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. Objective The objective of this section of the Quarterly Report on Form 10-Q is intended to provide a discussion and analysis, from management’s perspective, of the key performance indicators and material information necessary to assess our financial condition and results of operations for the three and six months ended June 30, 2022 and 2021 and cash flows for the six months ended June 30, 2022 and 2021. In addition, we also discuss the Company’s contractual and off-balance sheet arrangements. This discussion and analysis 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, 2021. 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, 2021. Overview Our Business – Victory is a diversified global asset management firm with $154.9 billion in AUM as of June 30, 2022. The Company operates a next-generation business model combining boutique investment qualities with the benefits of an integrated, centralized operating and distribution platform. The Company provides specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors. With 12 autonomous Investment Franchises and a Solutions Platform, Victory offers a wide array of investment products, including actively and passively managed mutual funds, rules-based and active ETFs, institutional separate accounts, VIPs, ESG and impact investment strategies, alternative investments, private closed-end funds, and a 529 Education Savings Plan. Victory Capital’s strategies are also offered through third-party investment products, including mutual funds, third-party ETF model strategies, retail SMAs and UMAs through wrap account programs, CITs, and UCITs. As of June 30, 2022, our Franchises and our Solutions Platform 28 Table of Contents collectively managed a diversified set of 129 investment strategies for a wide range of institutional and retail clients and direct investors. Franchises – Our Franchises are largely operationally integrated but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our largely 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. VCM employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities. Solutions – Our Solutions Platform consists of multi-asset, multi-manager, quantitative, rules-based, factor-based, and customized portfolios. These strategies are designed to achieve specific return characteristics, with products that include values-based and thematic outcomes and exposures. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds, UMA accounts, rules-based and active ETFs under our VictoryShares ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions. Professionals within our institutional and retail distribution channels, direct investor business 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 investor business serves the investment needs of clients including USAA members, the military community, and other individual clients. We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $154.9 billion at June 30, 2022. 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 investor channels with deep penetration. WestEnd Acquisition (the “WestEnd Acquisition”) – On December 31, 2021, the Company completed the acquisition of 100% of the equity interests of WestEnd pursuant to the WestEnd purchase agreement (as amended, the “WestEnd Purchase Agreement”), resulting in WestEnd becoming the Company’s twelfth investment franchise. Founded in 2004, and headquartered in Charlotte, NC, WestEnd provides financial advisors with a turnkey, core model allocation strategies serving as holistic solutions and complementary sources of alpha. The firm offers four primary ETF strategies and one large cap core strategy, all in tax efficient SMA structures. At December 31, 2021, the WestEnd acquired assets totaled $19.3 billion. The WestEnd acquired assets had no economic impact on operations in 2021 and no effect on asset flows, average assets, revenues or earnings in the full-year period ended December 31, 2021. The aggregate purchase price (the “WestEnd Purchase Price”) for the WestEnd Acquisition is estimated at $716.1 million, net of cash acquired, which includes (i) $475.8 million in cash paid at closing (the “WestEnd Closing”) net of cash acquired plus the acquisition date value of contingent payments due to sellers of $239.7 million plus $ 0.6 million paid in cash in April 2022 for net working capital adjustments . The contingent earn-out payments are based on net revenue of the WestEnd business during each of the first four years following the WestEnd Closing, subject to certain “catch-up” provisions over a five and one half year period following the WestEnd Closing. A maximum of $320.0 million ($80.0 million per year) in earn-out payments may be paid. The estimated fair value of contingent consideration payable to sellers was estimated at $221.4 million at June 30, 2022 as compared to $239.7 million at December 31, 2021 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The decrease in the liability of $18.3 million for the six months ended June 30, 2022 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. Refer to Note 4, Acquisitions, for further details on the WestEnd Acquisition. NEC Acquisition (the “NEC Acquisition”) – On November 1, 2021, the Company completed the acquisition of 100% of the equity interests in NEC, resulting in NEC becoming the Company’s eleventh investment franchise. Founded in 2004 and based in Hanover, NH, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies. At November 1, 2021, the NEC AUM that was acquired totaled $795.0 million. The estimated purchase price for the NEC Acquisition is $63.1 million, which includes $62.8 million in cash paid at closing, net of cash acquired, and $0.3 million paid in cash in March 2022 for net working capital adjustments. Under the terms of the purchase agreement, the Company will pay up to an additional $35.0 million in cash based on net revenue growth over a six year period following the closing date. Refer to Note 4, Acquisitions, for further details on the NEC Acquisition. THB Acquisition (the “THB Acquisition”) – On March 1, 2021, the Company completed the acquisition of certain assets of THB, resulting in THB becoming the Company’s tenth investment franchise. The acquisition expanded and diversified our investment platform, adding capacity constrained asset classes. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap assets classes, including U.S., global and international strategies. At March 1, 2021, the THB AUM that was acquired totaled $547 million. 29 Table of Contents In addition to servicing clients in the U.S., THB has a footprint in Australia and Europe which provides us with expanded distribution opportunities in regions in which we have a limited presence today. This will benefit all of our Franchises as we look to leverage THB’s distribution footprint to sell more of our investment strategies outside the U.S. Aligning with the Company’s responsible investing initiatives, all of THB’s strategies have ESG considerations integrated into their investment processes. THB was an early adopter of responsible investment practices and has been managing responsible investment portfolios for decades. Nominal consideration was paid for the assets of THB. The THB investment team shares in the revenue generated on their products and benefit from our centralized operational, marketing and distribution platforms. T HB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support. Refer to Note 4, Acquisitions, for further details on the THB Acquisition. USAA AMCO Acquisition – On July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management (“USAA Adviser”) and VCTA, formally known as the USAA Transfer Agency Company. The acquisition expanded and diversified the Company’s investment platform and increased the Company’s size and scale. The acquisition also provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct distribution channel. 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. In the fourth quarter of 2020, we paid $37.5 million in cash to sellers for the first annual contingent payment. In the fourth quarter of 2021, we paid $37.5 million in cash to sellers for the second annual contingent payment. The estimated fair value of contingent consideration payable to sellers was estimated at $57.0 million at June 30, 2022 as compared to $68.8 million at December 31, 2021 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The decrease in the liability of $11.8 million for the six months ended June 30, 2022 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. Refer to Note 4, Acquisitions, for further details on the USAA AMCO Acquisition. Alderwood - On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15% interest in Alderwood and made a capital contribution of $1.5 million in cash. Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. On January 31, 2022, the Company signed an amendment to the Alderwood members’ agreement (“Alderwood Amendment”) and made a $1.5 million capital contribution to Alderwood. The Alderwood Amendment reduced the Company’s commitment to contribute additional capital to Alderwood from $4.5 million to $3.0 million. The Company also has commitments to contribute additional capital of $50.0 million to a private fund to be launched by Alderwood, subject to certain terms and conditions, including obtaining an agreed amount of aggregate legally binding commitments from investors in the private fund. In July 2022, Alderwood decided to wind down its business and operations, including the business and operations of its private fund. On July 31, 2022, the Company’s wholly owned subsidiary retired as a member of Alderwood thereby terminating the Company’s commitment to contribute an additional $3 million in capital to Alderwood and $50 million in capital to Alderwood’s private fund. Alderwood returned the $1.5 million in capital the Company contributed pursuant to the Alderwood Amendment on July 27, 2022. Refer to Note 15, Equity Method Investment, for further discussion regarding the investment. COVID-19 Pandemic – The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. While COVID-19 did not have a material adverse effect on our business, operations and financial results, the extent to which the 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. We believe that doing our part to maintain the health and welfare of our employees is a critical element for achieving commercial success. As such, the Company has taken a proactive approach to addressing the ongoing COVID-19 pandemic’s impact on our employees in order to protect their health, encouraging and in some instances requiring working from home, and balancing these steps with a carefully considered return to office policy that complies with respective local guidelines for each of our offices. Business Highlights Assets under management : • AUM at June 30, 2022 decreased by $23.2 billion, or 13.0%, to $154.9 billion from $178.1 billion at March 31, 2022, driven by negative market action of $21.7 billion. Net flows for the quarter ended June 30, 2022 were comprised of $0.6 billion of net long-term outflows and $0.1 billion of net short-term outflows. 30 Table of Contents • AUM at June 30 , 202 2 and 202 1 was $1 5 4 .9 billion and $ 1 61 . 9 billion, respectively. We generated $ 9.3 billion in gross flows and $ 0.7 billion in negative net flows for the three months ended June 30 , 202 2 compared to $ 10 . 1 billion in gross flows and $ 0.2 billion in positive net flows for the same period in 202 1 . Net flows for the three months ended June 30 , 202 2 were comprised of $ 0.6 billion of long-term out flows and $ 0.1 billion of short-term outflows. • AUM at June 30, 2022 and 2021 was $154.9 billion and $161.9 billion, respectively. We generated $20.5 billion in gross flows and $2.3 billion in positive net flows for the six months ended June 30, 2022 compared to $16.9 billion in gross flows and $1.0 billion in negative net flows for the same period in 2021. Net flows for the six months ended June 30, 2022 were comprised of $2.4 billion of net long-term inflows and $0.1 billion of net short-term outflows. Investment performance : • 50 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 68% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 58% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 85% over a three-year period, 79% over a five-year period and 80% over a ten-year period. On an equal-weighted basis, 67% of our strategies have outperformed their benchmarks over a one-year period, 73% over a three-year period, 66% over a five-year period and 71% over a ten-year period. Financial highlights : • Total revenue for the three months ended June 30, 2022 was $216.0 million compared to $221.9 million for the same period in 2021. For the six months ended June 30, 2022 and 2021, total revenue was $446.0 million and $434.9 million, respectively. • Net income was $79.2 million for the three months ended June 30, 2022 compared to $69.3 million for the same period in 2021. For the six months ended June 30, 2022 and 2021, net income was $150.5 million and $134.5 million, respectively. • Adjusted EBITDA was $106.2 million for the three months ended June 30, 2022, or 49.2 % of revenue, compared to $112.2 million, or 50.6% of revenue, for the same period in 2021. For the six months ended June 30, 2022, Adjusted EBITDA was $220.6 million, or 49.5% of revenue, compared to $219.1 million, or 50.4% of revenue, for the same period in 2021. 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 $80.7 million for the three months ended June 30, 2022 compared to $87.2 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, Adjusted Net Income with tax benefit was $171.1 million compared to $170.8 million for the same period in 2021. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income. Key Performance Indicators The following table is a summary of key performance indicators utilized by management to assess results of operations: Three Months Ended June 30, Six Months Ended June 30, ($ in millions, except for basis points and percentages) 2022 2021 2022 2021 AUM at period end $ 154,947 $ 161,936 $ 154,947 $ 161,936 Average AUM 165,703 158,471 171,283 154,781 Gross flows 9,321 10,074 20,457 16,908 Net short-term flows (53 ) (126 ) (106 ) (317 ) Net long-term flows (630 ) 302 2,413 (681 ) Net flows (683 ) 176 2,307 (998 ) Total revenue 216.0 221.9 446.0 434.9 Revenue on average AUM 52.3 bps 56.2 bps 52.5 bps 56.7 bps Net income 79.2 69.3 150.5 134.5 Adjusted EBITDA (1) 106.2 112.2 220.6 219.1 Adjusted EBITDA Margin (2) 49.2 % 50.6 % 49.5 % 50.4 % Adjusted Net Income (1) 71.4 80.3 152.5 157.0 Tax benefit of goodwill and acquired intangibles (3) 9.3 6.9 18.6 13.8 ( 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.” 31 Table of Contents ( 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 June 30, (in millions) 2022 2021 (1) Solutions $ 50,485 $ 38,774 Fixed Income 29,398 36,444 U.S. Mid Cap Equity 26,356 30,340 U.S. Small Cap Equity 14,837 20,617 Global / Non-U.S. Equity 13,257 16,244 U.S. Large Cap Equity 11,857 15,284 Alternative Investments 5,617 978 Total Long-Term Assets 151,807 158,682 Money Market & Short-Term Assets 3,140 3,254 Total $ 154,947 $ 161,936 (1) Beginning in January 2022, the Company’s “Other” asset class has been categorized to Solutions, Fixed Income, Global / Non-U.S. Equity, and Alternative Investments based on the underlying investment strategy. Additionally, all assets managed using alternative investment strategies are now included in the Company’s Alternative Investments asset class. Prior-period figures have been adjusted accordingly. 32 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. Alternative Total Market / (in millions) Equity Equity Income Equity Equity Solutions Investments Long-term Short-term Total For the Three Months Ended June 30, 2022 Beginning AUM $ 30,543 $ 18,489 $ 33,071 $ 14,548 $ 15,654 $ 58,656 $ 4,025 $ 174,985 $ 3,113 $ 178,098 Gross client cash inflows 1,476 701 1,455 126 1,140 2,249 2,051 9,198 123 9,321 Gross client cash outflows (1,649 ) (1,791 ) (2,743 ) (396 ) (1,090 ) (1,761 ) (397 ) (9,828 ) (177 ) (10,005 ) Net client cash flows (174 ) (1,090 ) (1,288 ) (270 ) 50 488 1,654 (630 ) (53 ) (683 ) Market appreciation / (depreciation) (4,011 ) (2,558 ) (1,575 ) (2,365 ) (2,437 ) (8,652 ) (70 ) (21,669 ) (2 ) (21,670 ) Realizations and distributions — — — — — — — — — — Net transfers (2 ) (4 ) (809 ) (56 ) (10 ) (7 ) 9 (879 ) 82 (797 ) Ending AUM $ 26,356 $ 14,837 $ 29,398 $ 11,857 $ 13,257 $ 50,485 $ 5,617 $ 151,807 $ 3,140 $ 154,947 For the Three Months Ended June 30, 2021 (1) Beginning AUM $ 29,156 $ 20,230 $ 36,813 $ 14,448 $ 14,894 $ 34,709 $ 709 $ 150,958 $ 3,373 $ 154,331 Gross client cash inflows 1,412 1,238 1,754 91 1,108 4,056 314 9,973 102 10,074 Gross client cash outflows (1,940 ) (1,428 ) (2,953 ) (407 ) (562 ) (2,340 ) (41 ) (9,671 ) (228 ) (9,898 ) Net client cash flows (527 ) (190 ) (1,200 ) (316 ) 545 1,716 274 302 (126 ) 176 Market appreciation / (depreciation) 1,745 616 678 1,253 984 2,431 (7 ) 7,700 3 7,703 Net transfers (33 ) (39 ) 153 (101 ) (180 ) (81 ) 2 (278 ) 3 (275 ) Ending AUM $ 30,340 $ 20,617 $ 36,444 $ 15,284 $ 16,244 $ 38,774 $ 978 $ 158,682 $ 3,254 $ 161,936 (1) Beginning in January 2022, the Company’s “Other” asset class has been categorized to Solutions, Fixed Income, Global / Non-U.S. Equity, and Alternative Investments based on the underlying investment strategy. Additionally, all assets managed using alternative investment strategies are now included in the Company’s Alternative Investments asset class. Prior-period figures have been adjusted accordingly. U.S. U.S. U.S. Mid Small Large Global / Money Cap Cap Fixed Cap Non-U.S. Alternative Total Market / (in millions) Equity Equity Income Equity Equity Solutions Investments Long-term Short-term Total Six Months Ended June 30, 2022 Beginning AUM $ 30,578 $ 20,094 $ 35,154 $ 15,766 $ 16,050 $ 60,364 $ 2,548 $ 180,554 $ 3,100 $ 183,654 Gross client cash inflows 3,909 1,819 3,060 251 2,382 5,051 3,739 20,210 247 20,457 Gross client cash outflows (3,484 ) (3,143 ) (4,893 ) (779 ) (1,708 ) (3,236 ) (554 ) (17,797 ) (353 ) (18,150 ) Net client cash flows 425 (1,325 ) (1,833 ) (528 ) 673 1,815 3,185 2,413 (106 ) 2,307 Market appreciation / (depreciation) (4,666 ) (3,939 ) (3,116 ) (3,449 ) (3,533 ) (11,122 ) (98 ) (29,923 ) 3 (29,921 ) Realizations and distributions — — — — (30 ) (30 ) — (30 ) Net transfers 19 7 (806 ) 68 67 (572 ) 12 (1,206 ) 143 (1,064 ) Ending AUM $ 26,356 $ 14,837 $ 29,398 $ 11,857 $ 13,257 $ 50,485 $ 5,617 $ 151,807 $ 3,140 $ 154,947 Six Months Ended June 30, 2021 (1) Beginning AUM $ 26,230 $ 18,368 $ 36,639 $ 14,230 $ 14,141 $ 33,676 $ 422 $ 143,706 $ 3,534 $ 147,241 Gross client cash inflows 3,154 2,310 3,779 189 1,754 4,894 619 16,698 209 16,908 Gross client cash outflows (3,794 ) (3,124 ) (4,658 ) (839 ) (1,235 ) (3,663 ) (66 ) (17,379 ) (526 ) (17,906 ) Net client cash flows (640 ) (814 ) (879 ) (650 ) 519 1,231 552 (681 ) (317 ) (998 ) Market appreciation / (depreciation) 4,777 2,641 459 1,857 1,739 3,947 1 15,420 1 15,421 Net transfers (27 ) 423 226 (152 ) (155 ) (80 ) 2 236 36 272 Ending AUM $ 30,340 $ 20,617 $ 36,444 $ 15,284 $ 16,244 $ 38,774 $ 978 $ 158,682 $ 3,254 $ 161,936 33 Table of Contents (1) Beginning in January 2022, the Company’s “Other” asset class has been categorized to Solutions, Fixed Income, Global / Non-U.S. Equity, and Alternative Investments based on the underlying investment strategy. Additionally, all assets managed using alternative investment strategies are now included in the Company’s Alternative Investments asset class. Prior-period figures have been adjusted accordingly. The following table presents our AUM by distribution channel as of the dates indicated: As of June 30, 2022 2021 (in millions) Amount % of total Amount % of total Investor $ 54,494 35 % $ 70,656 44 % Institutional 45,284 29 % 47,544 29 % Retail 55,169 36 % 43,736 27 % Total AUM (1) $ 154,947 100 % $ 161,936 100 % (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 Pooled (in millions) Mutual Funds (1) ETFs (2) Vehicles (3) Total Three Months Ended June 30, 2022 Beginning AUM $ 118,119 $ 5,246 $ 54,733 $ 178,098 Gross client cash inflows 6,114 608 2,600 9,321 Gross client cash outflows (7,678 ) (130 ) (2,196 ) (10,005 ) Net client cash flows (1,565 ) 478 404 (683 ) Market appreciation (depreciation) (13,457 ) (568 ) (7,645 ) (21,670 ) Realizations and distributions — — — — Net transfers (800 ) — 2 (797 ) Ending AUM $ 102,297 $ 5,155 $ 47,494 $ 154,947 Three Months Ended June 30, 2021 Beginning AUM $ 117,830 $ 4,441 $ 32,061 $ 154,331 Gross client cash inflows 5,060 239 4,775 10,074 Gross client cash outflows (5,376 ) (169 ) (4,353 ) (9,898 ) Net client cash flows (317 ) 70 423 176 Market appreciation (depreciation) 5,879 218 1,606 7,703 Net transfers (229 ) (375 ) 329 (275 ) Ending AUM $ 123,164 $ 4,354 $ 34,418 $ 161,936 34 Table of Contents Separate Accounts and Other Pooled (in millions) Mutual Funds (1) ETFs (2) Vehicles (3) Total Six Months Ended June 30, 2022 Beginning AUM $ 124,142 $ 4,871 $ 54,641 $ 183,654 Gross client cash inflows 12,704 1,151 6,603 20,457 Gross client cash outflows (14,061 ) (199 ) (3,890 ) (18,150 ) Net client cash flows (1,357 ) 952 2,712 2,307 Market appreciation (depreciation) (19,421 ) (667 ) (9,832 ) (29,921 ) Realizations and distributions (30 ) (30 ) Net transfers (1,066 ) — 2 (1,064 ) Ending AUM $ 102,297 $ 5,155 $ 47,494 $ 154,947 Six Months Ended June 30, 2021 Beginning AUM $ 112,998 $ 3,976 $ 30,267 $ 147,241 Gross client cash inflows 10,525 479 5,904 16,908 Gross client cash outflows (11,669 ) (286 ) (5,950 ) (17,906 ) Net client cash flows (1,145 ) 193 (46 ) (998 ) Market appreciation (depreciation) 11,454 561 3,406 15,421 Net transfers (144 ) (375 ) 791 272 Ending AUM $ 123,164 $ 4,354 $ 34,418 $ 161,936 (1) Includes institutional and retail share classe s, money market and Variable Insurance Products or VIP funds. (2) Represents only ETF assets held by third parties. Excludes ETF assets held by other Victory Capital products. (3) Includes collective trust funds, wrap program accounts, UMAs, UCITS, private funds and non-U.S. domiciled pooled vehicles. June 30, 2022 AUM compared to March 31, 2022 AUM . At June 30, 2022, our total AUM was $154.9 billion, a decrease of $23.2 billion, or 13.0%, from $178.1 billion at March 31, 2022, primarily driven by negative market action of $21.7 billion . Net inflows from our Solutions and alternative investments strategies of $0.5 billion and $1.7 billion, respectively, were offset by net outflows from our U.S. small cap equity strategies and fixed income strategies of $1.1 billion and $1.3 billion, respectively. June 30, 2022 AUM compared to December 31, 2021 AUM . Total AUM decreased by $28.7 billion, or 15.6%, to $154.9 billion at June 30, 2022 compared to $183.7 billion at December 31, 2021. The decrease in AUM was due to negative market action of $29.9 billion partially offset by net inflows of $2.3 billion. Net inflows into our alternative investments and Solutions strategies of $3.2 billion and $1.8 billion, respectively, were partially offset by net outflows from fixed income strategies and U.S. small cap equity strategies of $1.8 billion and $1.3 billion, respectively. 35 Table of Contents GAAP Results of Operations The following table presents our GAAP results of operations for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2022 2021 2022 2021 Revenue Investment management fees $ 168,129 $ 168,033 $ 347,594 $ 328,317 Fund administration and distribution fees 47,877 53,871 98,431 106,536 Total revenue 216,006 221,904 446,025 434,853 Expenses Personnel compensation and benefits 57,582 57,462 122,483 116,468 Distribution and other asset-based expenses 40,868 44,223 84,452 86,326 General and administrative 13,921 13,713 26,683 27,023 Depreciation and amortization 10,758 4,694 21,365 9,079 Change in value of consideration payable for acquisition of business (26,600 ) 5,700 (30,100 ) 8,200 Acquisition-related costs 143 422 260 258 Restructuring and integration costs 8 422 17 2,475 Total operating expenses 96,680 126,636 225,160 249,829 Income from operations 119,326 95,268 220,865 185,024 Other (expense) income Interest income and other (expense) income (3,443 ) 1,932 (3,650 ) 4,666 Interest expense and other financing costs (9,925 ) (6,155 ) (19,158 ) (13,000 ) Loss on debt extinguishment (963 ) (1,146 ) (2,518 ) (3,927 ) Total other expense, net (14,331 ) (5,369 ) (25,326 ) (12,261 ) Income before income taxes 104,995 89,899 195,539 172,763 Income tax expense (25,790 ) (20,629 ) (45,061 ) (38,291 ) Net income $ 79,205 $ 69,270 $ 150,478 $ 134,472 Earnings per share of common stock Basic $ 1.16 $ 1.02 $ 2.19 $ 1.98 Diluted $ 1.09 $ 0.93 $ 2.05 $ 1.81 Weighted average number of shares outstanding Basic 68,521 67,776 68,633 67,769 Diluted 72,867 74,166 73,265 74,155 Dividends declared per share of common stock $ 0.25 $ 0.12 $ 0.50 $ 0.21 Investment Management Fees Three months ended June 30, 2022 compared to June 30, 2021 . Investment management fees were relatively flat, increasing 0.1%, or $0.1 million, to $168.1 million for the three months ended June 30, 2022 from $168.0 million for the same period in 2021. Six months ended June 30, 2022 compared to June 30, 2021 . Investment management fees increased by $19.3 million, or 5.9%, to $347.6 million for the six months ended June 30, 2022 from $328.3 million for the same period in 2021 due to an increase in average AUM over the comparable period, partially offset by a decrease in revenue realization. Fund Administration and Distribution Fees Three months ended June 30, 2022 compared to June 30, 2021 . Fund administration and distribution fees decreased by $6.0 million, or 11.1%, to $47.9 million for the three months ended June 30, 2022 compared to $53.9 million for the same period in 2021 due primarily to lower mutual fund average net assets. 36 Table of Contents Six months ended June 30, 202 2 compared to June 30, 20 2 1 . Fund administration and distribution fees decreased $8.1 million , or 7.6 %, to $ 98.4 million for the six months ended June 30, 20 2 2 from $ 106.5 million for the same period in 20 2 1 due to the same factors as discussed above in the quarterly section. Personnel Compensation and Benefits The following table presents the components of GAAP personnel compensation and benefits expense for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Salaries, payroll related taxes and employee benefits $ 18,949 $ 22,770 $ 42,661 $ 47,971 Incentive compensation 23,368 25,606 49,511 48,774 Sales-based compensation (1) 7,886 4,742 16,457 9,832 Equity awards granted to employees and directors (2) 4,965 4,344 8,910 9,891 Acquisition and transaction-related compensation 2,414 — 4,944 — Total personnel compensation and benefits expense $ 57,582 $ 57,462 $ 122,483 $ 116,468 (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 June 30, 2022 compared to June 30, 2021 . Personnel compensation and benefits were $57.6 million for the three months ended June 30, 2022, an increase of $0.1 million, or 0.2%, from $57.5 million for the same period in 2021. Incentive compensation and equity awards granted to employees and directors were $23.4 million and $5.0 million, respectively, for the three months ended June 30, 2022, compared to $25.6 million and $4.3 million, respectively, for the same period in 2021. Salaries, payroll related taxes and employee benefits were $18.9 million and $22.8 million, respectively, for the three months ended June 30, 2022 and 2021. Six months ended June 30, 2022 compared to June 30, 2021 . Personnel compensation and benefits increased by $6.0 million, or 5.2%, to $122.5 million for the six months ended June 30, 2022 from $116.5 million for the same period in 2021 due to an increase in variable costs such as sales-based compensation and the incentive compensation pool for employees. Also contributing was an increase in headcount and acquisition and transaction-related compensation as a result of the WestEnd and NEC acquisitions in the fourth quarter of 2021. Partially offsetting the increase was a $3.4 million decrease in the net unrealized fair value of deferred compensation plan investments. Salaries, payroll related taxes and employee benefits were $42.7 million and $48.0 million, respectively, for the six months ended June 30, 2022 and 2021. Incentive compensation and equity awards granted to employees and directors were $49.5 million and $8.9 million, respectively, for the six months ended June 30, 2022 compared to $48.8 million and $9.9 million, respectively, for the same period in 2021. 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, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Broker-dealer distribution fees $ 5,716 $ 6,581 $ 11,881 $ 12,782 Platform distribution fees 24,844 27,440 51,461 53,272 Sub-administration 4,064 4,293 8,290 8,384 Sub-advisory 3,627 3,102 7,512 6,432 Middle-office 2,617 2,807 5,308 5,456 Total distribution and other asset-based expenses $ 40,868 $ 44,223 $ 84,452 $ 86,326 Three months ended June 30, 2022 compared to June 30, 2021 . Distribution and other asset-based expenses are primarily based on AUM. For the three months ended June 30, 2022, distribution and other asset-based expenses were $40.9 million, a decrease of $3.4 million, or 7.6%, from $44.2 million for the same period in 2021. The decrease is primarily due to a change in vehicle mix and our underlying distribution platforms partially offset by an increase in average AUM over the comparable period. 37 Table of Contents Six months ended June 30, 202 2 compared to June 30, 20 2 1 . Distribution and other asset-based expenses were $ 84.5 million for the six months ended June 30 , 20 2 2 , a decrease of $ 1.9 million, or 2.2 %, from $ 86.3 million for the same period in 20 2 1 primarily due to same factors as discussed above in the quarterly section . General and Administrative Three months ended June 30, 2022 compared to June 30, 2021 . General and administrative expenses were $13.9 million for the three months ended June 30, 2022 compared to $13.7 million for the same period in 2021. The increase of $0.2 million, or 1.5%, was primarily due to an increase in travel and entertainment related expenses. Six months ended June 30, 2022 compared to June 30, 2021 . For the six months ended June 30, 2022 and 2021, general and administrative expenses were $26.7 million and $27.0 million, respectively, for a year over year decrease of $0.3 million, or 1.3%. The decrease was primarily due to a decrease in technology-related fees partially offset by an increase in travel and entertainment related expenses. Depreciation and Amortization Three months ended June 30, 2022 compared to June 30, 2021 . Depreciation and amortization increased by $6.1 million, or 129.2%, to $10.8 million for the three months ended June 30, 2022 from $4.7 million for the same period in 2021, primarily due to the increase in amortization expense related to definite lived intangible assets in connection with the WestEnd and NEC acquisitions. Six months ended June 30, 2022 compared to June 30, 2021 . Depreciation and amortization increased by $12.3 million, or 135.3%, to $21.4 million for the six months ended June 30, 2022 from $9.1 million for the same period in 2021, due to the same factors as discussed above in the quarterly section. Change in Value of Consideration Payable for Acquisition of Business Three months ended June 30, 2022 compared to June 30, 2021 . T he change in value of consideration payable for acquisition of business decreased $32.3 million as a result of decreases of $9.0 million and $17.6 million in the fair value of the contingent consideration associated with the USAA AMCO and WestEnd Acquisitions, respectively, for the three months ended June 30, 2022 compared to an increase of $5.7 million associated with the USAA AMCO Acquisition for the three months ended June 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable. Six months ended June 30, 2022 compared to June 30, 2021 . T he change in value of consideration payable for acquisition of business decreased $38.3 million as a result of decreases of $11.8 million and $18.3 million in the fair value of the contingent consideration associated with the USAA AMCO and WestEnd Acquisitions, respectively, for the six months ended June 30, 2022 compared to an increase of $8.2 million associated with the USAA AMCO Acquisition for the six months ended June 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable. Acquisition‑Related Costs Three months ended June 30, 2022 compared to June 30, 2021 . Acquisition-related costs for the three months ended June 30, 2022 were $0.1 million and $0.4 million for the three months ended June 30, 2021. Six months ended June 30, 2022 compared to June 30, 2021 . Acquisition-related costs for the six months ended June 30, 2022 and 2021 were flat at $0.3 million, respectively. Restructuring and Integration Costs Three months ended June 30, 2022 compared to June 30, 2021 . Restructuring and integration costs for the three months ended June 30, 2022 was $8 thousand and $0.4 million for the three months ended June 30, 2021. The decrease is primarily due to personnel restructuring within the direct to investor business . Six months ended June 30, 2022 compared to June 30, 2021 . Restructuring and integration costs were $17 thousand and $2.5 million, respectively, for the six months ended June 30, 2022 and 2021. The decrease is due to the same factors as discussed above in the quarterly section. Interest Income and Other Income (Expense) Three months ended June 30, 2022 compared to June 30, 2021 . Interest income and other income/(expense) was expense of $3.4 million for the three months ended June 30, 2022 compared to income of $1.9 million for the same period in 2021. The expense for the three months ended June 30, 2022 was primarily due to a $5.1 million decrease in the net unrealized fair value of deferred compensation plan investments. The income for the three months ended June 30, 2021 was primarily due to a $1.5 million increase in the net unrealized fair value of deferred compensation plan investments. 38 Table of Contents Six months ended June 30, 202 2 compared to June 30, 20 2 1 . For the six months ended June 30 , 20 2 2 and 20 2 1 , interest income and other income/(expense) was expense of $ 3 . 7 million and income of $ 4 . 7 million, respectively . The expense for the six months ended June 30, 2022 was primarily due to a $5.5 million decrease in the net unrealized fair value of deferred compensation plan investments. The income for the six months ended June 30, 2021 was primarily due to a $4.1 million increase in the net unrealized fair value of deferred compensation plan investments. Interest Expense and Other Financing Costs Three months ended June 30, 2022 compared to June 30, 2021 . Interest expense and other financing costs increased $3.8 million to $9.9 million for the three months ended June 30, 2022, compared to $6.2 million for the same period in 2021 d ue to an increase in interest expense as a result of a higher debt principal balance resulting from our incremental borrowing in December 2021 to fund the WestEnd Acquisition. Also contributing was a higher average interest rate over the comparable period. Six months ended June 30, 2022 compared to June 30, 2021 . For the six months ended June 30, 2022 and 2021, interest expense and other financing costs were $19.2 million and $13.0 million, respectively. The year-over-year increase is primarily due to the same factors as discussed above in the quarterly section. Loss on Debt Extinguishment Three months ended June 30, 2022 compared to June 30, 2021 . Loss on debt extinguishment was $1.0 million for the three months ended June 30, 2022 compared to $1.1 million for the same period in 2021. During the quarter ended June 30, 2022, the Company paid down $45.0 million of debt through prepayments and wrote off $1.0 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due. During the quarter ended June 30, 2021, the Company paid down $57.0 million of debt through prepayments and wrote off $1.1 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due . Refer to Note 9, Debt, for further details on the 2019 Credit Agreement. Six months ended June 30, 2022 compared to June 30, 2021 . Loss on debt extinguishment was $2.5 million for the six months ended June 30, 2022, due to repayments of term loan principal . Loss on debt extinguishment was $3.9 million for the six months ended June 30, 2021, due to repayments of term loan principal and the one-time write-off of debt issuance and debt discount costs associated with the 2021 term loan repricing in February 2021. Income Tax Expense Three months ended June 30, 2022 compared to June 30, 2021 . The effective tax rate for the three months ended June 30, 2022 and 2021 was 24.6% and 22.9%, respectively. The change in the effective tax rate was primarily due to lower excess tax benefits on share-based compensation and higher non-deductible expenses in 2022 compared to the same period in 2021. Six months ended June 30, 2022 compared to June 30, 2021 . For the six months ended June 30, 2022 and 2021, the effective tax rate was 23.0% and 22.2%, respectively. The change in the effective 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 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. 39 Table of Contents 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, (in thousands) 2022 2021 2022 2021 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 79,205 $ 69,270 $ 150,478 $ 134,472 Income tax expense (25,790 ) (20,629 ) (45,061 ) (38,291 ) Income before income taxes 104,995 89,899 195,539 172,763 Interest expense (1) 9,499 6,086 18,223 13,396 Depreciation (2) 2,102 1,524 4,056 2,770 Other business taxes (3) 541 524 1,131 898 Amortization of acquisition-related intangible assets (4) 8,656 3,171 17,312 6,309 Stock-based compensation (5) 2,860 3,124 5,493 7,760 Acquisition, restructuring and exit costs (6) (24,033 ) 6,544 (24,877 ) 10,933 Debt issuance costs (7) 1,560 1,304 3,621 4,097 Earnings/losses from equity method investments (8) 9 65 66 157 Adjusted EBITDA $ 106,189 $ 112,241 $ 220,564 $ 219,083 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 79,205 $ 69,270 $ 150,478 $ 134,472 Adjustments to reflect the operating performance of the Company: i. Other business taxes (3) 541 524 1,131 898 ii. Amortization of acquisition-related intangible assets (4) 8,656 3,171 17,312 6,309 iii. Stock-based compensation (5) 2,860 3,124 5,493 7,760 iv. Acquisition, restructuring and exit costs (6) (24,033 ) 6,544 (24,877 ) 10,933 v. Debt issuance costs (7) 1,560 1,304 3,621 4,097 Tax effect of above adjustments (9) 2,604 (3,667 ) (670 ) (7,499 ) Adjusted Net Income $ 71,393 $ 80,270 $ 152,488 $ 156,970 Tax benefit of goodwill and acquired intangibles (10) $ 9,327 $ 6,918 $ 18,649 $ 13,836 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. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Acquisition-related costs $ 143 $ 422 $ 260 $ 258 Restructuring and integration costs 8 422 17 2,475 Change in value of consideration payable for acquisition of business (26,600 ) 5,700 (30,100 ) 8,200 General and administrative — — — — Personnel compensation and benefits 2,416 — 4,946 — Total acquisition, restructuring and exit costs $ (24,033 ) $ 6,544 $ (24,877 ) $ 10,933 (7) Adding back debt issuance costs. ( 8 ) We adjust for losses (earnings) on equity method investments. 40 Table of Contents ( 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 continue to monitor our liquidity. The following table shows our liquidity position as of June 30, 2022 and December 31, 2021. June 30, December 31, (in thousands) 2022 2021 Cash and cash equivalents $ 42,718 $ 69,533 Accounts and other receivables 90,900 104,305 Undrawn commitment on revolving credit facility (1) 100,000 100,000 Accounts and other payables (94,045 ) (121,057 ) (1) The balance at June 30, 2022 represents the Company’s $99.9 million revolving credit facility and a $0.1 million standby letter of credit used as collateral for THB’s real estate location. 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 June 30, 2022 and December 31, 2021 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of June 30, 2022 and December 31, 2021. 2021 Debt Repricing and 2021 Incremental Term Loans On February 18, 2021, the Company entered into the Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement, dated as of July 1, 2019 (as amended by the First Amendment to Credit Agreement, dated as of January 17, 2020) , with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company refinanced the term loans with replacement term loans in an aggregate principal amount of $755.7 (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the term loans, including the same maturity date of July 1, 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25%, compared to 2.50% under the First Amendment. On December 31, 2021, the Company entered into the Third Amendment to the Credit Agreement (the “Third Amendment”), dated as of July 1, 2019 (as amended by the First Amendment to Credit Agreement, dated as of January 17, 2020, and the Second Amendment to Credit Agreement, dated as of February 18, 2021) with the guarantors party thereto, Barclays Bank PLC, as administrative agent, and the lenders party thereto from time to time. Pursuant to the Third Amendment, the Company obtained incremental term loans (the “2021 Incremental Term Loans”) in an aggregate principal amount of $505.0 million and used the proceeds to fund the WestEnd Acquisition of 100% of the equity interests of WestEnd and to pay fees and expenses incurred in connection therewith. The 2021 Incremental Term Loans will mature in 2028 and will bear interest at an annual rate equal to, at the option of the Company, either LIBOR (adjusted for reserves and subject to a 50 basis point floor) plus a margin of 2.25% or an alternate base rate plus a margin of 1.25%. The 2021 Incremental Term Loans will amortize at a rate of 1.00% per annum. Repayments of outstanding term loans under the 2019 Credit Agreement totaled $45.0 million and $115.0 million for the three and six months ended June 30, 2022, respectively. Subsequent to June 30, 2022, we reduced outstanding principal by $25.6 million, consisting of a $19.0 million reduction on the 2021 41 Table of Contents Incremental Term Loans and a $ 6.6 million reduction on the Repriced Term Loans, through repayments and open market term loan debt repurchases and retirements . Refer to Note 4, Acquisitions, for further details on the WestEnd Acquisition, as well as Note 11, Debt, for further information on the 2019 Credit Agreement. 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. Pursuant to the Second Amendment, the Company lowered the spread on the Term Loan by 0.25% resulting in a new fixed rate of 3.215% on the $450 million of Term Loan subject to the Swap. At June 30, 2022, the $450 million notional value Swap had a fair value of $36.1 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2022, the Company recognized income, net of tax, of $5.2 million and $21.5 million, respectively, in accumulated other comprehensive income (loss). For the three and six months ended June 30, 2022, the Company reclassified a loss of $0.1 million and $0.9 million, respectively, from accumulated other comprehensive income (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. Contingent Consideration At June 30, 2022, the Company had $278.4 million in contingent consideration that is estimated to be payable over the next two and four years resulting from the USAA AMCO and WestEnd Acquisitions, respectively. For the three and six months ended June 30, 2022, the Company recorded decreases of $9.0 million and $11.8 million, respectively, in contingent payment liabilities associated with the USAA AMCO Acquisition and $17.6 million and $18.3 million, respectively, in contingent payment liabilities associated WestEnd Acquisition, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. At June 30, 2022, the estimated fair value of the USAA AMCO Acquisition payments was $57.0 million, and a maximum of $75.0 million in contingent consideration ($37.5 million per year for the remaining 2 years of the earn out period) is potentially payable to sellers. At June 30, 2022, the estimated fair value of the WestEnd Acquisition contingent payments was $221.4 million, and a maximum of $320.0 million in contingent consideration ($80.0 million per year for the remaining four years of the earn out period) is potentially payable to sellers. 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, 2021. 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: Six Months Ended June 30, (in thousands) 2022 2021 Net cash provided by operating activities $ 165,055 $ 164,172 Net cash used in investing activities (7,152 ) (7,317 ) Net cash used in financing activities (184,585 ) (147,970 ) Operating Activities – Cash provided by operating activities during the six months ended June 30, 2022 was $165.1 million, compared to $164.2 million of cash provided by operating activities for the same period in 2021. The $0.9 million increase in cash provided by operating activities due to a $16.0 million increase in net income partially offset by a $17.3 million decrease in non-cash items. Cash provided by operating activities during the six months ended June 30, 2021 was $164.2 million and comprised of $134.5 million and $45.8 million of cash provided by net income and non-cash items, partially offset by $16.1 million in working capital source of cash. Investing Activities – Cash used in investing activities during the six months ended June 30, 2022 was $7.2 million and consisted of primarily of property and equipment purchases of $2.9 million, $1.9 million of net trading activity and $1.5 million for an equity investment in Alderwood. Cash used in investing activities during the six months ended June 30, 2021 was $7.3 million and consisted of property and equipment purchases of $5.6 million and $1.5 million of net trading activity. 42 Table of Contents Financing Activities – Cash used in financing activities during the six months ended June 30, 2022 was $184.6 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 $115.0 million, $29.4 million, $34.7 million, and $5.5 million, respectively. Cash used in financing activities during the six months ended June 30, 2021 was $148.0 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 $107.0 million, $17.7 million, $14.6 million, and $8.6 million, respectively. 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. 43 Table of Contents