# Victory Capital Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Victory Capital Holdings, Inc.](/companies/vctr.md) (CIK 1570827)
- Form: 10-Q
- Filed: 2023-08-04
- Accepted by EDGAR: Aug 4, 2023, 15:37 ET
- Period: 2023-06-30
- Accession: 0000950170-23-038531
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1570827/000095017023038531/vctr-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1570827/000095017023038531/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $204.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $405.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $87.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $162.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $17.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $30.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $56.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $105.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.83 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.85 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.58 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 68,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 69,037,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $141.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $2.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $43.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $79.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $43.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-06-30 | $2.54bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $1.49bn | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $987.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $1.05bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,042 characters.

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, 2023 and 2022 and cash flows for the six months ended June 30, 2023 and 2022. 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, 2022. 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, 2022.

### Overview

**Our Business –** Victory is a diversified global asset management firm with $161.6 billion in AUM as of June 30, 2023. 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, 2023, our Franchises and our Solutions Platform collectively managed a diversified set of 126 investment strategies for a wide range of institutional and retail clients and direct investors.

On April 24, 2023, we introduced “Victory Capital InVest”, the new brand for our direct investor business and announced the expansion of the business to include “Marketplace”, our new open architecture brokerage platform for individual investors. Marketplace provides investors with access to trade individual stocks as well as a broad range of mutual funds and ETFs from many providers. Investors can also choose mutual funds and ETFs from Victory Capital.

**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 $161.6 billion at June 30, 2023. 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, resulting in WestEnd becoming the Company’s twelfth investment franchise. Founded in 2004, and headquartered in Charlotte, NC, WestEnd is an ETF strategist advisor that provides financial advisors with a turnkey, core model allocation strategy for either a holistic solution or complementary source 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 aggregate purchase price (the “WestEnd Purchase Price”) for the WestEnd Acquisition was 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 $205.6 million at June 30, 2023 as compared to $202.7 million at December 31, 2022 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The increase in the liability of $2.9 million for the six months ended June 30, 2023 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.

The purchase price for the NEC Acquisition was $63.1 million, which included $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.

**USAA AMCO Acquisition –** On July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company 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 Asset Management Company 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. In the fourth quarter of 2022, the Company paid $37.5 million in cash to sellers for the third annual earn out period for the USAA AMCO Acquisition.

The estimated fair value of contingent consideration payable to sellers was estimated at $33.7 million at June 30, 2023 as compared to $27.7 million at December 31, 2022 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The increase in the liability of $6.0 million for the six months ended June 30, 2023 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.

### Business Highlights

Assets under management:

- AUM at June 30, 2023 increased by $3.0 billion, or 1.9%, to $161.6 billion from $158.6 billion at March 31, 2023, driven by positive market action of $5.5 billion partially offset by net outflows of $2.4 billion. Net flows for the quarter ended June 30, 2023 were comprised of $2.1 billion and $0.3 billion of net long-term and short-term outflows, respectively.
- AUM at June 30, 2023 and 2022 was $161.6 billion and $154.9 billion, respectively. We generated $5.8 billion in gross flows and $2.4 billion in net outflows for the three months ended June 30, 2023 compared to $9.3 billion in gross flows and $0.7 million in net outflows for the same period in 2022. Net flows for the three months ended June 30, 2023 were comprised of $2.1 billion and $0.3 billion of net long-term and short-term outflows, respectively.
- AUM at June 30, 2023 and 2022 was $161.6 billion and $154.9 billion, respectively. We generated $11.9 billion in gross flows and $3.7 billion in net outflows for the six months ended June 30, 2023 compared to $20.5 billion in gross flows and $2.3 billion in net inflows for the same period in 2022. Net flows for the six months ended June 30, 2023 were comprised of $3.3 billion and $0.3 billion of net long-term and short-term outflows, respectively.

Investment performance:

- 42 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 65% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 63% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 72% over a three-year period, 79% over a five-year period and 77% over a ten-year period. On an equal-weighted basis, 54% of our strategies have outperformed their benchmarks over a one-year period, 69% over a three-year period, 62% over a five-year period and 66% over a ten-year period.

Financial highlights:

- Total revenue for the three months ended June 30, 2023 was $204.2 million compared to $216.0 million for the same period in 2022. For the six months ended June 30, 2023 and 2022, total revenue was $405.5 million and $446.0 million, respectively.
- Net income was $56.7 million for the three months ended June 30, 2023 compared to $79.2 million for the same period in 2022. For the six months ended June 30, 2023 and 2022, net income was $105.9 million and $150.5 million, respectively.
- Adjusted EBITDA was $104.0 million for the three months ended June 30, 2023, or 50.9% of revenue, compared to $106.2 million, or 49.2% of revenue, for the same period in 2022. For the six months ended June 30, 2023, Adjusted EBITDA was $203.2 million, or 50.1% of revenue, compared to $220.6 million, or 49.5% of revenue, for the same period in 2022. 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 $75.9 million for the three months ended June 30, 2023 compared to $80.7 million for the three months ended June 30, 2022. For the six months ended June 30, 2023, Adjusted Net Income with tax benefit was $151.1 million compared to $171.1 million for the same period in 2022. 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:

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

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| AUM at period end | $161,622 | $154,947 | $161,622 | $154,947 |
| Average AUM | 157,372 | 165,703 | 157,595 | 171,283 |
| Gross flows | 5,822 | 9,321 | 11,911 | 20,457 |
| Net short-term flows | (316) | (53) | (325) | (106) |
| Net long-term flows | (2,106) | (630) | (3,342) | 2,413 |
| Net flows | (2,422) | (683) | (3,667) | 2,307 |
| Total revenue | 204.2 | 216.0 | 405.5 | 446.0 |
| Revenue on average AUM | 52.1 bps | 52.3 bps | 51.9 bps | 52.5 bps |
| Net income | 56.7 | 79.2 | 105.9 | 150.5 |
| Adjusted EBITDA(1) | 104.0 | 106.2 | 203.2 | 220.6 |
| Adjusted EBITDA Margin(2) | 50.9% | 49.2% | 50.1% | 49.5% |
| Adjusted Net Income(1) | 66.4 | 71.4 | 132.1 | 152.5 |
| Tax benefit of goodwill and acquired intangibles(3) | 9.5 | 9.3 | 19.1 | 18.6 |

(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:

*(in millions)*

|  | As of June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Solutions | $55,836 | $50,485 |
| Fixed Income | 26,098 | 29,398 |
| U.S. Mid Cap Equity | 30,007 | 26,356 |
| U.S. Small Cap Equity | 15,664 | 14,837 |
| Global / Non-U.S. Equity | 15,392 | 13,257 |
| U.S. Large Cap Equity | 12,170 | 11,857 |
| Alternative Investments | 3,301 | 5,617 |
| **Total Long-Term Assets** | **158,469** | **151,807** |
| Money Market & Short-Term Assets | 3,152 | 3,140 |
| **Total** | **$161,622** | **$154,947** |

The following tables summarize our asset flows by asset class for the periods indicated:

*(in millions)*

| For the Three Months Ended June 30, 2023 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Alternative Investments | Total Long-term | Money Market / Short-term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $29,035 | $15,648 | $26,535 | $11,425 | $14,868 | $54,416 | $3,317 | $155,244 | $3,377 | $158,621 |
| Gross client cash inflows | 1,259 | 743 | 873 | 87 | 559 | 1,622 | 449 | 5,591 | 231 | 5,822 |
| Gross client cash outflows | (1,126) | (1,128) | (1,324) | (290) | (585) | (2,834) | (408) | (7,697) | (547) | (8,244) |
| Net client cash flows | 132 | (386) | (451) | (204) | (26) | (1,212) | 41 | (2,106) | (316) | (2,422) |
| Market appreciation / (depreciation) | 824 | 404 | 48 | 954 | 575 | 2,682 | 12 | 5,499 | 38 | 5,537 |
| Realizations and distributions | — | — | — | — | — | — | (73) | (73) | — | (73) |
| Net transfers | 16 | (2) | (34) | (4) | (25) | (49) | 4 | (94) | 53 | (41) |
| Ending AUM | $30,007 | $15,664 | $26,098 | $12,170 | $15,392 | $55,836 | $3,301 | $158,469 | $3,152 | $161,622 |
| **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 |

29

*(in millions)*

| Six Months Ended June 30, 2023 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Alternative Investments | Total Long-term | Money Market / Short-term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $27,892 | $15,103 | $26,353 | $10,973 | $14,160 | $51,507 | $3,663 | $149,649 | $3,302 | $152,952 |
| Gross client cash inflows | 2,858 | 1,728 | 2,060 | 170 | 937 | 2,839 | 846 | 11,439 | 472 | 11,911 |
| Gross client cash outflows | (2,219) | (2,001) | (2,896) | (675) | (1,129) | (4,612) | (1,248) | (14,780) | (797) | (15,577) |
| Net client cash flows | 640 | (273) | (836) | (504) | (192) | (1,774) | (403) | (3,341) | (325) | (3,667) |
| Market appreciation / (depreciation) | 1,461 | 827 | 663 | 1,775 | 1,495 | 6,048 | 108 | 12,379 | 72 | 12,451 |
| Realizations and distributions | — | — | — | — | — | — | (73) | (73) | — | (73) |
| Net transfers | 15 | 7 | (82) | (74) | (71) | 55 | 6 | (144) | 103 | (42) |
| Ending AUM | $30,007 | $15,664 | $26,098 | $12,170 | $15,392 | $55,836 | $3,301 | $158,469 | $3,152 | $161,622 |
| **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 |

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

*(in millions)*

|  | As of June 30, 2023 Amount | % of total | 2022 Amount | % of total |
| --- | ---: | ---: | ---: | ---: |
| Investor | $56,324 | 35% | $54,494 | 35% |
| Institutional | 44,949 | 28% | 45,284 | 29% |
| Retail | 60,348 | 37% | 55,169 | 36% |
| Total AUM(1) | $161,622 | 100% | $154,947 | 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:

*(in millions)*

| Three Months Ended June 30, 2023 | Mutual Funds (1) | ETFs (2) | Separate Accounts and Other Pooled Vehicles (3) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $103,246 | $5,555 | $49,819 | $158,621 |
| Gross client cash inflows | 3,639 | 175 | 2,008 | 5,822 |
| Gross client cash outflows | (4,863) | (421) | (2,960) | (8,244) |
| Net client cash flows | (1,224) | (246) | (952) | (2,422) |
| Market appreciation (depreciation) | 3,923 | (117) | 1,731 | 5,537 |
| Realizations and distributions | — | — | (73) | (73) |
| Net transfers | (28) | — | (13) | (41) |
| Ending AUM | $105,916 | $5,193 | $50,513 | $161,622 |
| **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 |

*(in millions)*

| Six Months Ended June 30, 2023 | Mutual Funds (1) | ETFs (2) | Separate Accounts and Other Pooled Vehicles (3) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $99,447 | $5,627 | $47,877 | $152,952 |
| Gross client cash inflows | 8,185 | 393 | 3,333 | 11,911 |
| Gross client cash outflows | (10,269) | (655) | (4,654) | (15,577) |
| Net client cash flows | (2,084) | (262) | (1,321) | (3,667) |
| Market appreciation (depreciation) | 8,573 | (164) | 4,042 | 12,451 |
| Realizations and distributions | — | — | (73) | (73) |
| Net transfers | (19) | (9) | (13) | (42) |
| Ending AUM | $105,916 | $5,193 | $50,513 | $161,622 |
| **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 |

(1) Includes institutional and retail share classes, 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, 2023 AUM compared to March 31, 2023 AUM*. At June 30, 2023, our total AUM was $161.6 billion, an increase of $3.0 billion, or 1.9%, from $158.6 billion at March 31, 2023, primarily driven by positive market action of $5.5 billion partially offset by net outflows of $2.4 billion.

Net outflows were driven by our Solutions platform, fixed income strategies, U.S. small cap and U.S. large cap equity strategies of $1.2 billion, $0.5 billion, $0.4 billion and $0.2 billion, respectively.

*June 30, 2023 AUM compared to December 31, 2022 AUM.* Total AUM increased by $8.7 billion, or 5.7%, to $161.6 billion at June 30, 2023 compared to $153.0 billion at December 31, 2022. The increase in AUM was due to positive market action of $12.5 billion partially offset by net outflows of $3.7 billion.

Net outflows were driven by our Solutions platform, fixed income strategies, U.S. large cap, U.S. small cap equity strategies and our Alternative investments platform of $1.8 billion, $0.8 billion, $0.5 billion, $0.3 billion and $0.4 billion, respectively, partially offset by inflows of $0.6 billion in our U.S. mid cap equity strategies.

### GAAP Results of Operations

The following table presents our GAAP results of operations for the three and six months ended June 30, 2023 and 2022.

*(in thousands, except per share data)*

| Revenue | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $159,410 | $168,129 | $316,246 | $347,594 |
| Fund administration and distribution fees | 44,816 | 47,877 | 89,300 | 98,431 |
| **Total revenue** | **204,226** | **216,006** | **405,546** | **446,025** |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | 54,940 | 57,582 | 112,542 | 122,483 |
| Distribution and other asset-based expenses | 37,344 | 40,868 | 74,998 | 84,452 |
| General and administrative | 13,250 | 13,921 | 25,638 | 26,683 |
| Depreciation and amortization | 9,650 | 10,758 | 21,330 | 21,365 |
| Change in value of consideration payable for acquisition of business | 1,500 | (26,600) | 8,900 | (30,100) |
| Acquisition-related costs | 16 | 143 | 18 | 260 |
| Restructuring and integration costs | — | 8 | 29 | 17 |
| **Total operating expenses** | **116,700** | **96,680** | **243,455** | **225,160** |
| **Income from operations** | **87,526** | **119,326** | **162,091** | **220,865** |
| **Other income (expense)** |  |  |  |  |
| Interest income and other (expense) income | 1,971 | (3,443) | 3,515 | (3,650) |
| Interest expense and other financing costs | (14,902) | (9,925) | (29,141) | (19,158) |
| Loss on debt extinguishment | — | (963) | — | (2,518) |
| **Total other expense, net** | **(12,931)** | **(14,331)** | **(25,626)** | **(25,326)** |
| **Income before income taxes** | **74,595** | **104,995** | **136,465** | **195,539** |
| **Income tax expense** | **(17,924)** | **(25,790)** | **(30,521)** | **(45,061)** |
| **Net income** | **$56,671** | **$79,205** | **$105,944** | **$150,478** |
| **Earnings per share of common stock** |  |  |  |  |
| Basic | $0.85 | $1.16 | $1.58 | $2.19 |
| Diluted | $0.83 | $1.09 | $1.53 | $2.05 |
| **Weighted average number of shares outstanding** |  |  |  |  |
| Basic | 66,466 | 68,521 | 66,874 | 68,633 |
| Diluted | 68,500 | 72,867 | 69,037 | 73,265 |
| **Dividends declared per share of common stock** | $0.32 | $0.25 | $0.64 | $0.50 |

32

### Investment Management Fees

*Three months ended June 30, 2023 compared to June 30, 2022.* Investment management fees decreased 5.2%, or $8.7 million, to $159.4 million for the three months ended June 30, 2023 from $168.1 million for the same period in 2022 due to a decrease in average AUM over the comparable period.

*Six months ended June 30, 2023 compared to June 30, 2022.* Investment management fees decreased by $31.3 million, or 9.0%, to $316.2 million for the six months ended June 30, 2023 from $347.6 million for the same period in 2022 due to the same factors as discussed above in the quarterly section.

### Fund Administration and Distribution Fees

*Three months ended June 30, 2023 compared to June 30, 2022.* Fund administration and distribution fees decreased by $3.1 million, or 6.4%, to $44.8 million for the three months ended June 30, 2023 compared to $47.9 million for the same period in 2022 due primarily to lower mutual fund average net assets.

*Six months ended June 30, 2023 compared to June 30, 2022.* Fund administration and distribution fees decreased $9.1 million, or 9.3%, to $89.3 million for the three months ended June 30, 2023 from $98.4 million for the same period in 2022 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, 2023 and 2022:

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $22,848 | $18,949 | $47,305 | $42,661 |
| Incentive compensation | 21,315 | 23,368 | 43,234 | 49,511 |
| Sales-based compensation(1) | 5,102 | 7,886 | 10,522 | 16,457 |
| Equity awards granted to employees and directors(2) | 4,241 | 4,965 | 8,494 | 8,910 |
| Acquisition and transaction-related compensation | 1,434 | 2,414 | 2,987 | 4,944 |
| **Total personnel compensation and benefits expense** | **$54,940** | **$57,582** | **$112,542** | **$122,483** |

(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, 2023 compared to June 30, 2022.* Personnel compensation and benefits were $54.9 million for the three months ended June 30, 2023, a decrease of $2.6 million, or 4.6%, from $57.6 million for the same period in 2022 due to a decrease in variable costs such as incentive compensation and sales-based compensation. Incentive compensation and equity awards granted to employees and directors were $21.3 million and $4.2 million, respectively, for the three months ended June 30, 2023, compared to $23.4 million and $5.0 million, respectively, for the same period in 2022. Salaries, payroll related taxes and employee benefits were $22.8 million and $18.9 million, respectively, for the three months ended June 30, 2023 and 2022.

*Six months ended June 30, 2023 compared to June 30, 2022.* Personnel compensation and benefits decreased by $9.9 million, or 8.1%, to $112.5 million for the six months ended June 30, 2023 from $122.5 million for the same period in 2022 due to a decrease in variable costs such as incentive and sales-based compensation. Salaries, payroll related taxes and employee benefits were $47.3 million and $42.7 million, respectively, for the six months ended June 30, 2023 and 2022. Incentive compensation and equity awards granted to employees and directors were $43.2 million and $8.5 million, respectively, for the six months ended June 30, 2023 compared to $49.5 million and $8.9 million, respectively, for the same period in 2022.

### 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, 2023 and 2022:

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Broker-dealer distribution fees | $5,065 | $5,716 | $10,314 | $11,881 |
| Platform distribution fees | 23,067 | 24,844 | 46,190 | 51,461 |
| Sub-administration | 3,947 | 4,064 | 7,868 | 8,290 |
| Sub-advisory | 2,692 | 3,627 | 5,427 | 7,512 |
| Middle-office | 2,573 | 2,617 | 5,199 | 5,308 |
| **Total distribution and other asset-based expenses** | **$37,344** | **$40,868** | **$74,998** | **$84,452** |

*Three months ended June 30, 2023 compared to June 30, 2022.* Distribution and other asset-based expenses are primarily based on AUM. For the three months ended June 30, 2023, distribution and other asset-based expenses were $37.3 million, a decrease of $3.5 million, or 8.6%, from $40.9 million for the same period in 2022. The decrease is primarily due to a decrease in average AUM over the comparable period.

*Six months ended June 30, 2023 compared to June 30, 2022.* Distribution and other asset-based expenses were $75.0 million for the six months ended June 30, 2023, a decrease of $9.5 million, or 11.2%, from $84.5 million for the same period in 2022 primarily due to a decrease in average AUM over the comparable period.

### General and Administrative

*Three months ended June 30, 2023 compared to June 30, 2022.* General and administrative expenses were $13.3 million for the three months ended June 30, 2023 compared to $13.9 million for the same period in 2022. The decrease of $0.7 million, or 4.8%, was primarily due to a decrease in professional fees and technology-related expenses.

*Six months ended June 30, 2023 compared to June 30, 2022.* For the six months ended June 30, 2023 and 2022, general and administrative expenses were $25.6 million and $26.7 million, respectively, for a year over year decrease of $1.0 million, or 3.9%. The decrease was due to the same factors as discussed above in the quarterly section.

### Depreciation and Amortization

*Three months ended June 30, 2023 compared to June 30, 2022.* Depreciation and amortization decreased by $1.1 million, or 10.3%, to $9.7 million for the three months ended June 30, 2023 from $10.8 million for the same period in 2022, primarily due to a decrease in amortization expense related to definite-lived intangible assets in connection with the USAA acquisition.

*Six months ended June 30, 2023 compared to June 30, 2022.* Depreciation and amortization was $21.3 million and $21.4 million for the six months ended June 30, 2023 and 2022, respectively.

### Change in Value of Consideration Payable for Acquisition of Business

*Three months ended June 30, 2023 compared to June 30, 2022.* The change in value of consideration payable for acquisition of business increased $28.1 million primarily due to a $0.2 million decrease in the fair value of contingent consideration associated with the WestEnd Acquisition for the three months ended June 30, 2023 compared to a decrease of $17.6 million for the three months ended June 30, 2022. Also contributing was a $1.7 million increase in the fair value of contingent consideration associated with the USAA AMCO Acquisition for the three months ended June 30, 2023 compared to a decrease of $9.0 million for the three months ended June 30, 2022. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

*Six months ended June 30, 2023 compared to June 30, 2022.* The change in value of consideration payable for acquisition of business increased $39.0 million as a result of increases of $6.0 million and $2.9 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, 2023 compared to decreases of $11.8 million and $18.3 million associated with the USAA AMCO and WestEnd Acquisitions for the six months ended June 30, 2022. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

### Restructuring and Integration Costs

*Three months ended June 30, 2023 compared to June 30, 2022.* There were no restructuring and integration costs for the three months ended June 30, 2023 compared to $8 thousand for the three months ended June 30, 2022.

*Six months ended June 30, 2023 compared to June 30, 2022.* Restructuring and integration costs were $29 thousand and $17 thousand, respectively, for the six months ended June 30, 2023 and 2022.

### Interest Income and Other Income (Expense)

*Three months ended June 30, 2023 compared to June 30, 2022.* Interest income and other income/(expense) was income of $2.0 million for the three months ended June 30, 2023 compared to expense of $3.4 million for the same period in 2022. The income was primarily due to an increase in the net unrealized fair value of deferred compensation plan investments for the three months ended June 30, 2023 compared to a reduction in the net unrealized fair value of deferred compensation plan investments for the same period in 2022.

*Six months ended June 30, 2023 compared to June 30, 2022.* For the six months ended June 30, 2023 and 2022, interest income and other income/(expense) was income of $3.5 million and expense of $3.7 million, respectively. The income was primarily due to an increase in the net unrealized fair value of deferred compensation plan investments for the six months ended June 30, 2023 compared to a reduction in the net unrealized fair value of deferred compensation plan investments for the same period in 2022.

### Interest Expense and Other Financing Costs

*Three months ended June 30, 2023 compared to June 30, 2022.* Interest expense and other financing costs increased $5.0 million to $14.9 million for the three months ended June 30, 2023, compared to $9.9 million for the same period in 2022 due a higher average interest rate, partially offset by a lower debt principal balance over the comparable period.

*Six months ended June 30, 2023 compared to June 30, 2022.* For the six months ended June 30, 2023 and 2022, interest expense and other financing costs were $29.1 million and $19.2 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, 2023 compared to June 30, 2022.* The Company had no losses on debt extinguishment for the three months ended June 30, 2023. For the three months ended June 30, 2022, loss on debt extinguishment was $1.0 million. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

*Six months ended June 30, 2023 compared to June 30, 2022*. The Company had no losses on debt extinguishment for the six months ended June 30, 2023. For the six months ended June 30, 2022, loss on debt extinguishment was $2.5 million. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

### Income Tax Expense

*Three months ended June 30, 2023 compared to June 30, 2022.* The effective tax rate for the three months ended June 30, 2023 and 2022 was 24.0% and 24.6%, respectively. The decrease in the effective tax rate in 2023 compared to the same period in 2022 was due mainly to changes in non-deductible expenses.

*Six months ended June 30, 2023 compared to June 30, 2022*. For the six months ended June 30, 2023 and 2022, the effective tax rate was 22.4% and 23.0%, respectively. The decrease in the effective tax rate was due primarily to higher excess tax benefits on share-based compensation in 2023 compared to the same period in 2022. 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.

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

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$56,671** | **$79,205** | **$105,944** | **$150,478** |
| Income tax expense | (17,924) | (25,790) | (30,521) | (45,061) |
| **Income before income taxes** | **74,595** | **104,995** | **136,465** | **195,539** |
| Interest expense(1) | 14,146 | 9,499 | 27,628 | 18,223 |
| Depreciation(2) | 2,296 | 2,102 | 4,267 | 4,056 |
| Other business taxes(3) | 382 | 541 | 766 | 1,131 |
| Amortization of acquisition-related intangible assets(4) | 7,353 | 8,656 | 17,062 | 17,312 |
| Stock-based compensation(5) | 1,538 | 2,860 | 3,542 | 5,493 |
| Acquisition, restructuring and exit costs(6) | 2,949 | (24,033) | 11,933 | (24,877) |
| Debt issuance costs(7) | 756 | 1,560 | 1,504 | 3,621 |
| Earnings/losses from equity method investments(8) | — | 9 | — | 66 |
| **Adjusted EBITDA** | **$104,015** | **$106,189** | **$203,167** | **$220,564** |

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$56,671** | **$79,205** | **$105,944** | **$150,478** |
| Adjustments to reflect the operating performance of the Company: |  |  |  |  |
| i. Other business taxes(3) | 382 | 541 | 766 | 1,131 |
| ii. Amortization of acquisition-related intangible assets(4) | 7,353 | 8,656 | 17,062 | 17,312 |
| iii. Stock-based compensation(5) | 1,538 | 2,860 | 3,542 | 5,493 |
| iv. Acquisition, restructuring and exit costs(6) | 2,949 | (24,033) | 11,933 | (24,877) |
| v. Debt issuance costs(7) | 756 | 1,560 | 1,504 | 3,621 |
| Tax effect of above adjustments(9) | (3,244) | 2,604 | (8,701) | (670) |
| **Adjusted Net Income** | **$66,405** | **$71,393** | **$132,050** | **$152,488** |
| Tax benefit of goodwill and acquired intangibles(10) | $9,537 | $9,327 | $19,061 | $18,649 |

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.

*(in thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Acquisition-related costs | $16 | $143 | $18 | $260 |
| Restructuring and integration costs | — | 8 | 29 | 17 |
| Change in value of consideration payable for acquisition of business | 1,500 | (26,600) | 8,900 | (30,100) |
| Personnel compensation and benefits | 1,433 | 2,416 | 2,986 | 4,946 |
| **Total acquisition, restructuring and exit costs** | **$2,949** | **$(24,033)** | **$11,933** | **$(24,877)** |

(7) Adding back debt issuance costs.

(8) We adjust for losses (earnings) 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.

The following table shows our liquidity position as of June 30, 2023 and December 31, 2022.

*(in thousands)*

|  | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $43,780 | $38,171 |
| Accounts and other receivables | 92,964 | 84,473 |
| Undrawn commitment on revolving credit facility (1) | 100,000 | 100,000 |
| Accounts and other payables | (103,615) | (109,320) |

(1) The balances at June 30, 2023 and December 31, 2022 represent 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 maintained a $100.0 million revolving credit facility at June 30, 2023 and December 31, 2022 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of June 30, 2023 and December 31, 2022.

### 2021 Debt Repricing

On February 18, 2021, the Company entered into the Second Amendment (the “Second 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 Second Amendment, the Company repriced the existing term loans with replacement term loans in an aggregate principal amount of $755.7 million (the “Repriced Term Loans”). The Repriced Term Loans have substantially the same terms as the previously existing term loans, including the same maturity date of July 2026, except that the Repriced Term Loans provided for a reduced applicable margin on LIBOR of 25 basis points. After the Second Amendment, the applicable margin on LIBOR under the Repriced Term Loans was 2.25%.

### 2021 Incremental Term Loans

On December 31, 2021, the Company entered into the Third Amendment (the “Third Amendment”) to the 2019 Credit Agreement 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 and to pay fees and expenses incurred in connection therewith. The 2021 Incremental Term Loans mature in December 2028 and 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%.

Original issue discount was $2.5 million for the 2021 Incremental Term Loans. The Company incurred a total of $9.1 million of other third party costs related to the 2021 Incremental Term Loans, which were recorded as term loan debt issuance costs.

### 2022 LIBOR to Term SOFR Rate Transition

On September 23, 2022, the Company entered into the Fourth Amendment (the “Fourth Amendment”) to the 2019 Credit Agreement to change the interest rate on the Repriced Term Loans and 2021 Incremental Term Loans from LIBOR to a rate based on SOFR plus a ten-basis point credit spread adjustment. There was no change to the applicable margin on the referenced rate as a result of the Fourth Amendment.

The LIBOR rate loans outstanding as of the Fourth Amendment’s effective date continued as LIBOR rate loans until the end of their then current interest periods. The 2021 Incremental Term Loans converted into Term SOFR loans on September 30, 2022, while the Repriced Term Loans converted into Term SOFR loans on October 6, 2022. Also on October 6, 2022, the interest periods for the Repriced Term Loans and 2021 Incremental Term Loans were aligned and the three-month Term SOFR rate was elected for all the Company’s term loans.

### 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. On September 26, 2022, the Company and the Swap counterparty executed an amendment to the Swap (“the Swap Amendment”) to update LIBOR conventions to SOFR conventions and to modify the fixed rate for the change from three-month LIBOR to three-month Term SOFR effective on October 6, 2022. There was no change to the $450 million notional value, the July 1, 2026 expiration date, the quarterly payment frequency or the designated three-month maturity from the Swap Amendment. The interest rate effectively fixed by the Swap on $450 million of the Company’s outstanding term loan debt through July 1, 2026 changed from 3.215% to 3.149% as a result of the Swap Amendment.

At June 30, 2023, the $450 million notional value Swap had a fair value of $45.4 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2023, the Company recognized income, net of tax, of $3.9 million and a loss, net of tax, of $1.2 million, respectively, in accumulated other comprehensive income (loss). For the three and six months ended June 30, 2023, the Company reclassified income of $4.7 million and $8.9 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, 2023, the Company had $239.3 million in contingent consideration that is estimated to be payable over the next year and three years resulting from the USAA AMCO and WestEnd Acquisitions, respectively. For the three and six months ended June 30, 2023, the Company recorded an increases of $1.7 million and $6.0 million, respectively, in contingent payment liabilities associated with the USAA AMCO Acquisition and a decrease of $0.2 million and an increase of $2.9 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, 2023, the estimated fair value of the USAA AMCO Acquisition payment was $33.7 million, and a maximum of $37.5 million in contingent consideration ($37.5 million for the remaining year of the earn out period) is potentially payable to sellers. At June 30, 2023, the estimated fair value of the WestEnd Acquisition contingent payments was $205.6 million, and a maximum of $320.0 million in contingent consideration ($80.0 million per year) 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, 2022.

### 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:

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $141,562 | $165,055 |
| Net cash used in investing activities | (3,922) | (7,152) |
| Net cash used in financing activities | (132,034) | (184,585) |

***Operating Activities –*** Cash provided by operating activities during the six months ended June 30, 2023 was $141.6 million, compared to $165.1 million of cash provided by operating activities for the same period in 2022. The $23.5 million decrease in cash provided by operating activities is due to a $44.5 million decrease in net income partially offset by a $25.6 million increase in non-cash items.

Cash provided by operating activities during the six months ended June 30, 2022 was $165.1 million and comprised of $150.5 million and $28.5 million of cash provided by net income and non-cash items, partially offset by $13.9 million in working capital source of cash.

***Investing Activities –*** Cash used in investing activities during the six months ended June 30, 2023 was $3.9 million and consisted of primarily of property and equipment purchases of $2.6 million and $1.4 million of net trading activity.

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.

***Financing Activities –*** Cash used in financing activities during the six months ended June 30, 2023 was $132.0 million and was mostly attributable to repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $79.9 million, $43.6 million, and $8.5 million, respectively.

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.

### 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.

## Market risk

As filed, 6,180 characters.

*Market Risk –* Substantially all of our revenues are derived from investment management, fund administration and distribution fees, which are primarily based on the market value of our AUM. Accordingly, our revenues and net income may decline as a result of our AUM decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their assets in favor of other investment alternatives that they perceive to offer higher returns or lower risk, which could cause our revenues and net income to decline further.

The value of our AUM was approximately $162 billion at June 30, 2023. A 10% increase or decrease in the value of our AUM, if proportionately distributed over all of our strategies, products and client relationships, would cause an annualized increase or decrease in our revenues of approximately $84.2 million at our weighted-average fee rate of 52 basis points for the quarter ended June 30, 2023. Because of declining fee rates from larger relationships and differences in our fee rates across investment strategies, a change in the composition of our AUM, in particular, an increase in the proportion of our total AUM attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted-average fee rate. The same 10% increase or decrease in the value of our total AUM, if attributed entirely to a proportionate increase or decrease in the AUM of the Victory Funds, to which we provide a range of services in addition to those provided to institutional separate accounts, would cause an annualized increase or decrease in our revenues of approximately $98.8 million at the Victory Funds’ aggregate weighted-average fee rate of 61 basis points for the quarter ended June 30, 2023. If the same 10% increase or decrease in the value of our total AUM was attributable entirely to a proportionate increase or decrease in the assets of our institutional separate accounts, it would cause an annualized increase or decrease in our revenues of approximately $53.5 million at the weighted-average fee rate across all of our institutional separate accounts of 33 basis points for the quarter ended June 30, 2023.

As is customary in the investment management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of those asset classes. We believe our clients invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may implement their own risk management program or procedures. We have not adopted a corporate‑level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall AUM and related revenues. Some of these risks, such as sector and currency risks, are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular risks. While negative returns in our strategies and net client cash outflows do not directly reduce the assets on our balance sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our AUM would result in a reduction in our revenues.

*Exchange Rate Risk –* A portion of the accounts that we advise hold investments that are denominated in currencies other than the U.S. dollar. To the extent our AUM is denominated in currencies other than the U.S. dollar, the value of that AUM will decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar. Each investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the portfolios they manage. We believe many of our clients invest in those strategies in order to gain exposure to non‑U.S. currencies, or may implement their own hedging programs. As a result, we generally do not hedge an investment portfolio’s exposure to non‑U.S. currency.

We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 10% of our AUM are invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of any hedging arrangement, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of our AUM by approximately $1.6 billion, which would cause an annualized increase or decrease in revenues of approximately $8.3 million at our weighted-average fee rate for the business of 52 basis points for the quarter ended June 30, 2023.

*Interest Rate Risk –* Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. On March 27, 2020, the Company executed the Swap, a floating-to-fixed interest rate swap transaction, to effectively fix the interest rate at 3.465% on $450 million of its outstanding Original Term Loan through the Original Term Loan maturity date of July 2026. On September 26, 2022, the Company and the Swap counterparty executed an amendment to the Swap to update LIBOR conventions to SOFR conventions and to modify the fixed rate for the change from three-month LIBOR to three-month Term SOFR effective on October 6, 2022. There was no change to the $450 million notional value, the July 1, 2026 expiration date, the quarterly payment frequency or the designated three-month maturity from the Swap Amendment. The interest rate effectively fixed by the Swap on $450 million of the Company’s outstanding term loan debt through July 1, 2026 changed from 3.22% to 3.15% as a result of the Swap Amendment. Refer to Note 14, Derivatives, for further information on the Swap. At June 30, 2023, we were exposed to interest rate risk as a result of the unhedged amounts outstanding under the 2019 Credit Agreement, as amended. Refer to Note 9, Debt, for a description of the amounts outstanding as of such date and the applicable interest rate.

## Controls and procedures

As filed, 1,435 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) at June 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

### Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 936 characters.

For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC and the information contained in this report. The declaration, payment and determination of the amount of our quarterly dividends may change at any time. In making decisions regarding our quarterly dividends, we consider general economic and business conditions, our strategic plans and prospects, our businesses and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions (including under the terms of our 2019 Credit Agreement as amended) and legal, tax, regulatory and such other factors as we may deem relevant. There have been no material changes to the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2022.

Filed Aug 4, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-038531. Last ingested by Listed: Oct 30, 2026, 14:15 ET. No prices; not investment advice.