Victory Capital Holdings, Inc. 10-Q

Item 1. Financial Statements Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (U naudited) (In thousands, except shares data) June 30, 2020 December 31, 2019 Assets Cash and cash equivalents $ 55,184 $ 37,121 Receivables 74,805 95,093 Prepaid expenses 6,252 4,852 Investments 18,507 19,076 Property and equipment, net 16,009 13,240 Goodwill 404,750 404,750 Other intangible assets, net 1,168,885 1,175,471 Other assets 3,448 3,706 Total assets $ 1,747,840 $ 1,753,309 Liabilities and stockholders' equity Accounts payable and accrued expenses $ 78,265 $ 89,203 Accrued compensation and benefits 33,944 54,842 Consideration payable for acquisition of business 118,500 118,700 Deferred tax liability, net 14,785 5,486 Other liabilities 30,273 22,668 Long-term debt, net 857,233 924,539 Total liabilities 1,133,000 1,215,438 Stockholders' equity Class A common stock, $ 0.01 par value per share: 2020 - 400,000,000 shares authorized, 18,717,074 shares issued and 16,335,021 shares outstanding; 2019 - 400,000,000 shares authorized, 18,099,772 shares issued and 16,414,617 shares outstanding 187 181 Class B common stock, $ 0.01 par value per share: 2020 - 200,000,000 shares authorized, 54,504,294 shares issued and 51,360,645 shares outstanding; 2019 - 200,000,000 shares authorized, 53,937,394 shares issued and 51,281,512 shares outstanding 545 539 Additional paid-in capital 636,386 624,766 Class A treasury stock, at cost: 2020 - 2,382,053 shares; 2019 - 1,685,155 shares ( 33,104 ) ( 21,524 ) Class B treasury stock, at cost: 2020 - 3,143,649 shares; 2019 - 2,655,882 shares ( 40,912 ) ( 31,386 ) Accumulated other comprehensive loss ( 8,403 ) — Retained earnings (deficit) 60,141 ( 34,705 ) Total stockholders' equity 614,840 537,871 Total liabilities and stockholders' equity $ 1,747,840 $ 1,753,309 See the accompanying notes to the unaudited condensed consolidated financial statements. 3 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue Investment management fees $ 130,032 $ 78,042 $ 276,913 $ 152,453 Fund administration and distribution fees 51,854 13,318 109,394 26,386 Total revenue 181,886 91,360 386,307 178,839 Expenses Personnel compensation and benefits 49,105 35,542 96,676 70,043 Distribution and other asset-based expenses 41,630 16,182 96,490 31,949 General and administrative 13,289 7,087 25,177 14,174 Depreciation and amortization 4,166 5,263 8,216 10,485 Change in value of consideration payable for acquisition of business 5,300 ( 14 ) ( 200 ) ( 14 ) Acquisition-related costs ( 23 ) 2,787 ( 92 ) 5,564 Restructuring and integration costs 2,605 1,788 3,603 1,788 Total operating expenses 116,072 68,635 229,870 133,989 Income from operations 65,814 22,725 156,437 44,850 Other (expense) income Interest income and other (expense) income 2,966 656 ( 1,206 ) 2,489 Interest expense and other financing costs ( 9,710 ) ( 4,520 ) ( 21,118 ) ( 9,144 ) Gain (loss) on debt extinguishment 137 — ( 917 ) — Total other expense, net ( 6,607 ) ( 3,864 ) ( 23,241 ) ( 6,655 ) Income before income taxes 59,207 18,861 133,196 38,195 Income tax expense ( 14,487 ) ( 4,478 ) ( 31,310 ) ( 9,285 ) Net income $ 44,720 $ 14,383 $ 101,886 $ 28,910 Earnings per share of common stock Basic $ 0.66 $ 0.21 $ 1.50 $ 0.43 Diluted $ 0.61 $ 0.20 $ 1.38 $ 0.40 Weighted average number of shares outstanding Basic 67,821 67,583 67,806 67,552 Diluted 73,204 73,521 73,818 72,962 Dividends declared per share of common stock $ 0.05 $ — $ 0.10 $ — See the accompanying notes to the unaudited condensed consolidated financial statements. 4 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (U naudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income $ 44,720 $ 14,383 $ 101,886 $ 28,910 Other comprehensive (loss) income, net of tax Net unrealized loss on cash flow hedges ( 3,529 ) — ( 8,349 ) — Net unrealized gain (loss) on foreign currency translation 13 ( 8 ) ( 54 ) 4 Total other comprehensive (loss) income, net of tax ( 3,516 ) ( 8 ) ( 8,403 ) 4 Comprehensive income $ 41,204 $ 14,375 $ 93,483 $ 28,914 See the accompanying notes to the unaudited condensed consolidated financial statements. 5 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (U naudited) (In thousands) Accumulated Additional Other Retained Common Stock Treasury Stock Paid-In Comprehensive (Deficit) Class A Class B Class A Class B Capital Loss Earnings Total Balance, December 31, 2019 $ 181 $ 539 $ ( 21,524 ) $ ( 31,386 ) $ 624,766 $ — $ ( 34,705 ) $ 537,871 Issuance of common stock — — — — 26 — — 26 Share conversion - Class B to A 4 ( 4 ) — — — — — — Repurchase of shares — — ( 4,394 ) — — — — ( 4,394 ) Shares withheld related to net settlement of equity awards — — — ( 8,787 ) — — — ( 8,787 ) Vesting of restricted share grants — 7 — — ( 7 ) — — — Exercise of options — 3 — — 1,690 — — 1,693 Other comprehensive loss — — — — — ( 4,887 ) — ( 4,887 ) Share-based compensation — — — — 5,993 — — 5,993 Dividends paid — — — — — — ( 3,601 ) ( 3,601 ) Net income — — — — — — 57,166 57,166 Balance, March 31, 2020 185 545 ( 25,918 ) ( 40,173 ) 632,468 ( 4,887 ) 18,860 581,080 Issuance of common stock — — — — 32 — — 32 Share conversion - Class B to A 2 ( 2 ) — — — — — — Repurchase of shares — — ( 7,186 ) — — — — ( 7,186 ) Shares withheld related to net settlement of equity awards — — — ( 739 ) — — — ( 739 ) Vesting of restricted share grants — 2 — — ( 2 ) — — — Exercise of options — — — — 1 — — 1 Other comprehensive loss — — — — — ( 3,516 ) — ( 3,516 ) Share-based compensation — — — — 3,887 — — 3,887 Dividends paid — — — — — — ( 3,439 ) ( 3,439 ) Net income — — — — — — 44,720 44,720 Balance, June 30, 2020 $ 187 $ 545 $ ( 33,104 ) $ ( 40,912 ) $ 636,386 $ ( 8,403 ) $ 60,141 $ 614,840 Accumulated Additional Other Common Stock Treasury Stock Paid-In Comprehensive Retained Class A Class B Class A Class B Capital (Loss) Income Deficit Total Balance, December 31, 2018 $ 153 $ 553 $ ( 8,045 ) $ ( 21,719 ) $ 604,401 $ ( 86 ) $ ( 119,709 ) $ 455,548 Issuance of common stock — — — — 13 — — 13 Share conversion - Class B to A 4 ( 4 ) — — — — — — Repurchase of shares — — ( 1,344 ) — — — — ( 1,344 ) Shares withheld related to net settlement of equity awards — — — ( 318 ) — — — ( 318 ) Exercise of options — 1 — — 220 — — 221 Cumulative effect of adoption of ASU 2016-01 and 2018-02 — — — — — 62 ( 62 ) — Other comprehensive income — — — — — 12 — 12 Share-based compensation — — — — 1,547 — — 1,547 Dividends paid — — — — — — ( 41 ) ( 41 ) Net income — — — — — — 14,527 14,527 Balance, March 31, 2019 157 550 ( 9,389 ) ( 22,037 ) 606,181 ( 12 ) ( 105,285 ) 470,165 Issuance of common stock — — — — 16 — — 16 Share conversion - Class B to A 8 ( 8 ) — — — — — — Repurchase of shares — — ( 1,948 ) — — — — ( 1,948 ) Shares withheld related to net settlement of equity awards — — — ( 123 ) — — — ( 123 ) Exercise of options — 2 — — 733 — — 735 Other comprehensive loss — — — — — ( 8 ) — ( 8 ) Share-based compensation — — — — 3,755 — — 3,755 Dividends paid — — — — — — ( 24 ) ( 24 ) Net income — — — — — — 14,383 14,383 Balance, June 30, 2019 $ 165 $ 544 $ ( 11,337 ) $ ( 22,160 ) $ 610,685 $ ( 20 ) $ ( 90,926 ) $ 486,951 See the accompanying notes to the unaudited condensed consolidated financial statements. 6 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2020 2019 Cash flows from operating activities Net income $ 101,886 $ 28,910 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 11,907 3,075 Depreciation and amortization 8,216 10,485 Deferred financing costs and derivative and accretion expense 2,306 1,216 Stock-based and deferred compensation 9,446 8,743 Change in fair value of contingent consideration obligations ( 200 ) ( 14 ) Unrealized depreciation (appreciation) on investments 2,269 ( 1,886 ) Loss on equity method investment — 154 Loss on debt extinguishment 917 — Changes in operating assets and liabilities: Receivables 19,244 ( 66 ) Prepaid expenses ( 1,400 ) ( 1,087 ) Other assets 14 4 Accounts payable and accrued expenses ( 12,615 ) 8,534 Accrued compensation and benefits ( 20,881 ) ( 8,671 ) Other liabilities ( 198 ) ( 119 ) Net cash provided by operating activities 120,911 49,278 Cash flows from investing activities Purchases of property and equipment ( 5,280 ) ( 892 ) Purchases of trading securities ( 3,641 ) ( 3,054 ) Sales of trading securities 1,990 1,435 Purchases of available-for-sale securities ( 274 ) ( 104 ) Sales of available-for-sale securities 274 104 Net cash used in investing activities ( 6,931 ) ( 2,511 ) Cash flows from financing activities Issuance of Class A common stock, net of underwriter discount 58 29 Issuance of Class B common stock from exercise of stock options 1,694 956 Repurchase of common stock ( 13,057 ) ( 3,526 ) Payments of taxes related to net share settlement of equity awards ( 7,880 ) ( 236 ) Repayment of long-term senior debt ( 70,287 ) — Repayment of promissory note — ( 96 ) Payment of dividends ( 7,008 ) ( 65 ) Receipt of consideration for acquisition 649 — Net cash used in financing activities ( 95,831 ) ( 2,938 ) Effect of changes of foreign exchange rate on cash and cash equivalents ( 86 ) 7 Net increase in cash and cash equivalents 18,063 43,836 Cash and cash equivalents, beginning of period 37,121 51,491 Cash and cash equivalents, end of period $ 55,184 $ 95,327 Supplemental cash flow information Cash paid for interest $ 23,296 $ 7,499 Cash paid for income taxes 3,269 6,876 See the accompanying notes to the unaudited condensed consolidated financial statements. 7 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. ORGANIZATION AND NATURE OF BUSINESS Victory Capital Holdings, Inc., a Delaware corporation (along with its wholly-owned subsidiaries, collectively referred to as the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our”) was formed on February 13, 2013 for the purpose of acquiring Victory Capital Management Inc. (“VCM”) and Victory Capital Advisers, Inc. (“VCA”), which occurred on August 1, 2013. Effective June 30, 2020, Victory Capital Advisers, Inc. changed its name to Victory Capital Services, Inc. (“VCS”). On February 12, 2018, the Company completed the initial public offering (the “IPO”) of its Class A common stock, which trades on the NASDAQ under the symbol “VCTR.” On and effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Adviser and VCTA, formerly known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services. The USAA AMCO Acquisition includes USAA’s mutual fund and ETF businesses and its 529 College Savings Plan (collectively, the “USAA Mutual Fund Business”). Refer to Note 4, Acquisitions, for further details on the acquisition. VCM is a registered investment adviser managing assets through open-end mutual funds, separately managed accounts, unified management accounts, ETFs, collective trust funds, wrap separate account programs and Undertakings Collective Investment in Transferable Securities (“UCITs”). VCM also provides mutual fund administrative services for the Victory Portfolios, Victory Variable Insurance Funds, Victory Institutional Funds and the mutual fund series of the Victory Portfolios II (collectively, the “Victory Funds”), a family of open-end mutual funds, the VictoryShares (the Company’s ETF brand), as well as the USAA Mutual Fund Business, which includes the USAA Mutual Fund Trust, a family of open-end mutual funds (the “USAA Funds”). Additionally, VCM employs all of the Company’s United States investment professionals across its Franchises and Solutions, which are not separate legal entities. VCS is registered with the SEC as an introducing broker-dealer and serves as distributor and underwriter for the Victory Funds and USAA Funds. VCTA is registered with the SEC as a transfer agent for the USAA Funds. NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete annual financial statements. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial condition, results of operations, and cash flows for the interim periods presented. Operating results for the three and six month periods ending June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. Principles of Consolidation The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, after elimination of all intercompany balances and transactions. Our involvement with non-consolidated variable interest entities (“VIEs”) include sponsored investment funds and, in 2019, an equity method investment. For further discussion regarding VIEs, refer to Note 2, Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2019. Use of Estimates and Assumptions The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements and the notes. Actual results may ultimately differ materially from those estimates. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption. COVID-19 did not have a material adverse effect on our reported results for the three and six months ended June 30, 2020. 8 Table of Contents New Accounting Pronouncements Accounting Standards Adopted in 2020 • Derivatives and Hedging: Effective January 1, 2020, the Company early adopted Accounting Standards Update (“ASU”) 2017-12 (“ASU 2017-12”), Derivatives and Hedging (Topic 815) and ASU 2019-04, Codification Improvements to Topic 815, Derivatives and Hedging (“ASU 2019-04”). ASU 2017-12 improves and simplifies accounting rules for hedge accounting to better present the economic results of an entity’s risk management activities in its financial statements and improves the disclosures of hedging arrangements. Various provisions of ASU 2017-12 were subsequently clarified by the Financial Accounting Standards Board (“FASB”) in April 2019 through the issuance of ASU 2019-04. The Company did not have any existing hedging relationships at the time of adoption; therefore, the adoption of ASU 2017-12 and ASU 2019-04 had no impact on our consolidated financial statements. On March 27, 2020, the Company entered into an interest rate swap transaction (the “Swap”) to manage interest rate risk associated with a portion of its floating-rate long term debt (notional amount of $ 450 million). The Swap was designated as a cash flow hedge and the initial prospective quantitative hedge effectiveness assessment was deemed highly effective. Under ASU 2017-12, the Company has the option to perform subsequent assessments of hedge effectiveness qualitatively. The Company has elected to assess the Swap’s hedge effectiveness qualitatively and will verify and document on a quarterly basis that facts and circumstances have not changed. Recently Issued Accounting Standards • Subsequent Measurement of Goodwill: In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) (“ASU 2017-04”) which simplifies the test for goodwill impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (step two) to measure a goodwill impairment charge. Goodwill impairment will be based upon the results of step one of the impairment test, which is defined as the excess of the carrying amount of a reporting unit over its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. The effective date for calendar-year public business entities was January 1, 2020. Due to the Company’s status as an emerging growth company (“EGC”), the new guidance will be effective for the Company’s fiscal year that begins on January 1, 2021 and requires a prospective approach to adoption. Early adoption is permitted for interim or annual goodwill impairment tests. The impact of this new guidance will depend upon the performance of our one reporting unit and the market conditions impacting the fair value. • Leases: In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842) (the “New Lease Standard”) which supersedes previous lease guidance, Accounting Standards Codification (“ASC”) Topic 840 (“ASC Topic 840”). The New Lease Standard requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) on their balance sheet at the commencement date and recognize expenses on their income statement similar to ASC Topic 840 guidance. In addition, the FASB issued ASU 2018-11, Leases Targeted Improvements, which provides a package of practical expedients for entities to apply upon adoption. The effective date for calendar-year public business entities was January 1, 2019. In June 2020, the FASB deferred the effective date of the New Lease Standard for private companies and other companies who had not yet been required to adopt the standard. Due to the Company’s EGC status, we will adopt the New Lease Standard on January 1, 2022. We have assessed and evaluated our portfolio of active real estate leases and are currently surveying our business for other leases. As outlined in our Annual Report on Form 10-K for the year ended December 31, 2019, we have approximately $ 23 million in undiscounted, future minimum cash commitments under net operating leases. The New Lease Standard is expected to result in a gross up on our Consolidated Balance Sheets and to have no material impact to our Consolidated Statements of Operations, our liquidity or our debt covenant compliance under our current credit agreement. • Expected Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 creates a new model for determining current expected credit losses (“CECL”) on trade and other receivables, net investments in leases, contract assets and long-term receivables. The CECL impairment model requires companies to consider the risk of loss even if it is remote and to include forecasts of future economic conditions as well as information about past events and current conditions. The effective date for calendar-year public business entities is January 1, 2020. As an EGC, the Company currently expects to adopt ASU 2016-13 on January 1, 2023. We are currently reviewing the effect of this new standard on our consolidated financial statements. 9 Table of Contents NOTE 3. Revenue RECOGNITION In accordance with the new revenue recognition standard requirements, the following table disaggregates our revenue by type and product: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2020 2019 2020 2019 Investment management fees Mutual funds (Victory/USAA Funds) $ 104,858 $ 52,351 $ 224,372 $ 102,927 ETFs (VictoryShares) 2,446 2,040 5,608 4,056 Separate accounts and other vehicles 23,057 23,817 47,602 45,867 Performance-based fees Separate accounts and other vehicles ( 329 ) ( 166 ) ( 669 ) ( 397 ) Total investment management fees $ 130,032 $ 78,042 $ 276,913 $ 152,453 Fund administration and distribution fees Administration fees Mutual funds (Victory/USAA Funds) $ 26,733 $ 5,391 $ 56,343 $ 10,636 ETFs (VictoryShares) 300 276 685 546 Distribution fees Mutual funds (Victory/USAA Funds) 5,907 7,651 12,703 15,204 Transfer agent fees Mutual funds (USAA Funds) 18,914 — 39,663 — Total fund administration and distribution fees $ 51,854 $ 13,318 $ 109,394 $ 26,386 Total revenue $ 181,886 $ 91,360 $ 386,307 $ 178,839 The following table presents balances of receivables: (in thousands) June 30, 2020 December 31, 2019 Customer receivables Mutual funds (Victory/USAA Funds) $ 53,835 $ 64,407 ETFs (VictoryShares) 1,171 1,391 Separate accounts and other vehicles 19,704 27,836 Receivables from contracts with customers 74,710 93,634 Non-customer receivables 95 1,459 Total receivables $ 74,805 $ 95,093 Revenue The Company’s revenue includes fees earned from providing; • investment management services, • fund administration services, • fund transfer agent services, and • fund distribution services. Revenue is recognized for each distinct performance obligation identified in customer contracts when the performance obligation has been satisfied by transferring services to a customer either over time or at the point in time when the customer obtains control of the service. Revenue is recognized in the amount of variable or fixed consideration allocated to the satisfied performance obligation that Victory expects to be entitled to in exchange for transferring services to a customer. Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Investment management, fund administration and fund distribution fees are generally considered variable consideration as they are typically calculated as a percentage of AUM. Fund transfer agent fees are also considered variable consideration as they are calculated as a percentage of AUM or based on the number of accounts in the fund. In such cases, the amount of fees earned is subject to factors outside of the Company’s control including customer or underlying investor contributions and redemptions and financial 10 Table of Contents market volatility. These fees are considered constrained and are excluded from the transaction price until the asset values or number of accounts on which the customer is billed are calculated and the value of consideration is measurable. The Company has contractual arrangements with third parties to provide certain advisory, administration, transfer agent and distribution services. Management considers whether we are acting as the principal service provider or as an agent to determine whether revenue should be recorded based on the gross amount payable by the customer or net of payments to third-party service providers, respectively. Victory is considered a principal service provider if we control the service that is transferred to the customer. We are considered an agent when we arrange for the service to be provided by another party and do not control the service. Investment Management Fees Investment management fees are received in exchange for investment management services that represent a series of distinct incremental days of investment management service. Control of investment management services is transferred to the customers over time as these customers receive and consume the benefits provided by these services. Investment management fees are calculated as a contractual percentage of AUM and are generally paid in arrears on a monthly or quarterly basis. Investment management fees are recognized as revenue using a time-based output method to measure progress. Revenue is recorded at month end or quarter end when the value of consideration is measured. The amount of investment management fee revenue varies from one reporting period to another as levels of AUM change (from inflows, outflows and market movements) and as the number of days in the reporting period change. The Company may waive certain fees for investment management services provided to the Victory Funds, USAA Funds and VictoryShares and may subsidize certain share classes of the Victory Funds, USAA Funds and VictoryShares to ensure that specified operating expenses attributable to such share classes do not exceed a specified percentage. These waivers and reimbursements reduce the transaction price allocated to investment management services and are recognized as a reduction to investment management fees revenue. The amounts due to the Victory Funds, USAA Funds and VictoryShares for waivers and expense reimbursements represent consideration payable to customers, which is recorded in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets, and no distinct services are received in exchange for these payments. Performance‑based investment management fees, which include fees under performance fee and fulcrum fee arrangements, are included in the transaction price for providing investment management services. Performance-based investment management fees are calculated as a percentage of investment performance on a client’s account versus a specified benchmark or hurdle based on the terms of the contract with the customer. Performance-based investment management fees are variable consideration and are recognized as revenue when it is probable that a significant reversal of the cumulative revenue for the contractual performance period will not occur. Performance-based investment management fees recognized as revenue in the current period may pertain to performance obligations satisfied in prior periods. Fund Administration Fees The Company recognizes fund administration fees as revenue using a time-based output method to measure progress. Fund administration fees are determined based on the contractual rate applied to average daily net assets of the Victory Funds, USAA Funds and VictoryShares for which administration services are provided. Revenue is recorded on a monthly basis when the value of consideration is measured using actual average daily net assets and constraints are removed. The Company has contractual arrangements with a third party to provide certain sub-administration services. We are the primary obligor under the contracts with the Victory Funds, USAA Funds and VictoryShares and have the ability to select the service provider and establish pricing. As a result, fund administration fees and sub-administration expenses are recorded on a gross basis. Fund Transfer Agent Fees The Company recognizes fund transfer agent fees using a time-based output method to measure progress. Fund transfer agent fees are determined based on the contractual rate applied to either the average daily net assets of the USAA Funds for which transfer agent services are provided or number of accounts in the USAA Funds. Revenue is recorded on a monthly basis when the value of consideration is measured using actual average daily net assets or actual number of accounts and constraints are removed. The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. We are the primary obligor under the transfer agency contracts with the USAA Funds and have the ability to select the service provider and establish pricing. As a result, fund transfer agent fees and sub-transfer agent expenses are recorded on a gross basis. Fund Distribution Fees The Company receives compensation for sales and sales-related services promised under distribution contracts with the Victory Funds and USAA Funds. Revenue is measured in an amount that reflects the consideration to which the Company expects to be entitled in exchange for providing distribution services. Distribution fees are generally calculated as a percentage of average net assets in the 11 Table of Contents Victory Funds and USAA Funds. The Company’s performance obligation is satisfied at the point in time when control of the services is transferred to customers, which is upon investor subscription or redemption. Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, the Company may recognize distribution fee revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved. The Company’s distribution fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations. The Company has contractual arrangements with third parties to provide certain distribution services. The Company is the primary obligor under the contracts with the Victory Funds and USAA Funds and has the ability to select the service provider and establish pricing. Substantially all of the Company’s revenue is recorded gross of payments made to third parties. Costs Incurred to Obtain or Fulfill Customer Contracts The Company is required to capitalize certain costs directly related to the acquisition or fulfillment of a contract with a customer. Victory has not identified any sales-based compensation or similar costs that meet the definition of an incremental cost to acquire a contract and as such we have no intangible assets related to contract acquisitions. Direct costs incurred to fulfill services under the Company’s distribution contracts include sales commissions paid to third party dealers for the sale of Class C Shares. The Company may pay upfront sales commissions to dealers and institutions that sell Class C shares of the participating Victory Funds at the time of such sale. Upfront sales commission payments with respect to Class C shares equal 1.00 % of the purchase price of the Class C shares sold by the dealer or institution. When the Company makes an upfront payment to a dealer or institution for the sale of Class C shares, the Company capitalizes the cost of such payment, which is recorded in Prepaid expenses in the unaudited Condensed Consolidated Balance Sheets and amortizes the cost over a 12-month period, the estimated period of benefit. Valuation of Assets Under Management The fair value of assets under management of the Victory Funds, USAA Funds and VictoryShares is primarily determined using quoted market prices or independent third-party pricing services or broker price quotes. In limited circumstances, a quotation or price evaluation is not readily available from a pricing service. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the sponsored products. The same prescribed valuation process is used to price securities in separate accounts and other vehicles for which a quotation or price evaluation is not readily available from a pricing service. For the periods presented, a de minimis amount of the AUM was priced in this manner. NOTE 4. ACQUISITIONS USAA AMCO Acquisition On and effective July 1, 2019, the Company completed the USAA AMCO Acquisition, acquiring 100 % of the outstanding common stock of the USAA Acquired Companies and the USAA Mutual Fund Business. The USAA AMCO Acquisition expands and diversifies the Company’s investment platform, particularly in the fixed income and solutions asset classes, and increases the Company’s size and scale. Additional products added to the Company’s investment platforms include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds. The acquisition also added to the Company’s lineup of asset allocation portfolios and smart beta equity ETFs and provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct distribution channel. Purchase Price During the first quarter of 2020, the Company received a post-closing purchase price adjustment of $ 0.7 million in cash from the sellers related to net working capital adjustments. No further adjustments were recorded through the end of the measurement period on June 30, 2020. Total consideration paid through June 30, 2020 for the USAA AMCO Acquisition was $ 949.4 million, comprised of $ 851.3 million of cash paid at closing plus the acquisition date value of contingent payments due to sellers of $ 98.8 million less $ 0.7 million in net working capital adjustments settled in the first quarter of 2020. 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. To receive any contingent payment in respect of “non-managed money”-related assets for a given year, annual revenue from “non-managed money”-related assets must be at least 80 % of the revenue run-rate (as calculated under the Stock Purchase Agreement) of the USAA Adviser’s “non-managed money”-related assets under management as of the closing date, and to achieve the maximum contingent 12 Table of Contents payment for a given year, such annual revenue must total at least 100 % of that closing date revenue run-rate. Annual contingent payments in respect of “non-managed money”-related assets are subject to certain “catch-up” provisions set forth in the USAA Stock Purchase Agreement. The Company accounted for the acquisition in accordance with ASC 805, Business Combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the USAA AMCO Acquisition. The Company used an independent valuation specialist to assist with the determination of fair value for certain of the acquired assets and assumed liabilities disclosed below. The excess purchase price over the estimated fair values of assets acquired and liabilities assumed of $ 120.6 million was recorded to goodwill in the unaudited Condensed Consolidated Balance Sheets, all of which is expected to be deductible for tax purposes. The goodwill arising from the acquisition primarily results from expected future earnings and cash flows, as well as the synergies created by the integration of the USAA Acquired Companies within our organization. The following table summarizes the estimated amounts of identified acquired assets and liabilities assumed as of the acquisition date: (in thousands) Cash and cash equivalents $ 17,473 Investment management fees receivable 25,353 Fund administration and distribution fees receivable 4,779 Other receivables and prepaid expenses 299 Property and equipment 1,165 Other intangible assets (1) 808,670 Goodwill 120,643 Accounts payable and accrued expenses ( 5,575 ) Accrued compensation and benefits ( 5,907 ) Payable to members and custodians ( 17,473 ) Contingent consideration payable to sellers ( 98,800 ) Total purchase price consideration $ 850,627 (1) Includes $ 750.2 million for indefinite-lived investment advisory contracts, $ 19.1 million for indefinite-lived transfer agent contracts, $ 0.8 million for indefinite-lived distribution contracts, $ 38.2 million for definite-lived trade name assets and $ 0.4 million for definite-lived lease-related assets, all of which were recorded in other intangible assets, net on the unaudited Condensed Consolidated Balance Sheets. The following table summarizes the change in the goodwill balance from December 31, 2019 to June 30, 2020: (in thousands) As of June 30, 2020 Balance, beginning of period $ 404,750 Goodwill recorded in acquisition — Balance, end of period $ 404,750 Contingent Consideration The fair value of contingent consideration payable to sellers at June 30, 2020 was estimated to be $ 118.5 million as compared to $ 118.7 million at December 31, 2019. The decrease in the liability of $ 0.2 million in the six months ended June 30, 2020 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. The fair value of the USAA AMCO Acquisition contingent consideration payable was estimated using the real options method. Revenue related to “non-managed money” assets was simulated in a risk-neutral framework to calculate expected probability-weighted earn out payments, which were then discounted from the expected payment dates at the relevant cost of debt. Significant assumptions and inputs include the “non-managed money” revenue projected annual growth rate, the market price of risk, which adjusts the projected revenue growth rate to a risk-neutral expected growth rate, revenue volatility and discount rate. As of June 30, 2020, the projected annual growth rate for “non-managed money” revenue was approximately 4 %. The market price of risk and revenue volatility of approximately 7 % and 17 %, respectively, were based on data for comparable companies. As the contingent consideration represents a subordinate, unsecured claim of the Company, we have assessed a discount rate of approximately 5.3 %, which incorporates adjustments for credit risk and the subordination of the contingent consideration. Total estimated undiscounted earn out payments ranged from $ 130 million to $ 150 million, the maximum amount payable to sellers. 13 Table of Contents Actual and Pro Forma Results for USAA Acquired Companies Revenue of the USAA Acquired Companies for the three and six months ended June 30, 2020, was as follows: Unaudited Unaudited Three Months Ended Six Months Ended (in millions) June 30, 2020 June 30, 2020 Revenue $ 104.0 $ 221.3 Net income attributable to the USAA Acquired Companies for the three and six months ended June 30, 2020 is impractical to determine as the Company does not prepare discrete financial information at that level. The following Unaudited Pro Forma Condensed Combined Statements of Operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2018. This unaudited information should not be relied upon as indicative of historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future. The historical consolidated financial information of Victory and the USAA Acquired Companies have been adjusted to give effect to unaudited pro forma events that are directly attributable to the transaction, factually supportable and expected to have continuing impact on the combined results. These amounts have been calculated after adjusting the results of the USAA Acquired Companies to reflect additional interest expense, distribution costs, share-based compensation expense, income taxes and intangible asset amortization that would have been expensed assuming the fair value adjustments had been applied on January 1, 2018. In addition, Victory’s and the USAA Acquired Companies’ results were adjusted to remove incentive compensation, legal fees and mutual fund proxy costs directly attributable to the acquisition. Unaudited Unaudited Three Months Ended Six Months Ended (in thousands, except per share amount) June 30, 2019 June 30, 2019 Revenue $ 212.9 $ 417.9 Net income $ 16.9 $ 30.1 Earnings per share of common stock Basic $ 0.25 $ 0.45 Diluted $ 0.23 $ 0.41 Weighted average number of shares outstanding Basic 67,661 67,631 Diluted 73,666 73,086 Acquisition-Related Costs Costs related to acquisitions are summarized below and include legal and filing fees, advisory services, mutual fund proxy voting costs and other one-time expenses related to the transactions. These costs are included in acquisition-related costs in the unaudited Condensed Consolidated Statements of Operations. Acquisition-related costs Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2020 2019 2020 2019 USAA AMCO Acquisition $ 12 $ 2,222 $ ( 112 ) $ 4,808 Other ( 35 ) 565 20 756 Total acquisition-related costs $ ( 23 ) $ 2,787 $ ( 92 ) $ 5,564 14 Table of Contents Restructuring and Integration Costs In connection with business combinations, asset purchases and changes in business strategy, the Company incurs costs integrating investment platforms, products and personnel into existing systems, processes and service provider arrangements and restructuring the business to capture operating expense synergies. The following table presents the rollforward of restructuring and integration liabilities, which are recorded in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets, for the three and six months ended June 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2020 2019 2020 2019 Liability balance, beginning of period $ 2.5 $ 0.1 $ 3.0 $ 0.1 Severance Expense - USAA AMCO 0.9 1.4 0.9 1.4 Integration costs - USAA AMCO 1.7 0.4 2.7 0.4 Total restructuring and integration costs 2.6 1.8 3.6 1.8 Settlement of liabilities ( 2.3 ) ( 0.4 ) ( 3.8 ) ( 0.4 ) Liability balance, end of period $ 2.8 $ 1.5 $ 2.8 $ 1.5 NOTE 5. Fair Value Measurements The Company determines the fair value of certain financial and nonfinancial assets and liabilities. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value determinations utilize a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the fair value hierarchy contains three levels: • Level 1—Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets. • Level 2—Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the asset or liability being measured. • Level 3—Valuation inputs are unobservable and significant to the fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The table below shows liabilities measured at fair value on a recurring basis. As of June 30, 2020 (in thousands) Total Level 1 Level 2 Level 3 Financial Liabilities Interest Rate Swap Liability $ ( 10,957 ) $ - $ ( 10,957 ) $ - Contingent Consideration Arrangements ( 118,500 ) - - ( 118,500 ) Total Financial Liabilities $ ( 129,457 ) $ - $ ( 10,957 ) $ ( 118,500 ) As of December 31, 2019 (in thousands) Total Level 1 Level 2 Level 3 Financial Liabilities Contingent Consideration Arrangements $ ( 118,700 ) $ - $ - $ ( 118,700 ) Total Financial Liabilities $ ( 118,700 ) $ - $ - $ ( 118,700 ) The Swap liability represents amounts owed as of June 30, 2020 under a floating-to-fixed interest rate swap transaction entered into by the Company on March 27, 2020. The Swap effectively fixes the interest rate at 3.465 % on $ 450 million of the outstanding Term Loan balance through the Term Loan’s maturity in July 2026. The fair value of the Swap is included in other liabilities on the unaudited Condensed Consolidated Balance Sheets at June 30, 2020. Pricing was determined based on a third party, model-derived valuation in which all significant inputs are observable in active markets (Level 2). Refer to Note 14, Derivatives, for further detail on the Swap. The contingent consideration arrangement liabilities represent the USAA AMCO Acquisition estimated earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. Significant unobservable inputs for the option pricing model used to determine the estimated fair value of the USAA AMCO Acquisition earn-out payment liability include the “non-managed money” revenue projected growth rate, revenue volatility, market 15 Table of Contents price of risk and discount rate. An increase in market price of risk, discount rate and revenue volatility results in a lower fair value for the earn-out payment liability, while an increase in the projected growth rate for “non-managed money” revenue results in a higher fair value for the earn-out payment liability. Refer to Note 4, Acquisitions, for further details related to the valuation of contingent consideration payable related to the USAA AMCO Acquisition. Changes in the fair value of the liability, realized or unrealized, are recorded in earnings and are included in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. The following table presents the balance of the contingent consideration arrangement liabilities at December 31, 2019 and June 30, 2020, respectively. (in thousands) Contingent Consideration Liabilities Balance, December 31, 2019 $ ( 118,700 ) USAA AMCO change in fair value measurement 200 Balance, June 30, 2020 $ ( 118,500 ) There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy from December 31, 2019 to June 30, 2020. The Company recognizes transfers at the end of the reporting period. The net carrying value of accounts receivable and accounts payable approximates fair value due to the short‑term nature of these assets and liabilities. The fair value of our long-term debt at June 30, 2020 is considered to be its carrying value as the interest rate on the bank debt is variable and approximates current market rates. As a result, Level 2 inputs are utilized to determine the fair value of our long‑term debt. The fair value of the Company’s money market investment ($ 10.1 million within cash and cash equivalents), available-for-sale investments and trading securities are measured using Level 1 inputs, which are the market prices for shares in these open-end mutual funds . NOTE 6. Related-Party Transactions The Company considers certain funds that it manages, including the Victory Funds, the USAA Funds, the VictoryShares and collective trust funds that it sponsors (the “Victory Collective Funds”), to be related parties as a result of our advisory relationship. The Company receives investment management, administrative, distribution and compliance fees in accordance with contracts that VCM and VCS have with the Victory Funds and the USAA Funds and has invested a portion of its balance sheet cash in the USAA Treasury Money Market Fund and earns interest on the amount invested in this fund. We also receive investment management fees from the VictoryShares and Victory Collective Funds under VCM’s advisory contracts with these funds and administrative fees from the VictoryShares. In addition, we receive transfer agent fees in accordance with a contract that VCTA has with the USAA Funds. The table below presents balances and transactions involving related parties included in the unaudited Condensed Consolidated Balance Sheets and unaudited Condensed Consolidated Statements of Operations. • Included in cash and cash equivalents is cash held in the USAA Treasury Money Market Fund. • Included in receivables (fund administration and distribution fees) are amounts due from the Victory Funds and USAA Funds for compliance services and amounts due from the USAA Funds for transfer agent services. • Included in revenue (fund administration and distribution fees) are amounts earned for compliance services and transfer agent services. • Realized and unrealized gains and losses and dividend income on investments in the Victory Funds classified as available-for-sale securities and investments in the Victory Funds and USAA Funds classified as trading securities and dividend income on investments in the USAA Treasury Money Market Fund are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations. • Amounts due to the Victory Funds, USAA Funds and VictoryShares for waivers of investment management fees and reimbursements of fund operating expenses are included in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets and represent consideration payable to customers. 16 Table of Contents (in thousands) June 30, 2020 December 31, 2019 Related party assets Cash and cash equivalents $ 10,086 $ 10,060 Receivables (investment management fees) 40,443 47,872 Receivables (fund administration and distribution fees) 15,822 19,313 Investments (available-for-sale securities, fair value) 738 771 Investments (trading securities, fair value) 17,464 17,914 Total $ 84,553 $ 95,930 Related party liabilities Accounts payable and accrued expenses (fund reimbursements) $ 4,648 $ 4,316 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2020 2019 2020 2019 Related party revenue Investment management fees $ 108,966 $ 55,716 $ 233,276 $ 109,508 Fund administration and distribution fees 51,854 13,318 109,394 26,386 Total $ 160,820 $ 69,034 $ 342,670 $ 135,894 Related party other income (expense) Interest income and other income (expense) $ 2,702 $ 455 $ ( 2,096 ) $ 1,815 NOTE 7. Investments As of June 30, 2020 and December 31, 2019, the Company held both available-for-sale securities and trading securities. Available-for-sale investments consist entirely of seed capital investments in certain Victory Funds and USAA Funds. Trading securities are held under a deferred compensation plan and include Victory Funds, USAA Funds and third party mutual funds. Available‑For‑Sale Securities A summary of the cost and fair value of investments classified as available-for-sale were as follows: Gross Unrealized Fair (in thousands) Cost Gains (Losses) Value As of June 30, 2020 $ 701 $ 52 $ ( 15 ) $ 738 As of December 31, 2019 696 85 ( 10 ) 771 Unrealized and realized gains and losses on available‑for‑sale investments are recognized in the accompanying unaudited Condensed Consolidated Statements of Operations as “Interest income and other income (expense).” Proceeds from sales and realized gains and losses from available-for-sale securities in the periods ended June 30, 2020 and 2019 were as follows: Sale Realized (in thousands) Proceeds Gains (Losses) For the three months ended June 30, 2020 $ 274 $ 18 $ ( 13 ) For the three months ended June 30, 2019 104 4 — Sale Realized (in thousands) Proceeds Gains (Losses) For the six months ended June 30, 2020 $ 274 $ 18 $ ( 13 ) For the six months ended June 30, 2019 104 4 — 17 Table of Contents Trading Securities A summary of the cost and fair value of investments classified as trading securities were as follows: Gross Unrealized Fair (in thousands) Cost Gains (Losses) Value As of June 30, 2020 $ 20,265 $ 242 $ ( 2,738 ) $ 17,769 As of December 31, 2019 18,670 733 ( 1,098 ) 18,305 Unrealized and realized gains and losses on trading securities are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations. Proceeds from sales and realized gains and losses from trading securities in the periods ended June 30, 2020 and 2019 were as follows: Sale Realized (in thousands) Proceeds Gains (Losses) For the three months ended June 30, 2020 $ 899 $ 17 $ ( 96 ) For the three months ended June 30, 2019 865 12 ( 12 ) Sale Realized (in thousands) Proceeds Gains (Losses) For the six months ended June 30, 2020 $ 1,990 $ 37 $ ( 142 ) For the six months ended June 30, 2019 1,435 14 ( 31 ) NOTE 8. Income Taxes The effective tax rate for the three and six months ended June 30, 2020 and 2019 differs from the United States federal statutory rate primarily as a result of state and local income taxes, excess tax benefits on share-based compensation and certain non-deductible expenses. For the three months ended June 30, 2020 and 2019, the provision for income taxes was $ 14.5 million and $ 4.5 million, or 24.5 % and 23.7 %, of pre-tax income respectively. For the six months ended June 30, 2020 and 2019, the provision for income taxes was $ 31.3 million and $ 9.3 million, or 23.5 % and 24.3 % of pre-tax income, respectively. The effective tax rate for the three months ended June 30, 2020 was higher than the effective tax rate for the same period in 2019 due to lower excess tax benefits on share-based compensation partially offset by a lower state tax rate. The effective tax rate for the six months ended June 30, 2020 was lower than the effective tax rate for the same period in 2019 due mainly to higher excess tax benefits on share-based compensation and a lower state tax rate. No valuation allowance was recorded for deferred tax assets in the periods ended June 30, 2020 and 2019. At June 30, 2020, the Company had no liability for gross unrecognized tax benefits. It had a $ 0.2 million liability for interest and penalties on previously unrecognized gross tax benefits, which is included in “Other liabilities” in the accompanying unaudited Condensed Consolidated Balance Sheets. The Company expects that the amount of unrecognized tax benefits will change in the next 12 months; however, the Company does not expect the change to have a material impact on its consolidated financial statements . The following table presents the changes in gross unrecognized tax benefits, excluding interest and penalties, for the three and six months ending June 30, 2020 and 2019. (in thousands) 2020 2019 Beginning balance, January 1 $ 2,582 $ — Additions based on tax positions related to current period 280 — Reductions related to settlement of tax matters ( 908 ) — Ending balance, March 31 $ 1,954 $ — Additions based on tax positions related to current period — — Reductions related to settlement of tax matters ( 1,954 ) — Ending balance, June 30 $ — $ — 18 Table of Contents NOTE 9. Debt 2020 Debt Repricing Concurrent with the USAA AMCO Acquisition on July 1, 2019, the Company (i) entered into the 2019 Credit Agreement, (ii) repaid all indebtedness outstanding under the previous credit agreement (dated February 2018), and (iii) terminated the previous credit agreement. On January 17, 2020, we entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the First Amendment, the Company repriced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $ 952.0 million (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of July 2026 , except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.50 %, compared to 3.25 % under the Existing Term Loans. The following table summarizes the components of long-term debt under the 2019 Credit Agreement in the unaudited Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019: (in thousands) June 30, 2020 December 31, 2019 Term loan principal outstanding $ 880,689 $ 952,000 Unamortized debt issuance costs ( 14,717 ) ( 17,230 ) Unamortized debt discount ( 8,739 ) ( 10,231 ) Long-term debt, net $ 857,233 $ 924,539 The 2019 Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of the first lien leverage ratio, measured as of the last day of each fiscal quarter on which outstanding borrowings under the revolving credit facility exceed 35.0 % of the commitments thereunder (excluding certain letters of credit), of no greater than 3.80 to 1.00. As of June 30, 2020, there were no outstanding borrowings under the revolving credit facility and we were in compliance with our financial performance covenant. 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. Refer to Note 15, Subsequent Events, for information related to term loan activity subsequent to June 30, 2020. 2020 Swap Transaction On March 27, 2020, the Company executed the Swap, 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. Refer to Note 14, Derivatives, for further information on the Swap. Interest Expense As of June 30, 2020, the term loans under the 2019 Credit Agreement had an interest period of three months and an interest rate of 3.94 %. Including the impact of amortization of debt issuance costs and original issue discount described herein, the effective yield for term loans under the 2019 Credit Agreement as of June 30, 2020 was 4.37 %. The following table summarizes the components of interest expense and other financing costs in the unaudited Condensed Consolidated Statements of Operations for the periods ended June 30, 2020 and 2019: For the Three Months Ended June 30, For the Six Months Ended June 30, (in thousands) 2020 2019 2020 2019 Interest expense $ 8,967 $ 3,743 $ 19,023 $ 7,623 Amortization of debt issuance costs 756 366 1,537 730 Amortization of debt discount 377 147 769 293 Interest rate swap (income) expense ( 519 ) — ( 519 ) — Other 129 264 308 498 Total $ 9,710 $ 4,520 $ 21,118 $ 9,144 19 Table of Contents NOTE 10. Equity Shares Rollforward The following tables present the changes in the number of shares of common stock issued and repurchased (in thousands): Shares of Common Stock Issued Shares of Treasury Stock Class A Class B Class A Class B Balance, December 31, 2019 18,100 53,937 ( 1,685 ) ( 2,656 ) Issuance of shares 2 — — — Share conversion - Class B to A 406 ( 406 ) — — Repurchase of shares — — ( 240 ) — Vesting of restricted share grants — 719 — — Exercise of options — 288 — — Shares withheld related to net settlement of equity awards — — — ( 445 ) Balance, March 31, 2020 18,508 54,538 ( 1,925 ) ( 3,101 ) Issuance of shares 2 — — — Share conversion - Class B to A 207 ( 207 ) — — Repurchase of shares — — ( 457 ) — Vesting of restricted share grants — 173 — — Exercise of options — — — — Shares withheld related to net settlement of equity awards — — — ( 43 ) Balance, June 30, 2020 18,717 54,504 ( 2,382 ) ( 3,144 ) Shares of Common Stock Issued Shares of Treasury Stock Class A Class B Class A Class B Balance, December 31, 2018 15,281 55,284 ( 856 ) ( 2,147 ) Issuance of shares 1 — — — Share conversion - Class B to A 382 ( 382 ) — — Repurchase of shares — — ( 123 ) — Vesting of restricted share grants — 40 — — Exercise of options — 72 — — Shares withheld related to net settlement of equity awards — — — ( 29 ) Balance, March 31, 2019 15,664 55,014 ( 979 ) ( 2,176 ) Issuance of shares 1 — — — Share conversion - Class B to A 809 ( 809 ) — — Repurchase of shares — — ( 113 ) — Vesting of restricted share grants — 4 — — Exercise of options — 150 — — Shares withheld related to net settlement of equity awards — — — ( 8 ) Balance, June 30, 2019 16,474 54,359 ( 1,092 ) ( 2,184 ) Share Repurchase Program The share repurchase programs authorized in 2018 and 2019, each for $ 15.0 million of the Company’s Class A common stock were completed in September 2019 and June 2020, respectively. In May 2020, the Company’s Board of Directors authorized the Company to repurchase up to an additional $ 15.0 million of the Company’s Class A common stock in the open market or in privately negotiated transactions (“2020 Share Repurchase Program”). The amount and timing of the purchases under the 2020 Share Repurchase Program will depend on a number of factors including the price and availability of the Company’s shares, trading volume, capital availability, Company performance and general economic and market conditions. The 2020 Share Repurchase Program can be suspended or discontinued at any time. As of June 30, 2020, a total of 2,382,053 shares of Class A common stock had been repurchased under authorized share repurchase programs at a total cost of $ 33.1 million for an average price of $ 13.90 per share. As of June 30, 2020, $ 11.9 million was available for future purchases. The 2020 Share Repurchase Program expires when $ 15 million shares of Class A common stock are repurchased or on December 31, 2021. 20 Table of Contents Quarterly Dividends During the three months ended June 30, 2020, the Company paid a quarterly dividend of $ 3.4 million. Dividends paid during the six months ended June 30, 2020 included $ 6.8 million for the March and June 2020 quarterly dividends and $ 0.2 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards. NOTE 11. Share‑Based Compensation Current Period Activity During the three months ended June 30, 2020, the Company issued restricted stock awards for 20,394 shares of common stock, of which awards for 15,741 shares were fully vested on the grant date and awards for 4,653 shares vest based on service over a three year period. For the six months ended June 30, 2020, the Company issued restricted stock awards for 297,833 shares of common stock, of which awards for 18,979 shares were fully vested on the grant date and awards for 278,854 shares vest based on service over a three year period. Stock option award and restricted stock award activity during the six months ended June 30, 2020 and 2019 was as follows: Shares Subject to Stock Option Awards Six Months Ended June 30, 2020 2019 Avg wtd Avg wtd Avg wtd Avg wtd grant-date exercise grant-date exercise fair value price Units fair value price Units Outstanding at beginning of period $ 3.83 $ 6.27 7,880,167 $ 3.79 $ 6.12 9,070,052 Forfeited 6.34 13.86 1,272 6.51 14.26 ( 36,774 ) Exercised 3.74 5.89 ( 287,621 ) 3.23 4.30 ( 222,084 ) Outstanding at end of the period $ 3.84 $ 6.28 7,593,818 $ 3.79 $ 6.13 8,811,194 Vested $ 3.67 $ 5.78 6,758,066 $ 3.41 $ 4.98 6,691,308 Unvested 5.20 10.35 835,752 5.00 9.79 2,119,886 Restricted Stock Awards Six Months Ended June 30, 2020 2019 Avg wtd grant- Avg wtd grant- date fair value Units date fair value Units Unvested at beginning of period $ 14.29 3,215,619 $ 13.17 2,997,856 Granted 16.18 297,833 16.02 995,669 Vested 14.66 ( 892,921 ) 13.41 ( 43,996 ) Forfeited 17.29 ( 18,277 ) 14.02 ( 367,998 ) Unvested at end of period $ 14.45 2,602,254 $ 13.87 3,581,531 Dividend Payments At 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. Share-Based Compensation Expense The Company recorded $ 3.9 million and $ 3.8 million of share-based compensation expense in the three months ended June 30, 2020 and 2019, respectively, and $ 9.9 million and $ 5.3 million of share-based compensation in the six months ended June 30, 2020 and 2019, respectively, in personnel compensation and benefits in the unaudited Condensed Consolidated Statements of Operations. 21 Table of Contents NOTE 12. Earnings Per Share The following table sets forth the reconciliation of basic earnings per share and diluted earnings per share from net income for the three months ended June 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, (in thousands except per share amounts) 2020 2019 2020 2019 Net income $ 44,720 $ 14,383 $ 101,886 $ 28,910 Shares: Basic : Weighted average number of shares outstanding 67,821 67,583 67,806 67,552 Plus : Incremental shares from assumed conversion of dilutive instruments 5,383 5,938 6,012 5,410 Diluted : Weighted average number of shares outstanding 73,204 73,521 73,818 72,962 Earnings per share Basic: $ 0.66 $ 0.21 $ 1.50 $ 0.43 Diluted: $ 0.61 $ 0.20 $ 1.38 $ 0.40 Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive totaled 0.6 million and 0.8 million for the three months ended June 30, 2020 and 2019, respectively, and 45 thousand and 1.6 million for the six months ended June 30, 2020 and 2019, respectively. Holders of non-vested share-based compensation awards do not have rights to receive nonforfeitable dividends on the shares covered by the awards. NOTE 13. Accumulated Other Comprehensive Loss The following table presents changes in accumulated other comprehensive loss by component for the six months ended June 30, 2020 and 2019. Available-for- Cumulative Sale Cash Flow Translation (in thousands) Securities Hedges Adjustment Total Balance, December 31, 2019 $ — $ — $ — $ — Other comprehensive loss before reclassification and tax — ( 10,438 ) ( 72 ) ( 10,510 ) Tax impact — 2,485 18 2,503 Reclassifications, before tax — ( 519 ) — ( 519 ) Tax impact — 123 — 123 Net current period other comprehensive loss — ( 8,349 ) ( 54 ) ( 8,403 ) Balance, June 30, 2020 $ — $ ( 8,349 ) $ ( 54 ) $ ( 8,403 ) Balance, December 31, 2018 $ ( 59 ) $ — $ ( 27 ) $ ( 86 ) Other comprehensive income before reclassification and tax — — 5 5 Tax impact — — ( 1 ) ( 1 ) Net current period other comprehensive income — — 4 4 Cumulative effect of adoption of ASU 2016-01 and 2018-02 59 — 3 62 Balance, June 30, 2019 $ — $ — $ ( 20 ) $ ( 20 ) 22 Table of Contents NOTE 14. DERIVATIVES Interest Rate Swaps On March 27, 2020, the Company entered into the Swap to manage interest rate risk associated with a portion of its floating-rate long-term debt. The Company does not purchase or hold any derivative instruments for trading or speculative purposes. Under the terms of the Swap, the Company pays interest at a fixed rate of interest and receive interest that varies with the three-month LIBOR rate. The notional value, fixed rate of interest and expiration date of the Swap as of June 30, 2020 was $ 450 million – 3.465 % – July 1, 2026 . Refer to Note 5, Fair Value Measurements, for additional disclosures regarding fair value measurements. The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the change in fair value of the derivative instrument. A derivative qualifies for hedge accounting treatment if, at inception, it meets defined correlation and effectiveness criteria. These criteria require that the anticipated cash flows and/or changes in fair value of the hedging instrument substantially offset those of the position being hedged. The Swap is assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. For the three months ended June 30, 2020 and since inception, the Swap was deemed to be highly effective. The Swap is designated as a cash flow hedge. Accordingly, the Swap is measured at fair value with mark-to-market gains or losses deferred and included in accumulated other comprehensive income (loss), net of tax, to the extent the hedge is determined to be effective. Gains or losses from the Swap are reclassified to interest expense in the same period during which the hedged transaction affects earnings. The amount receivable from the Swap counterparty at June 30, 2020 of $ 0.5 million is recorded in other assets on the unaudited Condensed Consolidated Balance Sheets. The following table summarizes the classification of the Swap in the unaudited Condensed Consolidated Balance Sheets at June 30, 2020 (in thousands): June 30, 2020 Notional Amount Fair Value Balance Sheet Location Interest rate swap $ 450,000 $ 10,957 Other liabilities The following table summarizes the effects of the Swap in the unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (in thousands): Loss Recognized in AOCI, Net of Tax Loss Recognized in AOCI, Net of Tax Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Interest rate swap $ 3,529 — $ 8,349 — Gain Reclassified from AOCL into Interest Expense and Other Financing Costs Gain Reclassified from AOCL into Interest Expense and Other Financing Costs Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Interest rate swap $ 519 — $ 519 — NOTE 15. SUBSEQUENT EVENTS Subsequent to June 30, 2020, we reduced outstanding term loan principal by $ 20.5 million through repayments and open market term loan debt repurchases and retirements, for a total debt reduction of $ 239.8 million since July 1, 2019. On August 5, 2020 , our Board of Directors declared a quarterly cash dividend of $ 0.06 per share on Victory common stock, a 20 % increase over the second quarter 2020. The dividend is payable on September 25, 2020 , to stockholders of record on September 10, 2020 . 23 Table of Contents