepayments received after the reinvestment period must be used to pay down the note obligations.

The Company’s beneficial interests and maximum exposure to loss related to these consolidated CLOs is limited 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 prescribed by 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 March 31, 2018, as shown in the table below:

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Table of Contents

 
As of

March 31, 2018
($ in thousands)
 
Subordinated notes
$
89,950

Accrued investment management fees
1,698

  Total Beneficial Interests
$
91,648


The following table represents income and expenses of the consolidated CLOs included in the Company’s condensed consolidated statements of operations for the period indicated:
 
Three Months Ended March 31,
($ in thousands)
2018
Income:
 
Realized and unrealized gain (loss), net
$
4,037

Interest income
21,087

  Total Income
25,124

 
 
Expenses:
 
Other operating expenses
396

Interest expense
14,549

  Total Expense
14,945

Noncontrolling interest
(673
)
Net Income (loss) attributable to CIPs
$
9,506


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,
($ in thousands)
2018
Distributions received and unrealized gains on the subordinated notes held by the Company
$
7,647

Investment management fees
1,859

  Total Economic Interests
$
9,506



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Table of Contents

Fair Value Measurements of Consolidated Investment Products

The assets and liabilities of the consolidated investment products measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 by fair value hierarchy level were as follows:

As of March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
54,507

 
$
—

 
$
—

 
$
54,507

Debt investments
—

 
1,590,952

 
950

 
1,591,902

Equity investments
37,649

 
2,736

 
1,798

 
42,183

Total Assets Measured at Fair Value
$
92,156

 
$
1,593,688

 
$
2,748

 
$
1,688,592

Liabilities
 
 
 
 
 
 
 
Notes payable
$
—

 
$
1,460,177

 
$
—

 
$
1,460,177

Derivatives
—

 
—

 
—

 
—

Short sales
839

 
—

 
—

 
839

Total Liabilities Measured at Fair Value
$
839

 
$
1,460,177

 
$
—

 
$
1,461,016


As of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
82,769

 
$
—

 
$
—

 
$
82,769

Debt investments
—

 
1,527,845

 
33,887

 
1,561,732

Equity investments
35,126

 
—

 
894

 
36,020

Total Assets Measured at Fair Value
$
117,895

 
$
1,527,845

 
$
34,781

 
$
1,680,521

Liabilities
 
 
 
 
 
 
 
Notes payable
$
—

 
$
1,457,435

 
$
—

 
$
1,457,435

Derivatives
2

 
—

 
—

 
2

Short sales
719

 
—

 
—

 
719

Total Liabilities Measured at Fair Value
$
721

 
$
1,457,435

 
$
—

 
$
1,458,156


The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment products measured at fair value:

Cash equivalents represent 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.
Debt and equity investments represent the underlying debt, equity and other securities held in consolidated investment products. 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-U.S. securities), for which closing prices are not readily available or are deemed to not reflect readily available market prices, and are valued using an independent pricing service. Debt investments, including bank loan investments, are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. 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 analysis 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 securities that are not widely traded, are illiquid, or are priced by dealers based on pricing models used by market makers in the security.


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Table of Contents

For the three months ended March 31, 2018, no securities held by consolidated investment products were transferred from Level 2 to Level 1. For the three months ended March 31, 2017, securities held by consolidated investment products with an end-of-period value of $0.3 million were transferred from Level 2 to Level 1 because an exchange price became available. For the three months ended March 31, 2018 and 2017, securities held by consolidated investment products with an end-of-period value of $0.8 million and $0.4 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 are 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) the fair value of the beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services.

Short sales are transactions in which a security is sold which 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 in the condensed consolidated balance sheets within other liabilities of consolidated investment products and are classified as Level 1 based on the underlying equity security.

The securities purchase payable at March 31, 2018 and December 31, 2017 approximated fair value due to the short-term nature of the instruments.

The following table is a reconciliation of assets of consolidated investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value:
 
Three Months Ended March 31,
 ($ in thousands)
2018
 
2017
Level 3 Debt and Equity securities (a)
 
 
 
Balance at beginning of period
$
34,781

 
$
25

Realized gains (losses), net
43

 
(65
)
Change in unrealized gains (losses), net
2,375

 
62

Purchases
7,122

 
100

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