What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-11 · 212 added, 109 removed, 291 unchanged (52% of the section changed)

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Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our” shall mean Victory Capital Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries.

The following discussion is intended to assist in the understanding of our financial position at March 31, 2020 and December 31, 2019, results of operations for the three months ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended

December 31, 201 9 .

The following discussion is intended to assist in the understanding of our financial position at June 30, 2020 and December 31, 2019, results of operations for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2019.

This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Item 1A.

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We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business.

While COVID-19 did not have a material adverse effect on our reported results for our first quarter, the extent to which the COVID-19 pandemic impacts our business, operations and financial results going forward will depend on numerous evolving factors that we may not be able to accurately predict, including:

While COVID-19 did not have a material adverse effect on our reported results for our first and second quarters, the extent to which the COVID-19 pandemic impacts our business, operations and financial results going forward will depend on numerous evolving factors that we may not be able to accurately predict, including:

the duration and scope of the pandemic;

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We are a diversified global asset management firm operating a next generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform.

We have $123.8 billion in assets under management (“AUM”) as of March 31, 2020.

We have $129.1 billion in assets under management (“AUM”) as of June 30, 2020.

Our differentiated model features a scalable operating platform that provides centralized distribution, marketing and operations infrastructure to our Franchises and Solutions.

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Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily rules-based.

We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand.

We offer our Solutions Platform through a variety of vehicles, including separate accounts, unified managed accounts (“UMA”), mutual funds and VictoryShares which is our exchange traded fund (“ETF”) brand.

Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions.

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Systems and processes are customized as necessary to support our investment processes and operations.

We maintain relationships with multiple vendors for the majority of our outsourced functions, which we believe mitigates vendor‑specific risk.

We maintain relationships with multiple vendors for the majority of our outsourced

functions, which we believe mitigates vendor ‑specific risk.

We also have information security, business continuity and data privacy programs in place to help mitigate risk.

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Additionally, we believe having a majority of our expenses tied to AUM and the number of client accounts provides downside margin protection should there be sustained net outflows or adverse market conditions.

Professionals within our institutional, retail and direct member distribution channels and marketing organization sell our products through our centralized distribution model.

Professionals within our institutional, retail and direct distribution channels and marketing organization sell our products through our centralized distribution model.

Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators seeking sub-advisers.

Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs.

Our direct member channel serves the investment needs of individual clients including USAA members and the military community.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $123.8 billion at March 31, 2020.

We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct member distribution channels with deep penetration.

Our direct distribution channel serves the investment needs of individual clients including USAA members and the military community.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $129.1 billion at June 30, 2020.

USAA AMCO Acquisition

Effective July 1, 2019, the Company completed the USAA AMCO Acquisition, a transformative acquisition that increased AUM by $81.1 billion and significantly impacted our financial results for the three month period ended March 31, 2020.

The acquisition not only increased AUM and revenue, but also introduced additional personnel expenses and new and additional operating expenses such as third party distribution costs, expenses related to a transfer services agreement with USAA, 529 College Savings Plan, and direct member channel expenses that the Company did not incur prior to the acquisition.

Effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company (“USAA Adviser”) and Victory Capital Transfer Agency, Inc.

(“VCTA”), formally known as the USAA Transfer Agency Company.

The transformative acquisition increased AUM by $81.1 billion and significantly impacted our financial results for the three and six month periods ended June 30, 2020.

The acquisition not only increased AUM and revenue, but also introduced additional personnel expenses and new and additional operating expenses such as third party distribution costs, expenses related to a transfer services agreement with USAA, 529 College Savings Plan, and direct distribution channel expenses that the Company did not incur prior to the acquisition.

In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion.

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We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs.

Through the acquisition, the Company has the rights to offer products and services using the USAA brand for a period of time and the opportunity to offer its products to USAA members through a direct member channel.

In addition, we have entered into a referral agreement with USAA for members that are interested in investing in USAA Funds or the USAA 529 College Savings Plan.

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A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing date.

The estimated fair value of contingent consideration arrangements as of March 31, 2020 was $113.2 million and consist of the USAA AMCO earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

Refer to Note 4, Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition.

The estimated fair value of contingent consideration arrangements as of June 30, 2020 was $118.5 million and consist of the USAA AMCO earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

Refer to Note 4, Acquisitions for further details on the USAA AMCO Acquisition.

Business Highlights

Assets under management :

AUM at March 31, 2020 decreased by $28.1 billion, or 18.5%, to $123.8 billion from $151.8 billion at December 31, 2019, driven by negative market action and net outflows of $25.2 billion and $2.9 billion, respectively.

AUM at March 31, 2020 and 2019 was $123.8 billion and $58.1 billion, respectively.

We generated $14.9 billion in gross flows and $2.9 billion in negative net flows for the three months ended March 31, 2020 compared to $3.0 billion in gross flows and $1.1 billion in negative net flows for the same period in 2019.

AUM at June 30, 2020 increased by $5.3 billion, or 4.3%, to $129.1 billion from $123.8 billion at March 31, 2020, driven by positive market action of $17.2 billion partially offset by net outflows of $11.9 billion.

Net flows for the quarter ended June 30, 2020 were comprised of $3.5 billion of long-term outflows and $8.4 billion of short-term outflows.

AUM at June 30 , 20 20 and 201 9 was $ 129.1 billion and $ 64.1 billion, respectively.

We generated $ 9.6 billion in gross flows and $11.9 billion in negative net flows for the three months ended June 30, 2020 compared to $ 7.5 billion in gross flows and $3.7 billion in positive net flows for the same period in 201 9 .

AUM at June 30, 2020 and 2019 was $129.1 billion and $64.1 billion, respectively.

We generated $24.5 billion in gross flows and $14.8 billion in negative net flows for the six months ended June 30, 2020 compared to $10.6 billion in gross flows and $2.6 billion in positive net flows for the same period in 2019.

Net flows for six months ended June 30, 2020 were comprised of $6.6 billion of long-term outflows and $8.2 billion of short-term outflows.

Investment performance :

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We ranked 17 th overall on a one-year basis for 2019.

This is the 3 rd consecutive year that we have

been ranked among the top 10 best fund families and the 6 th c onsecutive year that we have been ranked among the top 25 best fund families by Barron’s .

This is the 3 rd consecutive year that we have been ranked among the top 10 best fund families and the 6 th consecutive year that we have been ranked among the top 25 best fund families by Barron’s .

In July 2020, Victory Capital became a signatory to the United Nations-supported Principles for Responsible Investment, broadening our commitment to responsible investing and formalizing what our autonomous Investment Franchises and Solutions Platform have been doing for many years.

Each of our Investment Franchises follows an approach to incorporating environmental, social and governance (“ESG”) considerations that best suits its own investment process or the objectives of its clients.

Financial highlights :

Total revenue for the three months ended March 31, 2020 was $204.4 million compared to $87.5 million for the same period in 2019.

Net income was $57.2 million for the three months ended March 31, 2020 compared to $14.5 million for the same period in 2019.

Adjusted EBITDA was $91.5 million for the three months ended March 31, 2020, or 44.8% of revenue, compared to $33.6 million, or 38.4% of revenue, for the same period in 2019.

Total revenue for the three months ended June 30, 2020 was $181.9 million compared to $91.4 million for the same period in 2019.

For the six months ended June 30, 2020 and 2019, total revenue was $386.3 million and $178.8 million, respectively.

Net income was $44.7 million for the three months ended June 30, 2020 compared to $14.4 million for the same period in 2019.

For the six months ended June 30, 2020 and 2019, net income was $101.9 million and $28.9 million, respectively.

Adjusted EBITDA was $86.3 million for the three months ended June 30, 2020, or 47.5% of revenue, compared to $36.6 million, or 40.0% of revenue, for the same period in 2019.

For the six months ended June 30, 2020, Adjusted EBITDA was $177.8 million, or 46.0% of revenue, compared to $70.2 million, 39.2% of revenue, for the same period in 2019.

Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted EBITDA calculation and reconciliation of generally accepted accounting principles (“GAAP”) net income to Adjusted EBITDA.

Adjusted Net Income was $61.7 million for the three months ended March 31, 2020 compared to $21.9 million for the three months ended March 31, 2019.

Adjusted Net Income with tax benefit was $65.1 million for the three months ended June 30, 2020 compared to $27.7 million for the three months ended June 30, 2019.

For the six months ended June 30, 2020, Adjusted Net Income with tax benefit was $133.5 million compared to $53.0 million for the same period in 2019.

Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income.

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The following table is a summary of key performance indicators utilized by management to assess results of operations:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions, except for basis points and percentages)

AUM at period end

Net short term flows

Net long term flows

Total revenue

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(in millions)

For the Three Months Ended March 31, 2020

For the Three Months Ended June 30, 2020

Beginning AUM

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Net transfers

For the Three Months Ended March 31, 2019

For the Three Months Ended June 30, 2019

Beginning AUM

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Net transfers

(in millions)

Six Months Ended

June 30, 2020

Beginning AUM

Gross client cash inflows

Gross client cash outflows

Net client cash flows

Market appreciation / (depreciation)

Net transfers

Six Months Ended

June 30, 2019

Beginning AUM

Gross client cash inflows

Gross client cash outflows

Net client cash flows

Market appreciation / (depreciation)

Net transfers

The following table presents our AUM by distribution channel as of the dates indicated:

As of March 31,

As of June 30,

(in millions)

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Mutual Funds (1)

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Beginning AUM

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Net transfers

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

Beginning AUM

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Net transfers

(in millions)

Mutual Funds (1)

Six Months Ended June 30, 2020

Beginning AUM

Gross client cash inflows

Gross client cash outflows

Net client cash flows

Market appreciation (depreciation)

Net transfers

Six Months Ended June 30, 2019

Beginning AUM

Gross client cash inflows

Gross client cash outflows

Net client cash flows

Market appreciation (depreciation)

Net transfers

Includes institutional and retail share classes, money market and Variable Insurance Products or VIP funds.

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Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.

March 31, 2020 AUM compared to December 31, 2019 AUM .

At March 31, 2020, our total AUM was $123.8 billion, a decrease of $28.1 billion, or 18.5%, from $151.8 billion at December 31, 2019, primarily driven by negative market action and net outflows of $25.2 billion and $2.9 billion, respectively.

The negative market action was driven by pullback in the market as a result of the economic uncertainty due to the COVID-19 pandemic.

Net outflows were driven by our fixed income strategies, U.S.

mid cap equity strategies and Solutions platform of $0.9 billion, $0.8 billion and $0.7 billion, respectively.

Money market and short-term assets accounted for $12.1 billion, or 9.8%, of the total AUM of $123.8 billion at March 31, 2020.

June 30, 2020 AUM compared to March 31, 2020 AUM .

At June 30, 2020, our total AUM was $129.1 billion, an increase of $5.3 billion, or 4.3%, from $123.8 billion at March 31, 2020, primarily driven by positive market action of $17.2 billion partially offset by net outflows of $11.9 billion.

Net outflows were driven by our money market and short-term assets, fixed income strategies, and our Solutions platform of $ 8.4 billion , $ 1 .

3 billion and $ 0.

7 billion, respectively.

Money market and short-term net outflows were primarily due to The Charles Schwab Company’s acquisition of USAA’s Investment Management Company in May 2020.

At June 30, 2020 m oney market and short-term assets accounted for $ 3.7 billion, or 2.9 %, of the total AUM of $ 129.1 billion.

June 30, 2020 AUM compared to December 31, 2019 AUM .

Total AUM decreased by $22.8 billion, or 15.0%, to $129.1 billion at June 30, 2020 compared to $151.8 billion at December 31, 2019.

The decrease in AUM was primarily due to net outflows of $14.8 billion and negative market action of $8.0 billion.

The net outflows were driven by $8.2 billion of money market and short-term assets, $2.2 billion in our fixed income strategies, $1.4 billion in our Solutions Platform and $1.4 billion in our U.S.

mid cap equity strategies.

Money market and short-term net outflows were primarily due to The Charles Schwab Company’s acquisition of USAA’s Investment Management Company in May 2020.

GAAP Results of Operations

The following table presents our GAAP results of operations for the three months ended March 31, 2020 and 2019.

The financial results for the three months ended March 31, 2020 reflect the USAA AMCO Acquisition that closed on July 1, 2019.

The acquisition significantly impacted our financial results for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019.

Three Months Ended March 31,

The following table presents our GAAP results of operations for the three months ended June 30, 2020 and 2019.

The financial results for the three and six months ended June 30, 2020 reflect the USAA AMCO Acquisition that closed on July 1, 2019.

The acquisition significantly impacted our financial results for the three and six months ended June 30, 2020 when compared to the three and six months ended June 30, 2019.

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except per share data)

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Income from operations

Other (expense) income

Interest income and other (expense) income

Other income (expense)

Interest income and other income (expense)

Interest expense and other financing costs

Loss on debt extinguishment

Gain (loss) on debt extinguishment

Total other expense, net

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Investment Management Fees

Three months ended March 31, 2020 compared to March 31, 2019 .

Investment management fees increased by $72.5 million, or 97.4%, to $146.9 million for the three months ended March 31, 2020 from $74.4 million for the same period in 2019 due to an increase in average AUM year over year, partially offset by a decrease in the realized fee rate due to a shift in asset mix.

Average AUM was $144.1 billion for the three months ended March 31, 2020 compared to $57.0 billion for the same period in 2019, largely attributable to acquired assets in the USAA AMCO Acquisition.

Three months ended June 30, 2020 compared to June 30, 2019 .

Investment management fees increased by $52.0 million, or 66.6%, to $130.0 million for the three months ended June 30, 2020 from $78.0 million for the same period in 2019 due to an increase in average AUM over the comparable period.

Average AUM was $128.9 billion for the three months ended June 30, 2020 compared to $60.1 billion for the same period in 2019, largely attributable to acquired assets in the USAA AMCO Acquisition.

Six months ended June 30, 2020 compared to June 30, 2019 .

Investment management fees increased by $124.5 million, or 81.6%, to $276.9 million for the six months ended June 30, 2020 from $152.5 million for the same period in 2019 due to the same factors as

discussed above in the quarterly section.

Average AUM was $ 136.5 billion and $ 58.6 billion , respectively, for the six months ended June 30, 20 20 and 201 9 .

Fund Administration and Distribution Fees

Three months ended March 3 1 , 20 20 compared to March 31 , 201 9 .

Fund administration and distribution fees increased by $44.

5 million, or 340.3 %, to $5 7 .

5 million for the three months ended March 31, 2020 from $ 13.1 million for the same period in 201 9 due to an increase in average AUM year over year and the addition of $ 20.7 million in transfer agent fees with the USAA Funds related to the USAA AMCO Acquisition, partially offset by a shift in the mix of assets to lower 12b-1 paying share classes.

Three months ended June 30, 2020 compared to June 30, 2019 .

Fund administration and distribution fees increased by $38.5 million, or 289.4%, to $51.9 million for the three months ended June 30, 2020 from $13.3 million for the same period in 2019 due to an increase in average AUM year over year and the addition of $18.9 million in transfer agent fees with the USAA Funds related to the USAA AMCO Acquisition, partially offset by a shift in the mix of assets to lower 12b-1 paying share classes.

Six months ended June 30, 2020 compared to June 30, 2019 .

Fund administration and distribution fees increased by $83.0 million, or 314.6%, to $109.4 million for the six months ended June 30, 2020 from $26.4 million for the same period in 2019 due to the same factors as discussed above in the quarterly section.

Personnel Compensation and Benefits

The following table presents the components of GAAP personnel compensation and benefits expense for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The following table presents the components of GAAP personnel compensation and benefits expense for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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The value of the equity awards is recognized as compensation expense over the vesting period.

Three months ended March 31, 2020 compared to March 31, 2019 .

Personnel compensation and benefits were $47.6 million for the three months ended March 31, 2020, an increase of $13.1 million, or 37.9%, from $34.5 million for the same period in 2019 primarily attributable to an increase in the headcount due to the USAA AMCO Acquisition.

Incentive compensation and equity awards granted to employees and directors were $20.5 million and $6.0 million, respectively, for the three months ended March 31, 2020, compared to $14.7 million and $1.5 million, respectively, for the same period in 2019.

Salaries, payroll related taxes and employee benefits were $16.6 million and $14.9 million, respectively, for the three months ended March 31, 2020 and 2019.

Three months ended June 30, 2020 compared to June 30, 2019 .

Personnel compensation and benefits were $49.1 million for the three months ended June 30, 2020, an increase of $13.6 million, or 38.2%, from $35.5 million for the same period in 2019 primarily attributable to an increase in the headcount due to the USAA AMCO Acquisition.

Incentive compensation and equity awards granted to employees and directors were $20.8 million and $3.9 million, respectively, for the three months ended June 30, 2020, compared to $16.0 million and $3.8 million, respectively, for the same period in 2019.

Salaries, payroll related taxes and employee benefits were $20.4 million and $12.6 million, respectively, for the three months ended June 30, 2020 and 2019.

Six months ended June 30, 2020 compared to June 30, 2019 .

Personnel compensation and benefits increased by $26.6 million, or 38.0%, to $96.7 million for the six months ended June 30, 2020 from $70.0 million for the same period in 2019 due to the same factors as discussed above in the quarterly section.

Salaries, payroll related taxes and employee benefits were $37.0 million and $27.5 million, respectively, for the six months ended June 30, 2020 and 2019.

Incentive compensation was $41.3 million for the six months ended June 30, 2020 compared to $30.6 million for the same period in 2019.

Distribution and Other Asset‑Based Expenses

The following table presents the components of distribution and other asset-based expenses for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The following table presents the components of distribution and other asset-based expenses for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Total distribution and other asset-based expenses

Three months ended March 31, 2020 compared to March 31, 2019 .

Three months ended June 30, 2020 compared to June 30, 2019 .

Distribution and other asset-based expenses are primarily based on AUM.

For the three months ended March 31, 2020, distribution and other asset-based expenses were $54.9 million, an increase of $39.1 million, or 247.9%, from $15.8 million for the same period in 2019, primarily due to the USAA AMCO Acquisition.

For the three months ended June 30, 2020, distribution and other asset-based expenses were $41.6 million, an increase of $25.4 million, or 157.3%, from $16.2 million for the same period in 2019, primarily due to the USAA AMCO Acquisition.

The acquisition introduced new operating expenses that the Company did not incur prior to the acquisition, such as platform distribution costs paid to third parties and USAA, sub-transfer agent service costs and 529 College Savings Plan expenses.

Six months ended June 30, 2020 compared to June 30, 2019 .

Distribution and other asset-based expenses were $96.5 million for the six months ended June 30, 2020, an increase of $64.5 million, or 202.0%, from $31.9 million for the same period in 2019 due to the same factors as discussed above in the quarterly section.

General and Administrative

Three months ended March 31, 2020 compared to March 31, 2019 .

General and administrative expenses were $11.9 million for the three months ended March 31, 2020 compared to $7.1 million for the same period in 2019.

The increase of $4.8 million, or 67.7%, was primarily due to the addition of transition service agreement costs related to the USAA AMCO Acquisition partially offset by $3.5 million in Ohio Commercial Activity Tax refunds received for tax years 2015-2019.

Three months ended June 30, 2020 compared to June 30, 2019 .

General and administrative expenses were $13.3 million for the three months ended June 30, 2020 compared to $7.1 million for the same period in 2019.

The increase of $6.2 million, or 87.5%, was primarily due to additional, ongoing costs associated with the transition service agreement related to the USAA AMCO Acquisition.

Also contributing, but to a lesser extent, were increases in facility, technology and professional fees.

Six months ended June 30, 2020 compared to June 30, 2019 .

For the six months ended June 30, 2020 and 2019, general and administrative expenses were $25.2 million and $14.2 million, respectively, for a year over year increase of $11.0 million, or 77.6%.

The increase was due to the same factors as discussed above in the quarterly section partially offset by $3.5 million in Ohio Commercial Activity Tax refunds received in 2020 for tax years 2015-2019.

Depreciation and Amortization

Three months ended March 31, 2020 compared to March 31, 2019 .

Depreciation and amortization decreased by $1.2 million, or 22.4%, to $4.1 million for the three months ended March 31, 2020 from $5.2 million for the same period in 2019, due to a reduction in amortization expense related to definite-lived intangible assets in connection with the Munder Capital Management acquisition that became fully amortized in the fourth quarter of 2019.

Three months ended June 30, 2020 compared to June 30, 2019 .

Depreciation and amortization decreased by $1.1 million, or 20.8%, to $4.2 million for the three months ended June 30, 2020 from $5.3 million for the same period in 2019, due to a reduction in amortization expense related to definite-lived intangible assets in connection with the Munder Capital Management acquisition that became fully amortized in the fourth quarter of 2019.

Six months ended June 30, 2020 compared to June 30, 2019 .

Depreciation and amortization decreased by $2.3 million, or 21.6%, to $8.2 million for the six months ended June 30, 2020 from $10.5 million for the same period in 2019, due to the same factors as discussed above in the quarterly section.

Change in Value of Consideration Payable for Acquisition of Business

Three months ended March 31, 2020 compared to March 31, 2019 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition decreased by $5.5 million, resulting in a change in the estimated fair value of consideration payable of $5.5 million for the three months ended March 31, 2020.

Three months ended June 30, 2020 compared to June 30, 2019 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $5.3 million, resulting in a change in the estimated fair value of consideration payable of $5.3 million for the three months ended June 30, 2020.

Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

Six months ended June 30, 2020 compared to June 30, 2019 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition decreased by $0.2 million, resulting in a change in the estimated fair value of consideration payable of $0.2 million for the six months ended June 30, 2020.

Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

Acquisition‑Related Costs

Three months ended March 31, 2020 compared to March 31, 2019 .

Acquisition-related costs for the three months ended March 31, 2020 were ($0.1) million and $2.8 million for the three months ended March 31, 2019.

The March 31, 2019 acquisition related costs were related to the USAA AMCO acquisition.

Three months ended June 30, 2020 compared to June 30, 2019 .

Acquisition-related costs for the three months ended June 30, 2020 were ($23) thousand and $2.8 million for the three months ended June 30, 2019.

The June 30, 2019 acquisition related costs were related to the USAA AMCO acquisition.

Six months ended June 30, 2020 compared to June 30, 2019 .

Acquisition-related costs for the six months ended June 30, 2020 and 2019 were ($0.1) million and $5.6 million, respectively.

The six months ended June 30, 2019 were due to the same factors as discussed above in the quarterly section.

Restructuring and Integration Costs

Three months ended March 31, 2020 compared to March 31, 2019 .

Restructuring and integration costs for the three months ended March 31, 2020 was $1.0 million compared to no such costs for the same period in 2019.

The increase is primarily due integration and conversion costs related to the USAA AMCO Acquisition.

Three months ended June 30, 2020 compared to June 30, 2019 .

Restructuring and integration costs for the three months ended June 30, 2020 was $2.6 million and $1.8 million for the three months ended June 30, 2019.

The increase is primarily due to integration and conversion costs related to the USAA AMCO Acquisition.

Six months ended June 30, 2020 compared to June 30, 2019 .

Restruc turi ng and integration costs were $ 3.6 million and $ 1.8 million, respectively, for the six months ended June 30, 20 20 and 201 9 , with the increase due to the same factors as discussed above in the quarterly section.

Interest Income and Other Income (Expense)

Three months ended March 31, 2020 compared to March 31, 2019 .

Interest income and other income/(expense) was expense of $4.2 million for the three months ended March 31, 2020 compared to income of $1.8 million for the same period in 2019.

The expense for the three months ended March 31, 2020 was primarily due to a $4.8 million reduction in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents.

Three months ended June 30, 2020 compared to June 30, 2019 .

Interest income and other income/(expense) was income of $3.0 million for the three months ended June 30, 2020 compared to income of $0.7 million for the same period in 2019.

The income for the three months ended June 30, 2020 was primarily due to a $2.6 million increase in the net unrealized fair value of deferred compensation plan investments.

Six months ended June 30, 2020 compared to June 30, 2019 .

For the six months ended June 30, 2020 and 2019, interest income and other income/(expense) was expense of $1.2 million and income of $2.5 million, respectively.

The expense for the six months ended June 30, 2020 was primarily due to a decrease in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents.

The income for the six months ended June 30, 2019 was primarily due to unrealized gains on deferred compensation plan investments and interest income on cash and cash equivalents.

Interest Expense and Other Financing Costs

Three months ended March 31, 2020 compared to March 31, 2019 .

Interest expense and other financing costs increased $6.8 million to $11.4 million for the three months ended March 31, 2020, compared to $4.6 million for the same period in 2019 due an increase in interest payments as a result of a higher debt principal balance over the comparable period as a result of the Company entering into the 2019 Credit Agreement, dated July 1, 2019, in conjunction with the USAA AMCO Acquisition.

Loss on Debt Extinguishment

Three months ended March 31, 2020 compared to March 31, 2019 .

Loss on debt extinguishment was $1.1 million and $0.0 million, respectively, for the three months ended March 31, 2020 and 2019.

The Company wrote-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal under the 2019 Credit Agreement.

The Company paid down $38.0 million of debt during the first quarter of 2020.

Three months ended June 30, 2020 compared to June 30, 2019 .

Interest expense and other financing costs increased $5.2 million to $9.7 million for the three months ended June 30, 2020, compared to $4.5 million for the same period in 2019 due to an increase in interest payments as a result of a higher debt principal balance over the comparable period as a result of the Company entering into the 2019 Credit Agreement, dated July 1, 2019, in conjunction with the USAA AMCO Acquisition.

Six months ended June 30, 2020 compared to June 30, 2019 .

For the six months ended June 30, 2020 and 2019, interest expense and other financing costs were $21.1 million and $9.1 million, respectively.

The expense increase is primarily due to the same factors as discussed above in the quarterly section.

Gain (Loss) on Debt Extinguishment

Three months ended June 30, 2020 compared to June 30, 2019 .

Gain on debt extinguishment was $0.1 million and $0.0 million, respectively, for the three months ended June 30, 2020 and 2019.

During the quarter ended June 30, 2020, the Company repurchased and retired outstanding debt below par in the open market and recognized a $1.0 million gain partially offset by $0.9 million in the write-off of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due.

The Company also paid down $33.3 million of debt during the second quarter of 2020.

Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

Six months ended June 30, 2020 compared to June 30, 2019 .

Loss on debt extinguishment was $0.9 million for the six months ended June 30, 2020, due to the write-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal under the 2019 Credit Agreement partially offset by gains recognized on open market debt repurchases and retirements below par.

Income Tax Expense

Three months ended March 31, 2020 compared to March 31, 2019 .

The effective tax rate for the three months ended March 31, 2020 and 2019 was 22.7% and 24.9%, respectively.

The decrease in the effective tax rate was primarily due to higher excess tax benefits on share-based compensation.

Three months ended June 30, 2020 compared to June 30, 2019 .

The effective tax rate for the three months ended June 30, 2020 and 2019 was 24.5% and 23.7%, respectively.

The increase in the effective tax rate was primarily due to a decrease in excess tax benefits on share-based compensation compared to the same period in 2019.

Six months ended June 30, 2020 compared to June 30, 2019 .

For the six months ended June 30, 2020 and 2019, the effective tax rate was 23.5% and 24.3%, respectively, due to an increase in excess tax benefits on share-based compensation over the comparable period.

Refer to Note 8, Income Taxes, for further details on our income taxes.

Supplemental Non‑GAAP Financial Information

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The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Debt issuance costs (7)

Earnings/losses from equity method investments (8)

Losses from equity method investments (8)

Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Adding back direct incremental costs of acquisitions, including restructuring costs.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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During the period of uncertainty related to the COVID-19 pandemic, we will continue to monitor our liquidity.

The following table shows our liquidity position as of March 31, 2020 and December 31, 2019.

The following table shows our liquidity position as of June 30, 2020 and December 31, 2019.

(in thousands)

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We continue to actively monitor the impact of the COVID-19 pandemic on the collectability of certain receivables.

We maintained a $100.0 million revolving credit facility at March 31, 2020 and December 31, 2019 (under the 2019 Credit Agreement) which had $100.0 million undrawn as of March 31, 2020 and December 31, 2019.

We maintained a $100.0 million revolving credit facility at June 30, 2020 and December 31, 2019 (under the 2019 Credit Agreement) which had $100.0 million undrawn as of June 30, 2020 and December 31, 2019.

2019 Credit Agreement and 2020 Debt Repricing

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All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019.

As of March 31, 2020, the Company has repaid $186.0 million of the outstanding term loans under the 2019 Credit Agreement.

As of March 31, 2020, we were in compliance with our financial performance covenant.

As of June 30, 2020, the Company has repaid or repurchased and retired $219.3 million of the outstanding term loans under the 2019 Credit Agreement.

As of June 30, 2020, we were in compliance with our financial performance covenant.

Refer to Note 4, Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further information on the 2019 Credit Agreement.

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Refer to Note 9, Debt, for further information on the repricing.

Subsequent to March 31, 2020, the Company established a trading account to opportunistically take advantage of potential short term trading arbitrage with respect to our term loan.

In April 2020, the Company established a trading account to opportunistically take advantage of potential short term trading arbitrage with respect to our term loan.

An alternative to principal prepayments, this allows us to buy back our outstanding term loan in the open market and retire the debt.

As we look to pay down our debt, this alternative is preferable at this time to principal prepayments when our debt trades at a discount to par.

Subsequent to March 31, 2020, we have bought back $31 million of our term loan, for a total debt reduction of $217 million since July 1, 2019.

A total of $71.3 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired during the first six months of 2020.

The Company repaid $38.0 million in outstanding term loans in the first three months of 2020 and recorded a $1.0 million loss on debt extinguishment.

During the three months ended June 30, 2020, the Company repaid or repurchased and retired $33.3 million of outstanding term loans and recorded a $0.1 million gain on debt

extinguishment.

Subsequent to June 30, 2020, we reduced outstanding term loan principal by an additional $20.5 million through open market term loan debt repurchases and prepayments, for a total debt reduction of $239.8 million since July 1, 2019.

2020 Swap Transaction

On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction (“Swap”) to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026.

Refer to Note 1 4 , De rivatives , for further information on the Swap .

At June 30, 2020, the $450 million notional value Swap had a fair value of $11.0 million, which was included in other liabilities on the unaudited Condensed Consolidated Balance Sheets.

For the three and six months ended June 30, 2020, the Company recognized a loss, net of tax, of $3.5 million and $8.3 million, respectively, in accumulated other comprehensive loss.

For the three and six months ended June 30, 2020, the Company reclassified a gain of $0.5 million from accumulated other comprehensive loss to interest expense and other financing costs on the unaudited Condensed Consolidated Statements of Operations.

Refer to Note 14, Derivatives, for further information on the Swap.

Capital Requirements

VCA is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels.

Victory Capital Services is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels.

In addition, we have certain non-U.S.

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The following table is derived from our unaudited Condensed Consolidated Statements of Cash Flows:

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

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Net cash used in financing activities

Operating Activities – Cash provided by operating activities during the three months ended March 31, 2020 was $51.9 million, compared to $17.9 million of cash provided by operating activities for the same period in 2019.

Operating Activities – Cash provided by operating activities during the six months ended June 30, 2020 was $120.9 million, compared to $49.3 million of cash provided by operating activities for the same period in 2019.

The $71.6 million increase in cash provided by operating activities was primarily due to a $73.0 million and $13.1 million increase in net income and non-cash items, partially offset by a $14.4 million net decrease in working capital source of cash.

The net decrease in working capital source of cash was primarily due to accounts payable and accrued expenses and compensation which was a $35.6 million use of cash for the three months ended March 31, 2020 compared to a $4.6 million use of cash for the same period last year, due to new and additional operating expenses that the Company did not incur prior to the USAA AMCO acquisition, such as distribution costs paid to third parties and USAA, sub-transfer agent service costs, 529 College Savings Plan expenses, and direct member channel expenses.

Investing Activities – Cash used in investing activities during the three months ended March 31, 2020 was $2.2 million and consisted of net trading activity of $1.5 million and $0.7 million of property and equipment purchases.

The nature of our trading activities is further described in Note 2, Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

For the three months ended March 31, 2019, cash used in investing activities was $1.4 million and consisted of $1.0 million of net trading activity and $0.5 million of property and equipment purchases.

Financing Activities – Cash used in financing activities during the three months ended March 31, 2020 was $49.6 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, and payment of dividends of $38.0 million, $6.0 million and $3.5 million, respectively.

Cash used in financing activities for the same period in 2019 was $1.7 million and consisted primarily of the repurchase of common stock of $1.6 million.

The net decrease in working capital source of cash was primarily due to accounts payable and accrued expenses and compensation which was a $33.5 million use of cash for the six months ended June 30, 2020 compared to a $0.1 million use of cash for the same period last year, due to new and additional operating expenses that the Company did not incur prior to the USAA AMCO acquisition, such as distribution costs paid to third parties and USAA, sub-transfer agent service costs, 529 College Savings Plan expenses, and direct member channel expenses.

Investing Activities – Cash used in investing activities during the six months ended June 30, 2020 was $6.9 million and consisted of property and equipment purchases of $5.3 million and $1.6 million of net trading activity.

For the six months ended June 30, 2019, Cash used in investing activities was $2.5 million and consisted primarily of net trading activity of $1.6 million and $0.9 million of property and equipment purchases.

Financing Activities – Cash used in financing activities during the six months ended June 30, 2020 was $95.8 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $70.3 million, $13.1 million, $7.0 million, and $6.1 million, respectively.

Cash used in financing activities during the six months ended June 30, 2019 was $2.9 million and was mostly attributable to $3.5 million of repurchases of our Class A common stock, slightly offset by $0.7 million in net activity related to stock-based equity awards.

Contractual Obligations

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On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026.

As of March 31, 2020, the Company recorded a $6.3 million liability, which is included in other liabilities in the unaudited Condensed Consolidated Balance Sheets.

As of June 30, 2020, the Company

recorded a $ 11.0 million liability , which is included in o ther liabilities in the unaudited Condensed Consolidated Balance Sheets .

Refer to Note 1 4 , Derivatives, for further discussion regarding the swap transaction.

For the three month period ended March 31, 2020, the Company recorded a $5.5 million reduction in contingent consideration arrangement liabilities representing the USAA AMCO Acquisition earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

For the six month period ended June 30, 2020, the Company recorded a $0.2 million reduction in contingent consideration arrangement liabilities representing the USAA AMCO Acquisition earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

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Holders of restricted stock awards that are unvested at the time the quarterly dividends are declared are entitled to be paid these dividends as and when the restricted stock vests.

As of March 31, 2020 and December 31, 2019, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.2 million and $1.3 million, respectively, which was not recorded as a liability as of the balance sheet date.

As of June 30, 2020 and December 31, 2019, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.3 million, which was not recorded as a liability as of the balance sheet date.

A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis