MidCap Financial Investment (MFIC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Apollo Investment Corporation for the quarterly period ended December 31, 2018, including various statements and detailed schedules of investments Statements of Assets and Liabilities As of December 31, 2018, total assets increased to $2.38 billion, while total liabilities rose more significantly to $1.07 billion, leading to a decrease in net assets to $1.32 billion and a decline in Net Asset Value (NAV) per share to $19.03 Key Balance Sheet Data (in thousands) | Metric | Dec 31, 2018 (Unaudited) | Mar 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,383,667 | $2,311,810 | | Investments at fair value | $2,307,966 | $2,248,047 | | Total Liabilities | $1,067,062 | $893,724 | | Debt | $994,487 | $789,846 | | Net Assets | $1,316,605 | $1,418,086 | | Net Asset Value Per Share | $19.03 | $19.67 | Statements of Operations For the three months ended December 31, 2018, the company reported a net decrease in net assets of $1.2 million, or ($0.02) per share, primarily due to a significant increase in net realized and unrealized losses Statements of Operations Highlights (in thousands) | Metric | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | Nine Months Ended Dec 31, 2018 | Nine Months Ended Dec 31, 2017 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $64,041 | $64,753 | $193,666 | $197,798 | | Net Expenses | $32,554 | $30,786 | $98,469 | $96,353 | | Net Investment Income | $31,487 | $33,967 | $95,197 | $101,445 | | Net Realized and Change in Unrealized Losses | ($32,665) | ($28,134) | ($55,096) | ($35,043) | | Net Increase (Decrease) in Net Assets | ($1,178) | $5,833 | $40,101 | $66,402 | | Earnings (Loss) Per Share — Basic | ($0.02) | $0.08 | $0.56 | $0.91 | Statements of Changes in Net Assets For the nine months ended December 31, 2018, net assets decreased by $101.5 million, primarily due to distributions to stockholders and common stock repurchases offsetting the increase from operations Changes in Net Assets (Nine Months Ended Dec 31, 2018, in thousands) | Description | Amount | | :--- | :--- | | Net Assets at beginning of period | $1,418,086 | | Net Increase from Operations | $40,101 | | Distributions to Stockholders | ($95,533) | | Repurchase of common stock | ($46,049) | | Net decrease in net assets | ($101,481) | | Net Assets at End of Period | $1,316,605 | Statements of Cash Flows For the nine months ended December 31, 2018, net cash used in operating activities was $46.3 million, a significant shift from the prior year, while net cash provided by financing activities was $55.8 million due to net debt issuances Cash Flow Summary (Nine Months Ended, in thousands) | Activity | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Net Cash Used in/Provided by Operating Activities | ($46,251) | $118,114 | | Net Cash Used in/Provided by Financing Activities | $55,821 | ($109,778) | | Net increase in cash and equivalents | $9,570 | $8,336 | Schedule of Investments This section details the company's investment portfolio by industry, type, cost, and fair value as of December 31, 2018, showing a total fair value of approximately $2.31 billion with concentrations in Aviation, Business Services, and Healthcare Portfolio Composition by Industry (at Fair Value, Dec 31, 2018) | Industry Classification | Percentage of Total Investments | | :--- | :--- | | Aviation and Consumer Transport | 19.7% | | Business Services | 14.5% | | Healthcare & Pharmaceuticals | 13.3% | | High Tech Industries | 8.0% | | Transportation – Cargo, Distribution | 7.1% | | Energy - Oil & Gas | 7.0% | | Other | 30.4% | | Total Investments | 100.0% | - The portfolio is categorized into Non-controlled/non-affiliated, Non-controlled/affiliated, and Controlled investments, with fair values of $1.49 billion, $51.2 million, and $764.0 million, respectively, as of December 31, 2018[81] Notes to Financial Statements The notes provide detailed explanations of the company's significant accounting policies, including investment valuation, income recognition, fair value measurements, related party transactions, debt obligations, stockholders' equity, commitments, and financial highlights Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations for the quarter ended December 31, 2018, covering business overview, investment portfolio activity, revenue and expense drivers, and liquidity, noting a strategic shift towards first lien secured debt Portfolio and Investment Activity For the nine months ended December 31, 2018, the company made $1.03 billion in new investments, resulting in net investment activity of $93.2 million, with the portfolio composition shifting significantly towards first lien secured debt (64%) while maintaining a stable weighted average yield of 9.6% Portfolio Composition Change (at Fair Value) | Portfolio Composition | Dec 31, 2018 | Mar 31, 2018 | | :--- | :--- | :--- | | First lien secured debt | 64% | 50% | | Second lien secured debt | 24% | 31% | | Total secured debt | 88% | 82% | | Unsecured debt | 0% | 5% | | Other | 12% | 13% | Investment Activity (in millions) | Period | Investments Made | Investments Sold/Repaid | Net Investment Activity | | :--- | :--- | :--- | :--- | | Three Months Ended Dec 31, 2018 | $305.3 | ($290.7) | $14.6 | | Nine Months Ended Dec 31, 2018 | $1,027.8 | ($934.6) | $93.2 | Results of Operations For the nine months ended December 31, 2018, total investment income decreased to $193.7 million, while net expenses increased to $98.5 million, resulting in a net increase in net assets from operations of $40.1 million after significant net realized and unrealized losses - The decrease in investment income for the nine months ended Dec 31, 2018, was primarily driven by a $4.3 million decrease in dividend income and a $1.7 million decrease in total interest income (including PIK)[364] - The increase in net expenses for the nine-month period was mainly due to a $2.2 million increase in interest and other debt expenses and a $2.2 million increase in other general and administrative expenses, partially offset by a $2.3 million decrease in management and incentive fees[366] - For the nine months ended Dec 31, 2018, significant net realized losses included $30.0 million from WTI Crude Oil options and $11.9 million from the write-off of Elements Behavioral Health, Inc[370] Liquidity and Capital Resources The company's liquidity is sourced from its Senior Secured Facility, debt offerings, and cash from operations, with total debt obligations at $1.005 billion as of December 31, 2018, and an unused capacity of $1.07 billion on its Senior Secured Facility Contractual Maturities of Debt Obligations (as of Dec 31, 2018, in millions) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Senior Secured Facility | $505.0 | $— | $— | $505.0 | $— | | 2043 Notes | $150.0 | $— | $— | $— | $150.0 | | 2025 Notes | $350.0 | $— | $— | $— | $350.0 | | Total Debt Obligations | $1,005.0 | $— | $— | $505.0 | $500.0 | - Distributions paid to stockholders during the nine months ended December 31, 2018, totaled $96.7 million, or $1.35 per share[382] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk due to floating interest rates on its loan portfolio and Senior Secured Facility, with a sensitivity analysis provided to show the estimated annual impact of interest rate changes on net investment income Interest Rate Sensitivity Analysis (as of Dec 31, 2018) | Basis Point Change | Estimated Annual Impact on Net Investment Income | | :--- | :--- | | Up 300 basis points | $20.1 million | | Up 100 basis points | $6.7 million | | Down 100 basis points | ($6.9 million) | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018, with no material changes to internal control over financial reporting identified during the quarter - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[391] - No changes in internal control over financial reporting occurred during the third fiscal quarter of 2019 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[392] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is a defendant in a complaint alleging "fraudulent conveyance" related to the bankruptcy of DSI Renal Holdings, with an alleged share of $41 million in damages, and intends to vigorously defend itself - The company is involved in a legal proceeding related to the bankruptcy of DSI Renal Holdings. The complaint seeks damages of approximately $425 million, of which the company's alleged share is $41 million, plus punitive damages[396] Item 1A. Risk Factors This section refers to the risk factors discussed in the company's Annual Report on Form 10-K for the year ended March 31, 2018, which could materially affect the business Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity, showing $166.1 million of common stock repurchased under publicly announced plans as of December 31, 2018, with $33.9 million remaining under current authorization Share Repurchase Plan Summary (as of Dec 31, 2018) | Agreement Date | Maximum Authorized | Repurchased | Remaining | | :--- | :--- | :--- | :--- | | August 5, 2015 | $50.0 million | $50.0 million | $— | | December 14, 2015 | $50.0 million | $50.0 million | $— | | September 14, 2016 | $50.0 million | $50.0 million | $— | | October 30, 2018 | $50.0 million | $16.1 million | $33.9 million | | Total | $200.0 million | $166.1 million | $33.9 million | Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period Item 4. Mine Safety Disclosures This section is not applicable to the company Item 5. Other Information The company reported no other information for this item Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and a Fee Offset Agreement