Victory Capital Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 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. Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2019. On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. 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 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; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; and the effect on our ability to sell and provide our services. Overview 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 $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. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees. Franchises Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. Victory Capital Management Inc. (“VCM”) employs all of the Company’s United States investment professionals across our Franchises, which are not separate legal entities. Solutions Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, unified managed accounts (“UMA”), mutual funds and VictoryShares which is our exchange traded fund (“ETF”) brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions. Our approach furthers our commitment to rules‑based investing and includes single and multi‑factor strategies designed to provide a variety of outcomes, including maximum diversification, dividend income, downside mitigation, minimum volatility, thematic and targeted factor exposure. Operations Our centralized operations functions provide our Franchises and Solutions Platform with the support they need so that they can focus on their investment processes. Our centralized operations functions include trading platforms, risk and compliance, middle‑ and back‑office support, technology, finance, human resources, accounting and legal. Although our operations are centralized, we do allow our Franchises a degree of customization with respect to their desired investment support functions, which we believe helps them maintain their individualized investment processes and minimize undue disruptions. 26 Table of Contents We outsource certain middle ‑ and back ‑office activities, such as sub-transfer agent, trade settlement, portfolio analytics, custodian reconciliation, portfolio accounting, corporate action processing, performance calculation and client reporting, to scaled, recognized service providers, who provide their services to us on a variable ‑cost basis. 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 also have information security, business continuity and data privacy programs in place to help mitigate risk. Outsourcing these functions enables us to grow our AUM, both organically and through acquisitions, without the incremental capital expenditures and working capital that would typically be needed. Under our direction and oversight, our outsourced model enhances our ability to integrate our acquisitions, as we are experienced in working with our vendors to efficiently bring additional Franchises onto our platform in a cost‑efficient manner. We believe both the scalability of our business and our cost structure, in which approximately two‑thirds of our operating expenses are variable, should drive industry-leading margins and facilitate free cash flow conversion. Additionally, we believe having a majority of our expenses tied to AUM and the number of client accounts provides downside margin protection should there be sustained net outflows or adverse market conditions. Professionals within our institutional, retail and direct distribution channels and marketing organization sell our products through our centralized distribution model. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs. Our direct 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 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. USAA AMCO Acquisition Effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company (“USAA Adviser”) and Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company. The transformative acquisition increased AUM by $81.1 billion and significantly impacted our financial results. The acquisition not only increased AUM and revenue, but also introduced additional personnel expenses and new and additional operating expenses such as third party distribution costs, expenses related to a transfer services agreement with USAA, 529 College Savings Plan, and direct distribution channel expenses that the Company did not incur prior to the acquisition. In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019. 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. We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs. Through the acquisition, the Company has the rights to offer products and services using the USAA brand for a period of time and the opportunity to offer its products to USAA members through a direct distribution channel. In addition, we have entered into a referral agreement with USAA for members that are interested in investing in USAA Funds or the USAA 529 College Savings Plan. Total consideration for the USAA AMCO Acquisition was $949.4 million, comprising of $851.3 million of cash paid at closing plus $98.8 million as the estimated fair value of contingent consideration as of the acquisition date 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 date. 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. 27 Table of Contents Business Highlights Assets under management : • 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 : • 39 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 67% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 55% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 70% over a three-year period, 69% over a five-year period and 75% over a ten-year period. On an equal-weighted basis, 43% of our strategies have outperformed their benchmarks over a one-year period, 50% over a three-year period, 53% over a five-year period and 64% over a ten-year period. Industry achievements and recognition : • We ranked 7 th in “Barron’s Best Fund Families of 2019” for the five-year period and 10 th for the 10-year period ended December 31, 2019. We ranked 17 th overall on a one-year basis for 2019. This is the 3 rd consecutive year that we have been ranked among the top 10 best fund families and the 6 th consecutive year that we have been ranked among the top 25 best fund families by Barron’s . • In July 2020, Victory Capital became a signatory to the United Nations-supported Principles for Responsible Investment, broadening our commitment to responsible investing and formalizing what our autonomous Investment Franchises and Solutions Platform have been doing for many years. Each of our Investment Franchises follows an approach to incorporating environmental, social and governance (“ESG”) considerations that best suits its own investment process or the objectives of its clients. Financial highlights : • Total revenue for the three months ended 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 $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 $120.3 million for the same period in 2019. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income. 28 Table of Contents Key Performance Indicators The following table is a summary of key performance indicators utilized by management to assess results of operations: Three Months Ended September 30, Nine Months Ended September 30, ($ in millions, except for basis points and percentages) 2020 2019 2020 2019 AUM at period end $ 132,662 $ 145,832 $ 132,662 $ 145,832 Average AUM 133,096 145,904 135,378 87,670 Gross flows 5,433 11,905 29,935 22,457 Net short term flows (96 ) (65 ) (8,311 ) (65 ) Net long term flows (2,878 ) 726 (9,445 ) 3,314 Net flows (2,974 ) 661 (17,756 ) 3,249 Total revenue 188.7 215.0 575.0 393.8 Revenue on average AUM 56.4 bps 58.5 bps 56.7 bps 60.1 bps Net income 55.7 26.0 157.6 54.9 Adjusted EBITDA (1) 95.6 96.3 273.5 166.5 Adjusted EBITDA Margin (2) 50.7 % 44.8 % 47.6 % 42.3 % Adjusted Net Income (1) 66.7 60.5 186.7 106.8 Tax benefit of goodwill and acquired intangibles (3) 6.7 6.8 20.2 13.5 ( 1 ) Management utilizes Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the business. These measures eliminate the impact of one‑time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail and reconciled to net income calculated in accordance with GAAP in “Supplemental Non‑GAAP Financial Information.” ( 2 ) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue. ( 3 ) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit. Assets Under Management Our profitability is largely affected by the level and composition of our AUM (including asset class and distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will continue to be, influenced by a number of factors, including; (i) investment performance, including fluctuations in the financial markets and the quality of our investment decisions; (ii) client flows into and out of our various strategies and investment vehicles; (iii) industry trends toward products or strategies that we either do or do not offer; (iv) our ability to attract and retain high quality investment, distribution, marketing and management personnel; (v) our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest of our clients or conversely to re‑open strategies in part or entirely; and (vi) general investor sentiment and confidence. Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle. Due to rounding, AUM numbers presented in the tables below may not add up precisely to the totals provided. The following table presents our AUM by asset class as of the dates indicated: As of September 30, (in millions) 2020 2019 Fixed Income $ 35,848 $ 37,784 Solutions 30,767 29,579 U.S. Mid Cap Equity 22,540 25,479 U.S. Small Cap Equity 14,453 16,266 U.S. Large Cap Equity 13,242 13,488 Global / Non-U.S. Equity 11,974 11,532 Other 207 243 Total Long-Term Assets $ 129,031 $ 134,371 Money Market & Short-Term Assets 3,631 11,460 Total $ 132,662 $ 145,832 29 Table of Contents The following tables summarize our asset flows by asset class for the periods indicated: U.S. Mid U.S. Small U.S. Large Global / Money Cap Cap Fixed Cap Non-U.S. Total Market / (in millions) Equity Equity Income Equity Equity Solutions Other Long-term Short-term Total For the Three Months Ended September 30, 2020 Beginning AUM $ 22,483 $ 14,083 $ 35,622 $ 12,524 $ 11,130 $ 29,305 $ 195 $ 125,343 $ 3,727 $ 129,070 Gross client cash inflows 760 1,061 1,470 147 463 1,155 11 5,067 367 5,433 Gross client cash outflows (1,890 ) (1,175 ) (1,850 ) (753 ) (568 ) (1,694 ) (16 ) (7,944 ) (463 ) (8,408 ) Net client cash flows (1,129 ) (114 ) (380 ) (606 ) (105 ) (539 ) (5 ) (2,878 ) (96 ) (2,974 ) Market appreciation / (depreciation) 1,259 591 607 1,141 948 2,001 19 6,566 1 6,566 Net transfers (73 ) (107 ) (2 ) 182 1 — (1 ) — — — Ending AUM $ 22,540 $ 14,453 $ 35,848 $ 13,242 $ 11,974 $ 30,767 $ 207 $ 129,031 $ 3,631 $ 132,662 For the Three Months Ended September 30, 2019 Beginning AUM $ 24,203 $ 15,278 $ 7,300 $ 4,108 $ 5,498 $ 6,919 $ 771 $ 64,077 $ — $ 64,077 Gross client cash inflows 880 779 4,071 166 326 1,207 28 7,456 4,449 11,905 Gross client cash outflows (1,396 ) (1,069 ) (1,789 ) (497 ) (566 ) (1,296 ) (118 ) (6,730 ) (4,514 ) (11,244 ) Net client cash flows (516 ) (290 ) 2,282 (331 ) (240 ) (89 ) (90 ) 726 (65 ) 661 Market appreciation / (depreciation) (26 ) (249 ) 528 (301 ) (192 ) 225 (83 ) (98 ) 44 (54 ) Net transfers 1,818 1,527 27,674 10,012 6,465 22,523 (354 ) 69,665 11,482 81,147 Ending AUM $ 25,479 $ 16,266 $ 37,784 $ 13,488 $ 11,532 $ 29,579 $ 243 $ 134,371 $ 11,460 $ 145,832 U.S. U.S. U.S. Mid Small Large Global / Money Cap Cap Fixed Cap Non-U.S. Total Market / (in millions) Equity Equity Income Equity Equity Solutions Other Long-term Short-term Total Nine Months Ended September 30, 2020 Beginning AUM $ 26,347 $ 17,346 $ 37,973 $ 14,091 $ 12,603 $ 31,649 $ 236 $ 140,245 $ 11,587 $ 151,832 Gross client cash inflows 3,177 3,291 4,918 600 1,570 3,917 32 17,506 12,429 29,935 Gross client cash outflows (5,666 ) (3,878 ) (7,515 ) (2,159 ) (1,827 ) (5,855 ) (52 ) (26,951 ) (20,740 ) (47,691 ) Net client cash flows (2,489 ) (587 ) (2,597 ) (1,558 ) (256 ) (1,938 ) (20 ) (9,445 ) (8,311 ) (17,756 ) Market appreciation / (depreciation) (1,220 ) (2,142 ) 749 520 (399 ) 1,045 (13 ) (1,461 ) 48 (1,413 ) Net transfers (99 ) (164 ) (278 ) 190 27 11 5 (307 ) 307 — Ending AUM $ 22,540 $ 14,453 $ 35,848 $ 13,242 $ 11,974 $ 30,767 $ 207 $ 129,031 $ 3,631 $ 132,662 Nine Months Ended September 30, 2019 Beginning AUM $ 20,019 $ 12,948 $ 6,836 $ 3,759 $ 4,610 $ 3,767 $ 823 $ 52,763 $ — $ 52,763 Gross client cash inflows 4,656 2,500 4,880 214 1,024 4,578 155 18,008 4,449 22,457 Gross client cash outflows (5,021 ) (3,052 ) (2,502 ) (809 ) (1,048 ) (1,940 ) (321 ) (14,694 ) (4,514 ) (19,208 ) Net client cash flows (365 ) (552 ) 2,378 (595 ) (24 ) 2,638 (166 ) 3,314 (65 ) 3,249 Market appreciation / (depreciation) 4,006 2,345 896 316 480 649 (60 ) 8,631 44 8,675 Net transfers 1,820 1,526 27,674 10,007 6,465 22,525 (354 ) 69,661 11,482 81,143 Ending AUM $ 25,479 $ 16,266 $ 37,784 $ 13,488 $ 11,532 $ 29,579 $ 243 $ 134,372 $ 11,460 $ 145,832 30 Table of Contents The following table presents our AUM by distribution channel as of the dates indicated: As of September 30, 2020 2019 (in millions) Amount % of total Amount % of total Direct $ 65,261 49 % $ 71,925 49 % Institutional 34,814 26 % 38,246 26 % Retail 32,587 25 % 35,661 25 % Total AUM (1) $ 132,662 100 % $ 145,832 100 % (1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment. The following tables summarize our asset flows by vehicle for the periods indicated: Separate Accounts and Other (in millions) Mutual Funds (1) ETFs (2) Vehicles (3) Total Three Months Ended September 30, 2020 Beginning AUM $ 100,430 $ 3,462 $ 25,179 $ 129,070 Gross client cash inflows 4,251 18 1,164 5,433 Gross client cash outflows (6,847 ) (139 ) (1,421 ) (8,408 ) Net client cash flows (2,596 ) (121 ) (257 ) (2,974 ) Market appreciation (depreciation) 5,151 147 1,269 6,566 Net transfers (63 ) — 63 — Ending AUM $ 102,921 $ 3,488 $ 26,254 $ 132,662 Three Months Ended September 30, 2019 Beginning AUM $ 34,258 $ 3,093 $ 26,726 $ 64,077 Gross client cash inflows 8,383 245 3,277 11,905 Gross client cash outflows (9,643 ) (258 ) (1,343 ) (11,244 ) Net client cash flows (1,260 ) (13 ) 1,934 661 Market appreciation (depreciation) 267 4 (325 ) (54 ) Net transfers 80,806 782 (441 ) 81,147 Ending AUM $ 114,071 $ 3,867 $ 27,894 $ 145,832 Separate Accounts and Other (in millions) Mutual Funds (1) ETFs (2) Vehicles (3) Total Nine Months Ended September 30, 2020 Beginning AUM $ 118,605 $ 4,213 $ 29,014 $ 151,832 Gross client cash inflows 26,617 363 2,954 29,935 Gross client cash outflows (42,204 ) (814 ) (4,673 ) (47,691 ) Net client cash flows (15,587 ) (451 ) (1,718 ) (17,756 ) Market appreciation (depreciation) (33 ) (274 ) (1,105 ) (1,413 ) Net transfers (63 ) — 63 — Ending AUM $ 102,921 $ 3,488 $ 26,254 $ 132,662 Nine Months Ended September 30, 2019 Beginning AUM $ 30,492 $ 2,956 $ 19,315 $ 52,763 Gross client cash inflows 12,760 594 9,103 22,457 Gross client cash outflows (15,403 ) (789 ) (3,016 ) (19,208 ) Net client cash flows (2,643 ) (195 ) 6,087 3,249 Market appreciation (depreciation) 5,421 323 2,931 8,675 Net transfers 80,802 782 (441 ) 81,143 Ending AUM $ 114,071 $ 3,867 $ 27,894 $ 145,832 31 Table of Contents (1) Includes institutional and retail share classe s, money market and Variable Insurance Products or VIP funds. ( 2 ) Excludes assets managed for other proprietary product (i.e. funds of funds) in order to adjust for double counting. ( 3) Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs. 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 $8.3 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. 32 Table of Contents GAAP Results of Operations 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) 2020 2019 2020 2019 Revenue Investment management fees $ 137,240 $ 155,406 $ 414,153 $ 307,859 Fund administration and distribution fees 51,416 59,574 160,810 85,960 Total revenue 188,656 214,980 574,963 393,819 Expenses Personnel compensation and benefits 47,375 55,556 144,051 125,599 Distribution and other asset-based expenses 39,123 57,202 135,613 89,151 General and administrative 13,196 17,654 38,373 31,828 Depreciation and amortization 3,936 7,768 12,152 18,253 Change in value of consideration payable for acquisition of business 2,000 — 1,800 (14 ) Acquisition-related costs 1,148 16,386 1,056 21,950 Restructuring and integration costs 1,285 4,841 4,888 6,629 Total operating expenses 108,063 159,407 337,933 293,396 Income from operations 80,593 55,573 237,030 100,423 Other income (expense) Interest income and other income (expense) 1,120 2,742 (86 ) 5,231 Interest expense and other financing costs (8,187 ) (16,856 ) (29,305 ) (26,000 ) Loss on debt extinguishment (758 ) (7,409 ) (1,675 ) (7,409 ) Total other expense, net (7,825 ) (21,523 ) (31,066 ) (28,178 ) Income before income taxes 72,768 34,050 205,964 72,245 Income tax expense (17,027 ) (8,058 ) (48,337 ) (17,343 ) Net income $ 55,741 $ 25,992 $ 157,627 $ 54,902 Earnings per share of common stock Basic $ 0.82 $ 0.38 $ 2.33 $ 0.81 Diluted $ 0.76 $ 0.35 $ 2.14 $ 0.75 Weighted average number of shares outstanding Basic 67,743 67,724 67,785 67,610 Diluted 73,437 73,671 73,703 73,300 Dividends declared per share of common stock $ 0.06 $ 0.05 $ 0.16 $ 0.05 Investment Management Fees 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. 33 Table of Contents 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 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 nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Salaries, payroll related taxes and employee benefits $ 17,782 $ 16,647 $ 54,769 $ 44,158 Incentive compensation 22,306 29,493 63,639 60,137 Sales-based compensation (1) 3,086 3,397 10,374 9,984 Equity awards granted to employees and directors (2) 4,201 4,814 14,081 10,115 Acquisition and transaction-related compensation — 1,205 1,188 1,205 Total personnel compensation and benefits expense $ 47,375 $ 55,556 $ 144,051 $ 125,599 (1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales. (2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards is recognized as compensation expense over the vesting period. 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 nine months ended September 30, 2020 and 2019: 34 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Broker-dealer distribution fees $ 5,594 $ 6,974 $ 17,045 $ 20,914 Platform distribution fees 24,082 36,293 90,971 45,856 Sub-administration 3,894 7,881 11,182 11,296 Sub-advisory 3,057 3,454 9,116 5,074 Middle-office 2,496 2,600 7,299 6,011 Total distribution and other asset-based expenses $ 39,123 $ 57,202 $ 135,613 $ 89,151 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 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. General and Administrative 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. Depreciation and Amortization 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 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. 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 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. 35 Table of Contents 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 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 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 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 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. 36 Table of Contents Supplemental Non ‑GAAP Financial Information We use non-GAAP performance measures to evaluate the underlying operations of our business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP measures that we believe distort the economic value of our organization and we believe that many investors use this information when assessing the financial performance of companies in the investment management industry. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net Income. The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 55,741 $ 25,992 $ 157,627 $ 54,902 Income tax expense (17,027 ) (8,058 ) (48,337 ) (17,343 ) Income before income taxes $ 72,768 $ 34,050 $ 205,964 $ 72,245 Interest expense (1) 7,497 18,388 26,292 25,854 Depreciation (2) 814 682 2,444 1,865 Other business taxes (3) 256 146 (2,821 ) 1,125 Amortization of acquisition-related intangible assets (4) 3,122 7,086 9,708 16,388 Stock-based compensation (5) 2,806 4,326 11,246 9,125 Acquisition, restructuring and exit costs (6) 6,996 24,452 15,559 31,804 Debt issuance costs (7) 1,386 10,002 5,087 10,732 Losses from equity method investments (8) — (2,837 ) — (2,683 ) Adjusted EBITDA $ 95,645 $ 96,295 $ 273,479 $ 166,455 Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 55,741 $ 25,992 $ 157,627 $ 54,902 Adjustments to reflect the operating performance of the Company: i. Other business taxes (3) 256 146 (2,821 ) 1,125 ii. Amortization of acquisition-related intangible assets (4) 3,122 7,086 9,708 16,388 iii. Stock-based compensation (5) 2,806 4,326 11,246 9,125 iv. Acquisition, restructuring and exit costs (6) 6,996 24,452 15,559 31,804 v. Debt issuance costs (7) 1,386 10,002 5,087 10,732 Tax effect of above adjustments (9) (3,642 ) (11,503 ) (9,695 ) (17,293 ) Adjusted Net Income $ 66,665 $ 60,501 $ 186,711 $ 106,783 Tax benefit of goodwill and acquired intangibles (10) $ 6,745 $ 6,802 $ 20,218 $ 13,523 Adjustments made to GAAP Net Income to calculate Adjusted EBITDA and Adjusted Net Income, as applicable, are: (1) Adding back interest paid on debt and other financing costs, net of interest income. (2) Adding back depreciation on property and equipment. (3) Adding back other business taxes. (4) Adding back amortization expense on acquisition‑related intangible assets. (5) Adding back stock‑based compensation associated with equity awards issued from pools created in connection with the management‑led buyout and various acquisitions and as a result of equity grants related to the IPO. (6) Adding back direct incremental costs of acquisitions, including restructuring costs. 37 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Acquisition-related costs $ 1,148 $ 16,386 $ 1,056 $ 21,950 Restructuring and integration costs 1,285 4,841 4,888 6,629 Change in value of consideration payable for acquisition of business 2,000 — 1,800 — General and administrative 2,563 2,020 6,627 2,020 Personnel compensation and benefits — 1,205 1,188 1,205 Total acquisition, restructuring and exit costs $ 6,996 $ 24,452 $ 15,559 $ 31,804 (7) Adding back debt issuance costs. ( 8 ) We adjust for earnings/losses on equity method investments. ( 9 ) Subtracting an estimate of income tax expense applied to the sum of the adjustments above. ( 10 ) Represents the tax benefits associated with deductions allowed for intangible assets and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangible assets with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit. Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures. Liquidity and Capital Resources Our primary uses of cash relate to repayment of our debt obligations, funding of acquisitions and working capital needs, repurchasing of shares and payment of dividends, which are all expected to be met through cash generated from our operations and available capital resources. We cannot predict the duration or scope of the COVID-19 pandemic, its impact on our business, and the potential negative financial impact to our results, but the Company has actively positioned itself so that our cash flows from operations and financing sources will be sufficient to meet our needs. 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 September 30, 2020 and December 31, 2019. September 30, December 31, (in thousands) 2020 2019 Cash and cash equivalents $ 56,284 $ 37,121 Accounts and other receivables 79,196 95,093 Undrawn commitment on revolving credit facility 100,000 100,000 Accounts and other payables (97,172 ) (144,045 ) We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consists primarily of investment management fees that have been earned but not yet received from clients, income and other taxes receivable, and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to assess collectability. 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 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 In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019. 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 38 Table of Contents 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 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. 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 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 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. Capital Requirements Victory Capital Services is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents. Cash Flows The following table is derived from our unaudited Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 30, (in thousands) 2020 2019 Net cash provided by operating activities $ 182,720 $ 167,685 Net cash used in investing activities (10,520 ) (845,888 ) Net cash used in financing activities (153,007 ) 705,708 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 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”). 39 Table of Contents 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 On January 17, 2020, we entered into 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 its Term Loan, lowering the interest rate spread by 75 basis points, from 3.25% over LIBOR, to 2.50% over LIBOR. 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 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 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. 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. There were no other significant changes to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2019. Off‑Balance Sheet Arrangements In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017 dividend was declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest. The Company announced the initiation of quarterly cash dividends in August 2019. 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 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 Our consolidated financial statements and the notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our Annual Report on Form 10-K. 40 Table of Contents