What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 172 added, 165 removed, 338 unchanged (50% of the section changed)

1 unchanged sentence

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 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.

The following discussion is intended to assist in the understanding of our financial position at September 30, 2020 and December 31, 2019, results of operations for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 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.

3 unchanged sentences

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 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:

While COVID-19 did not have a material adverse effect on our reported results for our first three 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;

3 unchanged sentences

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

We have $132.7 billion in assets under management (“AUM”) as of September 30, 2020.

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

13 unchanged sentences

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.

7 unchanged sentences

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.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview Partners II GP, L.P.

(“Crestview GP”) in August 2013 to $132.7 billion at September 30, 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 distribution channels with deep penetration.

2 unchanged sentences

(“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 transformative acquisition increased AUM by $81.1 billion and significantly impacted our financial results.

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.

1 unchanged sentence

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

The USAA AMCO Acquisition expands and diversifies our investment platform, particularly in the fixed income and solutions asset classes, and increases our size and scale.

The USAA AMCO Acquisition expanded and diversified our investment platform, particularly in the fixed income and solutions asset classes, and increased our size and scale.

Additional products added to our investments platform include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds.

4 unchanged sentences

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 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.

The estimated fair value of contingent consideration arrangements as of September 30, 2020 was $120.5 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.

1 unchanged sentence

Assets under management :

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.

AUM at September 30, 2020 increased by $3.6 billion, or 2.8%, to $132.7 billion from $129.1 billion at June 30, 2020, driven by positive market action of $6.6 billion partially offset by net outflows of $3.0 billion.

Net flows for the quarter ended September 30, 2020 were comprised of $2.9 billion of long-term outflows and $0.1 billion of short-term outflows.

AUM at September 30, 2020 and 2019 was $132.7 billion and $145.8 billion, respectively.

We generated $5.4 billion in gross flows and $3.0 billion in net outflows for the three months ended September 30, 2020 compared to $11.9 billion in gross flows and $0.7 billion in net inflows for the same period in 2019.

AUM at September 30, 2020 and 2019 was $132.7 billion and $145.8 billion, respectively.

We generated $30.0 billion in gross flows and $17.8 billion in net outflows for the nine months ended September 30, 2020 compared to $22.5 billion in gross flows and $3.2 billion in net inflows for the same period in 2019.

Net flows for nine months ended September 30, 2020 were comprised of $9.4 billion of long-term outflows and $8.3 billion of short-term outflows.

Investment performance :

9 unchanged sentences

Financial highlights :

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.

Total revenue for the three months ended September 30, 2020 was $188.7 million compared to $215.0 million for the same period in 2019.

For the nine months ended September 30, 2020 and 2019, total revenue was $575.0 million and $393.8 million, respectively.

Net income was $55.7 million for the three months ended September 30, 2020 compared to $26.0 million for the same period in 2019.

For the nine months ended September 30, 2020 and 2019, net income was $157.6 million and $54.9 million, respectively.

Adjusted EBITDA was $95.6 million for the three months ended September 30, 2020, or 50.7% of revenue, compared to $96.3 million, or 44.8% of revenue, for the same period in 2019.

For the nine months ended September 30, 2020, Adjusted EBITDA was $273.5 million, or 47.6% of revenue, compared to $166.5 million, 42.3% 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 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.

Adjusted Net Income with tax benefit was $73.4 million for the three months ended September 30, 2020 compared to $67.3 million for the three months ended September 30, 2019.

For the nine months ended September 30, 2020, Adjusted Net Income with tax benefit was $206.9 million compared to $120.3 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.

1 unchanged sentence

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

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

28 unchanged sentences

The following table presents our AUM by asset class as of the dates indicated:

September 30,

(in millions)

7 unchanged sentences

(in millions)

For the Three Months Ended June 30, 2020

For the Three Months Ended September 30, 2020

Beginning AUM

4 unchanged sentences

Net transfers

For the Three Months Ended June 30, 2019

For the Three Months Ended September 30, 2019

Beginning AUM

5 unchanged sentences

(in millions)

Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Beginning AUM

4 unchanged sentences

Net transfers

Six Months Ended

June 30, 2019

Nine Months Ended

September 30, 2019

Beginning AUM

5 unchanged sentences

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

As of June 30,

As of September 30,

(in millions)

5 unchanged sentences

Mutual Funds (1)

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Beginning AUM

4 unchanged sentences

Net transfers

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Beginning AUM

6 unchanged sentences

Mutual Funds (1)

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Beginning AUM

4 unchanged sentences

Net transfers

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Beginning AUM

4 unchanged sentences

Net transfers

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

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

Excludes assets managed for other proprietary product (i.e.

1 unchanged sentence

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

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.

September 30, 2020 AUM compared to June 30, 2020 AUM .

At September 30, 2020, our total AUM was $132.7 billion, an increase of $3.6 billion, or 2.8%, from $129.1 billion at June 30, 2020, primarily driven by positive market action of $6.6 billion partially offset by net outflows of $3.0 billion.

Net outflows were driven by our U.S.

mid cap equity and U.S.

large cap equity strategies as well as our Solutions platform of $1.1 billion, $0.6 billion and $0.5 billion, respectively.

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

Total AUM decreased by $19.2 billion, or 12.6%, to $132.7 billion at September 30, 2020 compared to $151.8 billion at December 31, 2019.

The decrease in AUM was primarily due to net outflows of $17.8 billion and negative market action of $1.4 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.

The net outflows were driven by $8.3 billion of money market and short-term assets, $2.6 billion in our fixed income strategies, $2.5 billion in our U.S.

mid cap equity strategies, and $1.9 billion in our Solutions Platform.

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 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,

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

The USAA AMCO Acquisition that closed on July 1, 2019 significantly impacted our financial results for the nine months ended September 30, 2020 when compared to the nine months ended September 30, 2019.

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except per share data)

14 unchanged sentences

Interest expense and other financing costs

Gain (loss) on debt extinguishment

Loss on debt extinguishment

Total other expense, net

5 unchanged sentences

Investment Management Fees

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 .

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

Investment management fees decreased by $18.2 million, or 11.7%, to $137.2 million for the three months ended September 30, 2020 compared to $155.4 million for the same period in 2019 due to the combination of a decrease in average AUM and a decrease in investment management fee realization over the comparable period.

Average AUM decreased $12.8 billion, or 8.7%, to $133.1 billion for the three months ended September 30, 2020 compared to $145.9 billion for the same period in 2019, largely attributable to net outflows.

Nine months ended September 30, 20 20 compared to September 30 , 201 9 .

Investment management fees increased by $ 106.3 million, or 34.5 %, to $ 414.2 million for the nine months ended September 30, 20 20 from $ 307.9 million for the same period in 201 9 largely attributable to acquired assets in the USAA AMCO acquisition .

Average AUM was $ 135.4 billion and $ 87.7 billion , respectively, for the nine months ended September 30, 20 20 and 201 9 .

Fund Administration and Distribution Fees

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.

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

Fund administration and distribution fees decreased by $8.2 million, or 13.7%, to $51.4 million for the three months ended September 30, 2020 compared to $59.6 million for the same period in 2019 due to the combination of a decrease in average mutual fund AUM over the comparable period and a shift in the mix of assets to lower 12b-1 paying share classes.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Fund administration and distribution fees increased by $74.9 million, or 87.1%, to $160.8 million for the nine months ended September 30, 2020 from $86.0 million for the same period in 2019 due to the addition of $56.8 million in transfer agent fees related to the USAA AMCO Acquisition, partially offset by a decline in fee realization due to a shift in the mix of assets to lower 12b-1 paying share classes.

Personnel Compensation and Benefits

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,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

9 unchanged sentences

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

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.

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

Personnel compensation and benefits were $47.4 million for the three months ended September 30, 2020, a decrease of $8.2 million, or 14.7%, from $55.6 million for the same period in 2019 primarily attributable to a decrease in incentive compensation.

Incentive compensation and equity awards granted to employees and directors were $22.3 million and $4.2 million, respectively, for the three months ended September 30, 2020, compared to $29.5 million and $4.8 million, respectively, for the same period in 2019.

Salaries, payroll related taxes and employee benefits increased $1.1 million to $17.8 million for the three months ended September 30, 2020 compared to $16.6 million for the same period in 2019 primarily attributable to an increase in headcount.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Personnel compensation and benefits increased by $18.5 million, or 14.7%, to $144.1 million for the nine months ended September 30, 2020 from $125.6 million for the same period in 2019 primarily attributable to an increase in the headcount due to the USAA AMCO Acquisition.

Salaries, payroll related taxes and employee benefits were $54.8 million and $44.2 million, respectively, for the nine months ended September 30, 2020 and 2019.

Incentive compensation and equity awards granted to employees and directors were $63.6 million and $14.1 million, respectively, for the nine months ended September 30, 2020, compared to $60.1 million and $10.1 million, respectively, 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 and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

4 unchanged sentences

Total distribution and other asset-based expenses

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

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

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

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.

For the three months ended September 30, 2020, distribution and other asset-based expenses were $39.1 million, a decrease of $18.1 million, or 31.6%, from $57.2 million for the same period in 2019, primarily due to the combination of a decrease in average mutual fund AUM over the comparable period and a change in asset mix of our underlying retail distribution platforms.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Distribution and other asset-based expenses were $135.6 million for the nine months ended September 30, 2020, an increase of $46.5 million, or 52.1%, from $89.2 million for the same period in 2019 due primarily 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 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.

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

General and administrative expenses were $13.2 million for the three months ended September 30, 2020 compared to $17.7 million for the same period in 2019.

The decrease of $4.5 million, or 25.3%, was primarily due to the combination of a decrease in costs associated with the transition service agreement related to the USAA AMCO Acquisition and expenses associated with travel and entertainment.

Nine months ended September 30, 2020 compared to September 30, 2019 .

For the nine months ended September 30, 2020 and 2019, general and administrative expenses were $38.4 million and $31.8 million, respectively, for a year over year increase of $6.6 million, or 20.6%.

The increase 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 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.

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

Depreciation and amortization decreased by $3.8 million, or 49.3%, to $3.9 million for the three months ended September 30, 2020 from $7.8 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.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Depreciation and amortization decreased by $6.1 million, or 33.4%, to $12.2 million for the nine months ended September 30, 2020 from $18.3 million for the same period in 2019, due to the same factor as discussed above in the quarterly section.

Change in Value of Consideration Payable for Acquisition of Business

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.

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

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $2.0 million, resulting in a change in the estimated fair value of consideration payable of $2.0 million for the three months ended September 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.

Nine months ended September 30, 2020 compared to September 30, 2019 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $1.8 million, resulting in a change in the estimated fair value of consideration payable of $1.8 million for the nine months ended September 30, 2020.

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

Acquisition‑Related Costs

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.

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

Acquisition-related costs were $1.1 million and $16.4 million for the three months ended September 30, 2020 and 2019, respectively.

The expense decrease is primarily due to costs recorded as a result of the USAA AMCO acquisition in July 2019 and include various transaction costs such as legal and filing fees and other professional fees.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Acquisition-related costs for the nine months ended September 30 , 20 20 and 201 9 were $1.1 million and $ 22 .

0 million, respectively.

The expense decrease was due to the same factors as discussed above in the quarterly section.

Restructuring and Integration Costs

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.

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

Restructuring and integration costs for the three months ended September 30, 2020 were $1.3 million and $4.8 million for the three months ended September 30, 2019.

The decrease is primarily due to a decrease in severance costs related to the USAA AMCO Acquisition.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Restructuring and integration costs were $4.9 million and $6.6 million, respectively, for the nine months ended September 30, 2020 and 2019, with the decrease due to the same factors as discussed above in the quarterly section.

Interest Income and Other Income (Expense)

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.

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

Interest income and other income (expense) was income of $1.1 million for the three months ended September 30, 2020 compared to income of $2.7 million for the same period in 2019.

The decrease was primarily due to a gain on sale of an equity method investment in Cerebellum Capital, LLC (“Cerebellum Capital”) recorded for the three months ended September 30, 2019.

Nine months ended September 30, 2020 compared to September 30, 2019 .

For the nine months ended September 30, 2020 and 2019, interest income and other income/(expense) was expense of $0.1 million and income of $5.2 million, respectively.

The decrease was primarily due to the same factors as discussed above in the quarterly section, as well as net unrealized gains on deferred compensation plan investments and higher yields on our cash invested in money market accounts recorded for the nine months ended September 30, 2019.

Interest Expense and Other Financing Costs

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.

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

Interest expense and other financing costs were $8.2 million for the three months ended September 30, 2020, compared to $16.9 million for the same period in 2019.

The expense decrease is largely due to a decrease in interest payments as a result of a decline in our term loan interest rate and a lower debt principal balance.

Nine months ended September 30, 2020 compared to September 30, 2019 .

For the nine months ended September 30, 2020 and 2019, interest expense and other financing costs were $29.3 million and $26.0 million, respectively.

The expense increase is primarily due to the 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 on July 1, 2019 in conjunction with the USAA AMCO acquisition.

Loss on Debt Extinguishment

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

For the three months ended September 30, 2020 and 2019, loss on debt extinguishment was $0.8 million and $7.4 million, respectively.

The expense decrease is primarily due to the write-off of unamortized debt issuance costs and unamortized debt discount in the third quarter of 2019 as a result of the termination of the previous credit agreement, dated February 2018.

Nine months ended September 30, 2020 compared to September 30, 2019 .

Loss on debt extinguishment was $1.7 million and $7.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The expense decrease was due to the same factors as discussed above in the quarterly section.

Income Tax Expense

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.

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

The effective tax rate for the three months ended September 30, 2020 and 2019 was 23.4% and 23.7%, respectively.

The slight decrease in the effective tax rate was due to the combination of decreased excess tax benefits on share-based compensation and decreased expense related to state uncertain tax positions over the comparable period.

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

Nine months ended September 30, 2020 compared to September 30, 2019 .

For the nine months ended September 30, 2020 and 2019, the effective tax rate was 23.5% and 24.0%, respectively.

The change in the effective tax rate was due to the same factors as discussed above in the quarterly section.

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

Supplemental Non ‑GAAP Financial Information

4 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

12 unchanged sentences

Adjusted EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

17 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

18 unchanged sentences

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 June 30, 2020 and December 31, 2019.

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

September 30,

(in thousands)

7 unchanged sentences

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 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.

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

2019 Credit Agreement and 2020 Debt Repricing

1 unchanged sentence

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

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.

As of September 30, 2020, the Company has repaid or repurchased and retired $262.8 million of the outstanding term loans under the 2019 Credit Agreement.

As of September 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.

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 (the “Repriced Term Loans”).

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 (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.

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

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

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.

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.

This alternative is preferable to principal prepayments when our debt trades at a discount to par.

A total of $114.8 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired during the first nine 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.

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

During the three months ended September 30, 2020, the Company repaid or repurchased and retired $43.5 million in outstanding term loans and recorded a $0.8 million loss on debt extinguishment.

Subsequent to September 30, 2020, we reduced the outstanding term loan principal by an additional $20.0 million through prepayments, for a total debt reduction of $282.8 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.

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.

At September 30, 2020, the $450 million notional value Swap had a fair value of $11.8 million, which was included in other liabilities on the unaudited Condensed Consolidated Balance Sheets.

For the three and nine months ended September 30, 2020, the Company recognized a loss, net of tax, of $0.7 million and $9.0 million, respectively, in accumulated other comprehensive loss.

For the three and nine months ended September 30, 2020, the Company reclassified a loss of $0.7 million and $0.2 million, respectively, 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.

5 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

2 unchanged sentences

Net cash used in financing activities

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.

Operating Activities – Cash provided by operating activities during the nine months ended September 30, 2020 was $182.7 million, compared to $167.7 million of cash provided by operating activities for the same period in 2019.

The $15.0 million increase in cash provided by operating activities was primarily due to a $102.7 million and $18.7 million increase in net income and non-cash items, partially offset by a $106.4 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 $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.

The net decrease in working capital source of cash was primarily due to accrued expenses and compensation which was a $48.7 million use of cash for the nine months ended September 30, 2020 compared to a $77.3 million source of cash for the same period last year due to the timing of new operating expenses as a result of the USAA AMCO Acquisition.

The acquisition introduced new operating expenses that the Company did not incur prior to the 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 nine months ended September 30, 2020 was $10.5 million and consisted of property and equipment purchases of $7.0 million, $1.6 million of net trading activity and $1.5 million for an equity investment in Alderwood Partners LLP (“Alderwood”).

Cash used in investing activities during the nine months ended September 30, 2019 was $845.9 million and consisted primarily of $851.3 million paid in cash at the July 1, 2019 closing of the USAA AMCO Acquisition, partially offset by $10.6 million in proceeds from the Company selling 100% of its equity investment in Cerebellum Capital, LLC (“Cerebellum”).

Financing Activities – Cash used in financing activities during the nine months ended September 30 , 20 20 was $ 153.0 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 $ 113.4 million, $ 22.8 million , $ 11.5 million, and $ 5.9 million, respectively.

Cash provided by financing activities during the nine months ended September 30, 2019 was $705.7 million and was mostly attributable to $1,069 million of net proceeds from the 2019 Credit Agreement, partially offset by the repayment and termination of the previous credit agreement (dated February 2018) of $280.0 million.

The Company also paid $63.0 million of the outstanding term loans under the 2019 Credit Agreement in the third quarter of 2019 and a dividend to stockholders in the amount of $3.4 million and $0.5 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards.

Contractual Obligations

2 unchanged sentences

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 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 .

As of September 30, 2020, the Company recorded an $11.8 million liability, representing the fair value of the swap, which is included in other liabilities in the unaudited Condensed Consolidated Balance Sheets.

Refer to Note 14, Derivatives, for further discussion regarding the swap transaction.

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.

For the nine month period ended September 30, 2020, the Company recorded a $1.8 million increase 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.

5 unchanged sentences

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 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.

As of September 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 $1.0 million and $1.3 million, respectively, 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.

On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15% interest in Alderwood.

Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses.

The Company has commitments to contribute additional capital of $4.5 million to Alderwood and $50 million to a private fund to be launched by Alderwood, upon the satisfaction of certain conditions.

Until these conditions are satisfied, the Company does not have an obligation to contribute the additional capital and has not met the recognition criteria for a liability.

Refer to Note 15, Equity Method Investment, for further discussion regarding the investment.

Critical Accounting Policies and Estimates

4 unchanged sentences

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