# Virtus Investment Partners, Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Virtus Investment Partners, Inc.](/companies/vrts.md) (CIK 883237)
- Form: 10-Q
- Filed: 2022-11-08
- Accepted by EDGAR: Nov 8, 2022, 16:44 ET
- Period: 2022-09-30
- Accession: 0000883237-22-000246
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/883237/000088323722000246/vrts-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/883237/000088323722000246/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $210.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $688.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $44.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $166.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $10.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $44.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $27.4m | us-gaap:ProfitLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $80.8m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $4.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $10.76 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $4.33 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $11.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 7,463,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 7,636,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $154.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $5.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $35.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $80.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2022-09-30 | $3.55bn | us-gaap:Assets |
| Total liabilities | at 2022-09-30 | $2.62bn | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $255.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2022-09-30 | $799.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,242 characters.

### 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 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," "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 the Company and the markets in which we operate, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net asset inflows and outflows, operating cash flows, business plans and ability to borrow, for all future periods. All forward-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 that 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 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" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, resulting from: (i) any reduction in our assets under management; (ii) general domestic and global economic and political conditions (including war, acts of terrorism and civil unrest); (iii) inability to achieve the expected benefits of our strategic transactions; (iv) the ongoing effects of the COVID-19 pandemic and associated global economic disruption; (v) withdrawal, renegotiation or termination of investment advisory agreements; (vi) damage to our reputation; (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; (xvii) adverse civil litigation and government investigations or proceedings; (xviii) unfavorable changes in tax laws or limitations; (xix) volatility associated with our common stock; (xx) inability to make quarterly common stock dividends; (xxi) certain corporate governance provisions in our charter and bylaws; (xxii) losses or costs not covered by insurance; (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 referred to above, in our 2021 Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and our other periodic reports filed with the Securities and Exchange Commission (the "SEC") could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.

Certain other factors that may impact our continuing operations, prospects, financial results and liquidity, or that 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 Relations." You are urged to carefully consider all such factors.

### Overview

### Our Business

We provide investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process and individual 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 and 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 investment products and through multiple distribution channels. Our investment strategies are available in a diverse range of styles and disciplines, managed by differentiated investment managers. We have offerings in various asset classes (equity, fixed income, multi-asset and alternative), geographies (domestic, global, international and emerging), market capitalizations (large, mid and small), styles (growth, core and value) and investment approaches (fundamental, quantitative and specialty). Our retail products include open-end funds, closed-end funds 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 provide subadvisory services to other investment advisers and serve as the collateral manager for structured products.

We distribute our open-end funds principally through financial intermediaries. We have broad distribution access in the U.S. retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisers, banks and insurance companies. In many of these firms, we have a number of products that are on preferred "recommended" lists and on fee-based advisory programs. Our sales efforts are supported by regional sales professionals, a national account relationship group, and separate teams for ETFs and the retirement and insurance channels. Our retail separate accounts are distributed through financial intermediaries and directly to private clients by teams at an affiliated manager.

Our institutional services are marketed through relationships with consultants as well as directly to clients. We target key market segments, including foundations and endowments, corporate, public and private pension plans, and subadvisory relationships.

### Financial Highlights

- Net income per diluted share was $4.25 in the third quarter of 2022, a decrease of $3.11, or 42.3%, as compared to net income per diluted share of $7.36 in the third quarter of 2021.
- Total sales were $5.7 billion in the third quarter of 2022, a decrease of $1.9 billion, or 24.9%, from $7.6 billion in the third quarter of 2021. Net outflows were $3.3 billion in the third quarter of 2022 compared to $0.5 billion in the third quarter of 2021.
- Assets under management were $145.0 billion at September 30, 2022, a decrease of $32.3 billion, or 18.2%, from September 30, 2021.

### AlphaSimplex

On October 19, 2022, the Company entered into an agreement to acquire AlphaSimplex, a leading manager of liquid alternative investment solutions with $10.9 billion of assets under management at September 30, 2022. Under the agreement, the Company would acquire 100% of AlphaSimplex for $130.0 million at closing which includes deferred retention incentives for management. The transaction is expected to close near the end of the first quarter of 2023, subject to customary closing conditions, necessary regulatory approvals, and approvals by the mutual fund boards and fund shareholders.

### Stone Harbor Investment Partners

On January 1, 2022, the Company acquired 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 of assets under management at December 31, 2021.

### Westchester Capital Management

On October 1, 2021, the Company acquired of Westchester Capital Management ("Westchester"), a recognized leader in global event-driven strategies with $5.1 billion of assets under management.

### Fund Adoption and NFJ Investment Group

On February 1, 2021, the Company executed an agreement with Allianz Global Investors U.S. LLC ("AGI"), 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 AGI's open-end, closed-end, institutional and retail separate account assets.

### Assets Under Management

At September 30, 2022, total assets under management were $145.0 billion, representing a decrease of $32.3 billion, or 18.2%, from September 30, 2021, and a decrease of $42.2 billion, or 22.6%, from December 31, 2021. The decrease from

September 30, 2021 was due to $39.6 billion of negative market performance and $10.0 billion of net outflows partially offset by an increase of $19.8 billion in assets under management from the addition of Stone Harbor and Westchester. The decrease from December 31, 2021 was due to $45.9 billion in negative market performance and $10.0 billion of net outflows, partially offset by an increase of $14.7 billion in assets under management from the addition of 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 investment adviser. Other fee earning assets are not included in our assets under management. At September 30, 2021, we had $2.5 billion of other fee earning assets.

### Operating Results

In the third quarter of 2022, total revenues decreased 16.6% to $210.3 million from $252.1 million in the third quarter of 2021, primarily as a result of lower average assets under management due to negative market performance and net outflows partially offset by an increase in assets under management from Stone Harbor and Westchester. Operating income decreased $49.3 million to $44.0 million in the third quarter of 2022 compared to $93.3 million in the third quarter of 2021, due primarily to the previously mentioned factors.

### Assets Under Management by Product

The following table summarizes our assets under management by product:

*(in millions)*

|  | As of September 30, 2022 | 2021 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Open-End Funds (1) | $54,454 | $74,365 | $(19,911) | (26.8)% |
| Closed-End Funds | 10,146 | 11,721 | (1,575) | (13.4)% |
| Retail Separate Accounts | 33,381 | 41,528 | (8,147) | (19.6)% |
| Institutional Accounts (2) | 46,993 | 49,691 | (2,698) | (5.4)% |
| Total | $144,974 | $177,305 | $(32,331) | (18.2)% |
| Average Assets Under Management (3) | $172,853 | $168,934 | $3,919 | 2.3% |

(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.

(3) Averages are calculated as follows:

- Funds - average daily or weekly balances
- Retail Separate Accounts - prior-quarter ending balance
- Institutional Accounts - average of month-end balances

### Asset Flows by Product

The following table summarizes asset flows by product:

*(in millions)*

| Open-End Funds (1) | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Beginning balance | $59,479 | $76,593 | $78,706 | $51,608 |
| Inflows | 2,880 | 3,809 | 10,956 | 14,812 |
| Outflows | (5,689) | (5,168) | (21,710) | (15,582) |
| Net flows | (2,809) | (1,359) | (10,754) | (770) |
| Market performance | (2,012) | (775) | (17,919) | 4,026 |
| Other (2) | (204) | (94) | 4,421 | 19,501 |
| **Ending balance** | **$54,454** | **$74,365** | **$54,454** | **$74,365** |
| **Closed-End Funds** |  |  |  |  |
| Beginning balance | $10,645 | $11,993 | $12,068 | $5,914 |
| Inflows | 157 | 3 | 189 | 3 |
| Outflows | — | — | — | — |
| Net flows | 157 | 3 | 189 | 3 |
| Market performance | (531) | (114) | (1,977) | 505 |
| Other (2) | (125) | (161) | (134) | 5,299 |
| **Ending balance** | **$10,146** | **$11,721** | **$10,146** | **$11,721** |
| **Retail Separate Accounts** |  |  |  |  |
| Beginning balance | $35,248 | $40,578 | $44,538 | $29,751 |
| Inflows | 1,179 | 2,003 | 4,489 | 6,975 |
| Outflows | (1,418) | (1,231) | (4,789) | (2,960) |
| Net flows | (239) | 772 | (300) | 4,015 |
| Market performance | (1,628) | 178 | (10,857) | 4,229 |
| Other (2) | — | — | — | 3,533 |
| **Ending balance** | **$33,381** | **$41,528** | **$33,381** | **$41,528** |
| **Institutional Accounts (3)** |  |  |  |  |
| Beginning balance | $50,048 | $49,474 | $51,874 | $44,921 |
| Inflows | 1,507 | 1,808 | 7,408 | 5,994 |
| Outflows | (1,930) | (1,727) | (6,585) | (5,779) |
| Net flows | (423) | 81 | 823 | 215 |
| Market performance | (2,475) | 258 | (15,144) | 4,259 |
| Other (2) | (157) | (122) | 9,440 | 296 |
| **Ending balance** | **$46,993** | **$49,691** | **$46,993** | **$49,691** |
| **Total** |  |  |  |  |
| Beginning balance | $155,420 | $178,638 | $187,186 | $132,194 |
| Inflows | 5,723 | 7,623 | 23,042 | 27,784 |
| Outflows | (9,037) | (8,126) | (33,084) | (24,321) |
| Net flows | (3,314) | (503) | (10,042) | 3,463 |
| Market performance | (6,646) | (453) | (45,897) | 13,019 |
| Other (2) | (486) | (377) | 13,727 | 28,629 |
| **Ending balance** | **$144,974** | **$177,305** | **$144,974** | **$177,305** |

(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

The following table summarizes assets under management by asset class:

*(in millions)*

| Asset Class | As of September 30, 2022 | 2021 | Change $% |  | % of Total 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Equity | $78,034 | $112,732 | $(34,698) | (30.8)% | 53.7% | 63.6% |
| Fixed income | 36,910 | 35,240 | 1,670 | 4.7% | 25.5% | 19.9% |
| Multi-asset (1) | 19,364 | 23,641 | (4,277) | (18.1)% | 13.4% | 13.3% |
| Alternatives (2) | 10,666 | 5,692 | 4,974 | 87.4% | 7.4% | 3.2% |
| **Total** | $144,974 | $177,305 | $(32,331) | (18.2)% | 100.0% | 100.0% |

(1) Includes strategies with substantial holdings in at least two of the following asset classes: equity, fixed income, and alternatives.

(2) Consists of event-driven, real estate securities, infrastructure, long/short and other strategies.

### Average Assets Under Management and Average Fees Earned

The following table summarizes the average management fees earned in basis points and average assets under management:

| Products | Three Months Ended September 30, Average Fee Earned (expressed in basis points) 2022 2021 | Average Assets Under Management (in millions) (3) 2022 2021 |
| --- | ---: | ---: |
| Open-End Funds (1) | 46.8 45.7 | $60,185 $76,368 |
| Closed-End Funds | 57.0 56.2 | 10,971 12,091 |
| Retail Separate Accounts | 42.2 44.0 | 35,248 40,578 |
| Institutional Accounts (2) | 31.3 31.3 | 50,668 50,542 |
| All Products | 41.5 42.0 | $157,072 $179,579 |
|  | **Nine Months Ended September 30,** |  |
|  | **Average Fee Earned (expressed in basis points)** | **Average Assets Under Management (in millions) (3)** |
|  | **2022** **2021** | **2022** **2021** |
| **Products** |  |  |
| Open-End Funds (1) | 46.4 46.3 | $67,105 $72,930 |
| Closed-End Funds | 57.4 55.8 | $11,379 $11,122 |
| Retail Separate Accounts | 42.9 44.6 | $40,203 $36,647 |
| Institutional Accounts (2) | 31.1 32.1 | $54,166 $48,235 |
| All Products | 41.5 42.5 | $172,853 $168,934 |

(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.

(3) Averages are calculated as follows:

- Funds - average daily or weekly balances
- Retail Separate Accounts - prior-quarter ending balance
- Institutional Accounts - average of month-end balances

Average fees earned represent investment management fees, net of revenue-related adjustments, divided by average net assets, excluding the impact of consolidation of investment products ("CIP"). Revenue-related adjustments are based on specific agreements and reflect 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, an average of current quarter’s asset values 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, 2022 decreased by 0.5 basis points and 1.0 basis points, respectively, compared to the same periods in the prior year primarily due to a lower proportion of assets under management in equity products as a result of negative equity markets in the current year periods partially offset by a higher proportion of alternative assets in the current year periods.

### Results of Operations

### Summary Financial Data

*(in thousands)*

|  | Three Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  | Nine Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment management fees | $172,850 | $201,133 | $(28,283) | (14.1)% | $564,691 | $567,912 | $(3,221) | (0.6)% |
| Other revenue | 37,411 | 50,931 | (13,520) | (26.5)% | 123,317 | 145,060 | (21,743) | (15.0)% |
| Total revenues | 210,261 | 252,064 | (41,803) | (16.6)% | 688,008 | 712,972 | (24,964) | (3.5)% |
| Total operating expenses | 166,244 | 158,782 | 7,462 | 4.7% | 521,769 | 471,137 | 50,632 | 10.7% |
| Operating income (loss) | 44,017 | 93,282 | (49,265) | (52.8)% | 166,239 | 241,835 | (75,596) | (31.3)% |
| Other income (expense), net | (11,592) | (2,304) | (9,288) | 403.1% | (59,262) | 1,738 | (61,000) | N/M |
| Interest income (expense), net | 5,744 | 7,356 | (1,612) | (21.9)% | 17,785 | 20,626 | (2,841) | (13.8)% |
| Income (loss) before income taxes | 38,169 | 98,334 | (60,165) | (61.2)% | 124,762 | 264,199 | (139,437) | (52.8)% |
| Income tax expense (benefit) | 10,754 | 25,823 | (15,069) | (58.4)% | 43,969 | 63,377 | (19,408) | (30.6)% |
| Net income (loss) | 27,415 | 72,511 | (45,096) | (62.2)% | 80,793 | 200,822 | (120,029) | (59.8)% |
| Noncontrolling interests | 4,265 | (13,775) | 18,040 | (131.0)% | 1,348 | (42,531) | 43,879 | (103.2)% |
| Net Income (Loss) Attributable to Virtus Investment Partners, Inc. | $31,680 | $58,736 | $(27,056) | (46.1)% | $82,141 | $158,291 | $(76,150) | (48.1)% |
| Earnings (loss) per share-diluted | $4.25 | $7.36 | $(3.11) | (42.3)% | $10.76 | $19.72 | $(8.96) | (45.4)% |

N/M = Not Meaningful

### Revenues

Revenues by source were as follows:

*(in thousands)*

| Investment management fees | Three Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  | Nine Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Open-end funds | $80,234 | $99,711 | $(19,477) | (19.5)% | $262,486 | $286,104 | $(23,618) | (8.3)% |
| Closed-end funds | 15,773 | 17,116 | (1,343) | (7.8)% | 48,887 | 46,451 | 2,436 | 5.2% |
| Retail separate accounts | 39,154 | 46,625 | (7,471) | (16.0)% | 134,069 | 126,612 | 7,457 | 5.9% |
| Institutional accounts | 37,689 | 37,681 | 8 | 0.0% | 119,249 | 108,745 | 10,504 | 9.7% |
| Total investment management fees | 172,850 | 201,133 | (28,283) | (14.1)% | 564,691 | 567,912 | (3,221) | (0.6)% |
| **Distribution and service fees** | 15,746 | 23,293 | (7,547) | (32.4)% | 52,912 | 67,091 | (14,179) | (21.1)% |
| **Administration and shareholder service fees** | 20,563 | 26,479 | (5,916) | (22.3)% | 66,889 | 74,916 | (8,027) | (10.7)% |
| **Other income and fees** | 1,102 | 1,159 | (57) | (4.9)% | 3,516 | 3,053 | 463 | 15.2% |
| **Total revenues** | $210,261 | $252,064 | $(41,803) | (16.6)% | $688,008 | $712,972 | $(24,964) | (3.5)% |

#### 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 decreased by $28.3 million, or 14.1%, for the three months ended September 30, 2022, and decreased $3.2 million, or 0.6%, for the nine months ended September 30, 2022, compared to the same periods in the prior year. The decrease in investment management fees during the three-month period was due to a decrease in average assets under management of $22.5 billion, or 12.5%, as well as a lower blended fee rate, partially offset by the addition of Stone Harbor and

Westchester assets under management. The decrease in investment management fees during the nine-month period was due to the lower blended fee rate offset by an increase in average assets under management of $3.9 billion, or 2.3%, as a result of the addition of Stone Harbor and Westchester.

#### Distribution and Service Fees

Distribution and service fees are sales- and asset-based fees earned from open-end funds for marketing and distribution services. Distribution and service fees decreased by $7.5 million, or 32.4%, and $14.2 million, or 21.1%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year, due primarily to lower sales for open-end funds in share classes that have sales-based distribution and service fees.

#### Administration and Shareholder Service Fees

Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our U.S. retail funds, ETFs, and certain of our closed-end funds. Fund administration and shareholder service fees decreased by $5.9 million, or 22.3%, and $8.0 million, or 10.7%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year primarily due to the net decrease in average assets under management for our open-end and closed-end funds during the periods as a result of market performance and net outflows in our open-end funds.

#### 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 increased by $0.5 million, or 15.2%, for the nine months ended September 30, 2022, compared to the same period in the prior year. The increase for the nine months ended September 30, 2022 was primarily due to higher redemption income in the period.

### Operating Expenses

Operating expenses by category were as follows:

*(in thousands)*

| Operating expenses | Three Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  | Nine Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Employment expenses | $88,230 | $87,345 | $885 | 1.0% | $283,583 | $266,734 | $16,849 | 6.3% |
| Distribution and other asset-based expenses | 26,818 | 36,692 | (9,874) | (26.9)% | 88,247 | 105,007 | (16,760) | (16.0)% |
| Other operating expenses | 31,096 | 22,800 | 8,296 | 36.4% | 94,367 | 64,326 | 30,041 | 46.7% |
| Other operating expenses of CIP | 538 | 639 | (101) | (15.8)% | 1,927 | 1,857 | 70 | 3.8% |
| Restructuring expense | 4,015 | — | 4,015 | 100.0% | 4,015 | — | 4,015 | 100.0% |
| Change in fair value of contingent consideration | — | — | — | —% | 2,900 | — | 2,900 | 100.0% |
| Depreciation expense | 938 | 915 | 23 | 2.5% | 2,835 | 2,994 | (159) | (5.3)% |
| Amortization expense | 14,609 | 10,391 | 4,218 | 40.6% | 43,895 | 30,219 | 13,676 | 45.3% |
| **Total operating expenses** | **$166,244** | **$158,782** | **$7,462** | **4.7%** | **$521,769** | **$471,137** | **$50,632** | **10.7%** |

#### Employment Expenses

Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three and nine months ended September 30, 2022 were $88.2 million and $283.6 million, which represented an increase of $0.9 million, or 1.0%, and $16.8 million, or 6.3%, respectively, compared to the same periods in the prior year. The increases in both periods were primarily due to the addition of Stone Harbor and Westchester.

#### Distribution and Other Asset-Based Expenses

Distribution and other asset-based expenses consist primarily of payments to third-party client intermediaries for providing services to investors in sponsored investment products. These payments are primarily based on assets under management or on 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-line basis over the period commissions are recovered from distribution fee revenues and contingent sales charges received upon redemption of shares. During the three and nine months ended

September 30, 2022, distribution and other asset-based expenses decreased $9.9 million, or 26.9%, and $16.8 million, or 16.0%, respectively, as compared to the same periods in the prior year primarily due to lower sales and a decrease in assets under management in share classes that have sales- and asset-based 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, and other business costs. For the three and nine months ended September 30, 2022, other operating expenses increased by $8.3 million, or 36.4%, and $30.0 million, or 46.7%, respectively, as compared to the same periods in the prior year primarily due to the addition of Stone Harbor and Westchester, as well as higher travel and related expenses.

#### Other Operating Expenses of CIP

Other operating expenses of CIP remained consistent during the three and nine months ended September 30, 2022, compared to the same periods in the prior year.

#### Restructuring Expense

Restructuring expense primarily consist of costs incurred during the three and nine months ended September 30, 2022 related to the write-down of right-of-use assets for a lease in conjunction with the consolidation of certain office space.

#### Change in Fair Value of Contingent Consideration

Our contingent consideration related to our NFJ, Westchester and Stone Harbor transactions are remeasured at fair value each reporting date taking into consideration changes in various estimates, including probability of success, discount rates and amount of time until the conditions of the contingent payments are achieved. The change in fair value is recorded in the current period as a gain or loss. The change in value of continent consideration of $2.9 million during the nine months ended September 30, 2022 was primarily attributable to higher future revenue projections and the time value of money.

#### Depreciation Expense

Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements. Depreciation expense remained consistent during the three and nine months ended September 30, 2022, compared to the same periods in the prior year.

#### Amortization Expense

Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives. Amortization expense increased $4.2 million, or 40.6%, and $13.7 million, or 45.3%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The increases during the three- and nine-month periods were due to the additional amortization associated with the acquisitions of Stone Harbor and Westchester.

### Other Income (Expense)

Other Income (Expense), net by category were as follows:

*(in thousands)*

| Other Income (Expense) | Three Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  | Nine Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Realized and unrealized gain (loss) on investments, net | $(2,493) | $(504) | $(1,989) | 394.6% | $(16,018) | $2,881 | $(18,899) | (656.0)% |
| Realized and unrealized gain (loss) of CIP, net | (8,440) | (2,801) | (5,639) | 201.3% | (43,443) | (4,741) | (38,702) | 816.3% |
| Other income (expense), net | (659) | 1,001 | (1,660) | (165.8)% | 199 | 3,598 | (3,399) | (94.5)% |
| Total Other Income (Expense), net | **$(11,592)** | **$(2,304)** | **$(9,288)** | **403.1%** | **$(59,262)** | **$1,738** | **$(61,000)** | **(3,509.8)%** |

#### Realized and unrealized gain (loss) on investments, net

Realized and unrealized gain (loss) on investments, net changed during the three and nine months ended September 30, 2022 by $(2.0) million and $(18.9) million, respectively, as compared to the same periods in the prior year. The realized and unrealized gains and losses during the periods reflected changes in overall market conditions experienced during the periods.

#### Realized and unrealized gain (loss) of CIP, net

Realized and unrealized gain (loss) of CIP, net changed $(5.6) million and $(38.7) million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The changes for the three and nine months ended September 30, 2022 consisted primarily of an increase in net realized and unrealized gains of $5.7 million and losses of $119.1 million, respectively, due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $11.3 million and gains of $80.4 million, respectively, related to the value of the notes payable.

#### Other income (expense), net

Other income (expense), net decreased $1.7 million and $3.4 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The decreases during the three- and nine-month periods were primarily due to lower equity method investment income during the current year periods.

### Interest Income (Expense)

Interest Income (Expense), net by category were as follows:

*(in thousands)*

| Interest Income (Expense) | Three Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  | Nine Months Ended September 30, 2022 | 2021 | 2022 vs. 2021% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense | $(3,557) | $(2,348) | $(1,209) | 51.5% | $(8,661) | $(6,918) | $(1,743) | 25.2% |
| Interest and dividend income | 1,013 | 269 | 744 | 276.6% | 1,870 | 571 | 1,299 | 227.5% |
| Interest and dividend income of investments of CIP | 28,644 | 22,877 | 5,767 | 25.2% | 71,436 | 69,315 | 2,121 | 3.1% |
| Interest expense of CIP | (20,356) | (13,442) | (6,914) | 51.4% | (46,860) | (42,342) | (4,518) | 10.7% |
| **Total Interest Income (Expense), net** | **$5,744** | **$7,356** | **$(1,612)** | **(21.9)%** | **$17,785** | **$20,626** | **$(2,841)** | **(13.8)%** |

#### Interest Expense

Interest expense increased $1.2 million, or 51.5%, and $1.7 million, or 25.2%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The increases were attributable to higher interest rates.

#### Interest and Dividend Income

Interest and dividend income increased $0.7 million, or 276.6%, and $1.3 million, or 227.5%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The increases were attributable to higher average investment balances and increasing interest rates during the current year periods compared to prior year periods.

#### Interest and Dividend Income of Investments of CIP

Interest and dividend income of investments of CIP increased $5.8 million, or 25.2%, and $2.1 million, or 3.1%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The increases were primarily due to higher average interest rates.

#### Interest Expense of CIP

Interest expense of CIP represents interest expense on the notes payable of CIP. Interest expense of CIP increased $6.9 million, or 51.4%, and $4.5 million, or 10.7%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. The increases during the three and nine months ended September 30, 2022 were primarily due to higher average interest rates.

### Income Tax Expense (Benefit)

The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 35.2% and 24.0% for the nine months ended September 30, 2022 and 2021, respectively. The higher estimated effective tax rate for the nine months ended September 30, 2022 was primarily due to valuation allowances recorded in the current year for the tax effects of unrealized losses on certain Company investments.

### Liquidity and Capital Resources

#### Certain Financial Data

The following table summarizes certain financial data relating to our liquidity and capital resources:

*(in thousands)*

| Balance Sheet Data | September 30, 2022 2022 vs. 2021% | December 31, 2021 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $309,248 | $378,921 | $(69,673) | (18.4)% |
| Investments | 98,245 | 108,890 | (10,645) | (9.8)% |
| Contingent consideration | 133,628 | 162,564 | (28,936) | (17.8)% |
| Debt | 255,428 | 266,346 | (10,918) | (4.1)% |
| Redeemable noncontrolling interests | 124,442 | 138,965 | (14,523) | (10.5)% |
| Total equity | 805,939 | 836,627 | (30,688) | (3.7)% |

*(in thousands)*

| Cash Flow Data Provided by (Used in): | Nine Months Ended September 30, 2022 | 2021 | Change 2022 vs. 2021% |  |
| --- | ---: | ---: | ---: | ---: |
| Operating activities | $154,850 | $423,679 | $(268,829) | (63.5)% |
| Investing activities | (25,747) | (16,525) | (9,222) | 55.8% |
| Financing activities | (318,968) | (153,513) | (165,455) | 107.8% |

### Overview

At September 30, 2022, we had $309.2 million of cash and cash equivalents and $98.2 million of investments, which included $73.1 million of investment securities, compared to $378.9 million of cash and cash equivalents and $108.9 million of investments, which included $80.3 million of investment securities, at December 31, 2021.

### Uses of Capital

Our main uses of capital related to operating activities comprise employee compensation and related benefit costs, which include annual incentive compensation, other operating expenses, which primarily consist of investment research, technology costs, professional fees, distribution and occupancy 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 quarters of 2022 and 2021, we paid $151.6 million and $96.9 million, respectively, in incentive compensation earned during the years ended December 31, 2021 and 2020, respectively.

In addition to operating activities, other uses of cash could 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 our common stock, or withholding obligations for the net settlement of employee share transactions; (v) investments in our infrastructure; (vi) investments in inorganic growth opportunities that may require upfront and/or future payments; (vii) integration costs, including restructuring and severance, related to acquisitions, if any; and (viii) purchases of affiliate noncontrolling interests.

### Capital and Reserve Requirements

We operate an SEC registered broker-dealer subsidiary that is subject to certain rules regarding minimum net capital. The broker-dealer is required to maintain a ratio of "aggregate indebtedness" to "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 September 30, 2022, the ratio of aggregate indebtedness to net capital of our broker-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 sponsored funds. CIP represent investment products for which we provide investment management services and where we either have a controlling financial interest or are considered the primary beneficiary of an investment product that is considered a variable interest entity.

### Operating Cash Flow

Net cash provided by operating activities of $154.9 million for the nine months ended September 30, 2022 changed by $268.8 million from net cash provided by operating activities of $423.7 million for the same period in the prior year primarily due to a $207.0 million reduction in net sales of investments by CIP and a decrease in accrued compensation and other liability balances.

### Investing Cash Flow

Cash flows from investing activities consist primarily of capital expenditures and other investing activities related to our business operations. Net cash used in investing activities was $25.7 million for the nine months ended September 30, 2022 compared to net cash used in investing activities of $16.5 million in the same period for the prior year. The increase in cash used in investing activities during the nine months ended September 30, 2022 compared to the prior year period related to cash paid for the Stone Harbor acquisition in the nine months ended September 30, 2022.

### Financing Cash Flow

Cash flows from financing activities consist primarily of transactions related to our common shares, issuance and repayment of debt by us and our CIP, payments of contingent consideration and changes to noncontrolling interests. Net cash used in financing activities increased by $165.5 million to $319.0 million for the nine months ended September 30, 2022 from $153.5 million for the nine months ended September 30, 2021. The net change was primarily due to an inflow of $81.2 million from the refinancing of our credit agreement in the prior year, an increase from the prior year in outflows from repurchases of common shares of $47.5 million and contingent consideration payments of $33.0 million, partially offset by a decrease of $14.5 million in net borrowings of CIP during the nine months ended September 30, 2022 compared to the prior year period.

### Credit Agreement

The Company's credit agreement, as amended (the "Credit Agreement"), comprises (i) a $275.0 million term loan with a seven-year term (the "Term Loan") expiring in September 2028, and (ii) a $175.0 million revolving credit facility with a five-year term expiring in September 2026. During the nine months ended September 30, 2022, the Company repaid $12.1 million outstanding under its Term Loan. At September 30, 2022, $262.2 million was outstanding under the Term Loan and there were no outstanding borrowings under the revolving credit facility. In accordance with ASC 835, *Interest*, the amounts outstanding under the Company's Term Loan are presented in the Condensed Consolidated Balance Sheet net of related debt issuance costs, which were $6.8 million as of September 30, 2022.

### Critical Accounting Policies and Estimates

Our financial statements and the accompanying notes are prepared in accordance with 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 2021 Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our 2021 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, 2022.

### Recently Issued Accounting Pronouncements

For a discussion of accounting standards, see Note 2 in our condensed consolidated financial statements.

## Market risk

As filed, 315 characters.

The Company is primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices. During the three and nine months ended September 30, 2022, there were no material changes to the information contained in Part II, Item 7A of the Company's 2021 Annual Report on Form 10-K.

## Controls and procedures

As filed, 1,735 characters.

### 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"), is recorded, processed, summarized and reported within the time periods specified in the SEC'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 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. 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, 2022, the end of the period covered by this Quarterly Report on Form 10-Q.

### Changes in Internal Control 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.

## Risk factors

As filed, 136 characters.

There have been no material changes to the Company’s risk factors from those previously reported in our 2021 Annual Report on Form 10-K.

Filed Nov 8, 2022.
Source: SEC EDGAR, the filing index for accession 0000883237-22-000246. Last ingested by Listed: Oct 30, 2026, 14:15 ET. No prices; not investment advice.