# Victory Capital Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2019

- Company: [Victory Capital Holdings, Inc.](/companies/vctr.md) (CIK 1570827)
- Form: 10-Q
- Filed: 2019-11-13
- Accepted by EDGAR: Nov 13, 2019, 09:15 ET
- Period: 2019-09-30
- Accession: 0001558370-19-010897
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1570827/000155837019010897/vctr-20190930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1570827/000155837019010897/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $215.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $393.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | $55.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | $100.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $8.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $17.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $26.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $54.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.38 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $0.81 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 73,671,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 73,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $167.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $2.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-01-01 to 2019-09-30 | $4.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2019-01-01 to 2019-09-30 | $9.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-09-30 | $79.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-09-30 | $1.79bn | us-gaap:Assets |
| Total liabilities | at 2019-09-30 | $1.28bn | us-gaap:Liabilities |
| Long-term debt | at 2019-09-30 | $1.01bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2019-09-30 | $506.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 59,404 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.

The following discussion is intended to assist in the understanding of our financial position at September 30, 2019 and December 31, 2018, results of operations for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018, and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements (the “accompanying 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, 2018. 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, 2018.

### Overview

We are an investment management firm operating a next generation, integrated multi-boutique model with $145.8 billion in assets under management (“AUM”) as of September 30, 2019. Our differentiated model features a scalable operating platform that provides centralized distribution, marketing and operations infrastructure to our Franchises and Solutions. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees.

#### Franchises

Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated multi-boutique model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. Victory Capital Management Inc. (“VCM”) employs all of the Company’s United States investment professionals across our Franchises, which are not separate legal entities.

#### Solutions

Solutions consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer Solutions through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our exchange traded fund (“ETF”) brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions.

We sell our products through our centralized distribution model with 134 professionals across both our institutional, retail and direct member distribution channels and marketing organization. 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 member channel serves the investment needs of USAA members and the military community.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $145.8 billion at September 30, 2019. We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing member, institutional and retail distribution channels with deep penetration.

### USAA AMCO Acquisition

Effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of the USAA Asset Management Company (“USAA Adviser”) and the Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services (together with USAA Adviser, the “USAA Acquired Companies”), which includes USAA’s mutual fund and ETF businesses and its 529 College Savings Plan (collectively, the “USAA Mutual Fund Business”).

Victory’s transformative acquisition of the USAA Mutual Fund Business increased AUM by $81.1 billion and significantly impacted our financial results for the three and nine months ended September 30, 2019. The acquisition not only increased revenue, but also introduced additional personnel expenses and new operating expenses such as third party distribution costs, expenses related to a transfer services agreement with USAA, 529 College Savings Plan, and direct member channel expenses that the Company did not incur prior to the acquisition. In conjunction with the USAA AMCO Acquisition, the Company entered into a credit agreement (the “2019 Credit Agreement”), dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019.

The USAA AMCO Acquisition expands and diversifies our investment platform, particularly in the fixed income and solutions asset classes, and increases our size and scale. Additional products added to our investments platform include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds. We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs. Through the acquisition, the Company has the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct member channel.

Total consideration for the USAA AMCO Acquisition was $954.1 million, comprising of $851.3 million of cash paid at closing and $102.8 million in contingent consideration. 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. Refer to Note 4, Acquisitions, to the accompanying financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further details on the 2019 Credit Agreement.

### Business Highlights

Assets under management:

- AUM at September 30, 2019 grew by $81.8 billion, or 127.6%, to $145.8 billion from $64.1 billion at June 30, 2019, primarily driven by $81.1 billion of acquired assets and positive net inflows of $0.7 billion, compared to positive net inflows of $3.7 billion at June 30, 2019.
- AUM at September 30, 2019 and 2018 was $145.8 billion and $63.6 billion, respectively. We generated $11.9 billion in gross flows and $0.7 billion in positive net inflows for the three months ended September 30, 2019 compared to $2.9 billion in gross flows and $0.7 billion in negative net outflows for the same period in 2018.
- AUM generated $22.5 billion in gross flows and $3.2 billion in positive net inflows for the nine months ended September 30, 2019 compared to $10.1 billion in gross flows and $1.4 billion in negative net outflows for the same period in 2018.

Investment performance:

- **Legacy Victory Capital:** 25 of our Legacy Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 74% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 76% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 83% over a three-year period, 73% over a five-year period and 92% over a ten-year period. On an equal-weighted basis, 55% of our strategies have outperformed their benchmarks over a one-year period, 65% over a three-year period, 68% over a five-year period and 82% over a ten-year period.
- **USAA Fixed Income:** 12 of our USAA Fixed Income mutual funds and ETFs had overall Morningstar ratings of four or five stars and 99% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 67% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 88% over a three-year period, 88% over a five-year period and 95% over a ten-year period. On an equal-weighted basis, 64% of our strategies have outperformed their benchmarks over a one-year period, 83% over a three-year period, 83% over a five-year period and 91% over a ten-year period.
- **Total Victory Capital:** 44 of our Total 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. 59% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 64% over a three-year period, 60% over a five-year period and 73% over a ten-year period. On an equal-weighted basis, 47% of our strategies have outperformed their benchmarks over a one-year period, 52% over a three-year period, 55% over a five-year period and 68% over a ten-year period.

Industry achievements and recognition:

- For the fourth consecutive year, eVestment ranked us in the top 5 in their 2018 Institutional Brand Awareness by AUM category.
- We ranked 9th in “*Barron’s Best Fund Families of 2018”* for the one-year period ended December 31, 2018. We also ranked 4th in the mixed asset category and 5th in the taxable bond category. This is the 2nd consecutive year that we have been ranked among the top 10 best fund families and the 5th consecutive year that we have been ranked among the top 25 best fund families by *Barron’s.*

Financial highlights:

- Total revenue for the three months ended September 30, 2019 was $215.0 million compared to $108.1 million for the same period in 2018. For the nine months ended September 30, 2019 and 2018, total revenue was $393.8 million and $317.4 million, respectively.
- Net income was $26.0 million for the three months ended September 30, 2019 compared to $20.6 million for the same period in 2018. For the nine months ended September 30, 2019 and 2018, net income was $54.9 million and $49.8 million, respectively.
- Adjusted EBITDA was $96.3 million for the three months ended September 30, 2019, or 44.8% of revenue, compared to $43.3 million, or 40.1% of revenue, for the same period in 2018. For the nine months ended September 30, 2019, Adjusted EBITDA was $166.5 million, or 42.3% of revenue, compared to $123.8 million, 39.0% of revenue, for the same period in 2018. 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 was $60.5 million for the three months ended September 30, 2019 compared to $29.0 million for the three months ended September 30, 2018. For the nine months ended September 30, 2019, Adjusted Net Income was $106.8 million compared to $78.6 million for the same period in 2018. 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 September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| AUM at period end | $145,832 | $63,640 | $145,832 | $63,640 |
| Average AUM | 145,904 | 63,447 | 87,670 | 62,361 |
| Gross flows | 11,905 | 2,896 | 22,457 | 10,102 |
| Net flows | 661 | (672) | 3,249 | (1,408) |
| Total revenue(1) | 215.0 | 108.1 | 393.8 | 317.4 |
| Revenue on average AUM(1) | 58.5 bps | 67.6 bps | 60.1 bps | 68.0 bps |
| Net income | 26.0 | 20.6 | 54.9 | 49.8 |
| Adjusted EBITDA(2) | 96.3 | 43.3 | 166.5 | 123.8 |
| Adjusted EBITDA Margin(1)(3) | 44.8% | 40.1% | 42.3% | 39.0% |
| Adjusted Net Income(2) | 60.5 | 29.0 | 106.8 | 78.6 |
| Tax benefit of goodwill and acquired intangibles(4) | 6.8 | 3.3 | 13.5 | 10.0 |

(1) On January 1, 2019, the Company adopted Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”) and now records all Mutual Fund and ETF waivers and expense reimbursements as a reduction of reported revenue and not as an expense item. The impact in the three months and nine months ended September 30, 2019 was a decrease in revenue and operating expenses of $5.2 million and $13.4 million, respectively. Prior periods have not been restated, as permitted by the Financial Accounting Standards Board (“FASB”), due to the Company adopting the new revenue guidance using the modified retrospective method.

(2) 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.”

(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

(4) 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. The table below sets forth our AUM by Franchise and Solutions as of September 30, 2019. The amounts shown in the table exclude assets managed for other proprietary products (e.g. funds of funds), to adjust for the double counting of holdings.

Due to rounding, AUM numbers presented in the tables below may not add up precisely to the totals provided.

*(in billions)*

|  | September 30, 2019 |
| --- | ---: |
| Solutions | $49.1 |
| USAA | 42.3 |
| Sycamore | 22.4 |
| RS Growth | 8.8 |
| INCORE | 6.3 |
| Integrity | 5.0 |
| Trivalent | 3.2 |
| Munder | 2.7 |
| RS Value | 2.6 |
| Sophus | 1.7 |
| NewBridge | 1.2 |
| RS International | 0.3 |
| **Total** | **$145.8** |

33

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

*(in millions)*

|  | As of September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Fixed Income | $37,784 | $7,149 |
| Solutions | 29,579 | 4,224 |
| U.S. Mid Cap Equity | 25,479 | 25,014 |
| U.S. Small Cap Equity | 16,266 | 16,438 |
| U.S. Large Cap Equity | 13,488 | 4,644 |
| Global / Non-U.S. Equity | 11,532 | 4,738 |
| Other | 243 | 1,433 |
| **Total Long-Term Assets** | **$134,371** | **$63,640** |
| Money Market | 11,460 | — |
| **Total** | **$145,832** | **$63,640** |

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

*(in millions)*

| For Three Months Ended September 30, 2019 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Other | Total Long-term | Money Market | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $24,203 | $15,278 | $7,300 | $4,108 | $5,498 | $6,919 | $771 | $64,077 | $— | $64,077 |
| Gross client cash inflows | 880 | 779 | 4,071 | 166 | 326 | 1,207 | 28 | 7,456 | 4,449 | 11,905 |
| Gross client cash outflows | (1,396) | (1,069) | (1,789) | (497) | (566) | (1,296) | (118) | (6,730) | (4,514) | (11,244) |
| Net client cash flows | (516) | (290) | 2,282 | (331) | (240) | (89) | (90) | 726 | (65) | 661 |
| Market appreciation / (depreciation) | (26) | (249) | 528 | (301) | (192) | 225 | (83) | (98) | 44 | (54) |
| Net transfers | 1,818 | 1,527 | 27,674 | 10,012 | 6,465 | 22,523 | (354) | 69,665 | 11,482 | 81,147 |
| Ending AUM | $25,479 | $16,266 | $37,784 | $13,488 | $11,532 | $29,579 | $243 | $134,371 | $11,460 | $145,832 |
| **For Three Months Ended September 30, 2018** |  |  |  |  |  |  |  |  |  |  |
| Beginning AUM | $24,485 | $15,971 | $6,978 | $4,577 | $4,705 | $3,815 | $1,725 | $62,256 | $— | $62,256 |
| Gross client cash inflows | 964 | 740 | 449 | 42 | 307 | 321 | 73 | 2,896 | — | 2,896 |
| Gross client cash outflows | (1,660) | (860) | (346) | (179) | (193) | (61) | (269) | (3,568) | — | (3,568) |
| Net client cash flows | (696) | (120) | 103 | (137) | 114 | 260 | (196) | (672) | — | (672) |
| Market appreciation / (depreciation) | 1,225 | 587 | 67 | 204 | (81) | 149 | (95) | 2,056 | — | 2,056 |
| Net transfers | — | — | 1 | — | — | — | (1) | — | — | — |
| Ending AUM | $25,014 | $16,438 | $7,149 | $4,644 | $4,738 | $4,224 | $1,433 | $63,640 | $— | $63,640 |

34

*(in millions)*

| Nine Months Ended September 30, 2019 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Other | Total Long-term | Money Market | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $20,019 | $12,948 | $6,836 | $3,759 | $4,610 | $3,767 | $823 | $52,763 | $— | $52,763 |
| Gross client cash inflows | 4,656 | 2,500 | 4,880 | 214 | 1,024 | 4,578 | 155 | 18,008 | 4,449 | 22,457 |
| Gross client cash outflows | (5,021) | (3,052) | (2,502) | (809) | (1,048) | (1,940) | (321) | (14,694) | (4,514) | (19,208) |
| Net client cash flows | (365) | (552) | 2,378 | (595) | (24) | 2,638 | (166) | 3,314 | (65) | 3,249 |
| Market appreciation / (depreciation) | 4,006 | 2,345 | 896 | 316 | 480 | 649 | (60) | 8,631 | 44 | 8,675 |
| Net transfers | 1,820 | 1,526 | 27,674 | 10,007 | 6,465 | 22,525 | (354) | 69,661 | 11,482 | 81,143 |
| Ending AUM | $25,479 | $16,266 | $37,784 | $13,488 | $11,532 | $29,579 | $243 | $134,372 | $11,460 | $145,832 |
| **Nine Months Ended September 30, 2018** |  |  |  |  |  |  |  |  |  |  |
| Beginning AUM | $25,185 | $15,308 | $7,551 | $4,789 | $4,105 | $3,028 | $1,805 | $61,771 | $— | $61,771 |
| Gross client cash inflows | 3,292 | 2,383 | 1,145 | 200 | 1,420 | 1,307 | 355 | 10,102 | — | 10,102 |
| Gross client cash outflows | (5,162) | (2,527) | (1,637) | (677) | (594) | (307) | (606) | (11,510) | — | (11,510) |
| Net client cash flows | (1,870) | (144) | (492) | (477) | 826 | 1,000 | (251) | (1,408) | — | (1,408) |
| Market appreciation / (depreciation) | 1,680 | 1,293 | 89 | 320 | (185) | 156 | (68) | 3,285 | — | 3,285 |
| Net transfers | 19 | (19) | 1 | 12 | (8) | 40 | (53) | (8) | — | (8) |
| Ending AUM | $25,014 | $16,438 | $7,149 | $4,644 | $4,738 | $4,224 | $1,433 | $63,640 | $— | $63,640 |

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

*(in millions)*

|  | As of September 30, 2019 Amount | % of total | 2018 Amount | % of total |
| --- | ---: | ---: | ---: | ---: |
| Member | $71,925 | 49% | $- | -% |
| Institutional | 38,246 | 26% | 35,138 | 57% |
| Retail | 35,661 | 25% | 28,502 | 43% |
| Total AUM(1) | $145,832 | 100% | $63,640 | 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 September 30, 2019 | Mutual Funds(1) | ETFs | Separate Accounts and Other Vehicles(2) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $34,258 | $3,093 | $26,726 | $64,077 |
| Gross client cash inflows | 8,383 | 245 | 3,277 | 11,905 |
| Gross client cash outflows | (9,643) | (258) | (1,343) | (11,244) |
| Net client cash flows | (1,260) | (13) | 1,934 | 661 |
| Market appreciation / (depreciation) | 267 | 4 | (325) | (54) |
| Net transfers | 80,806 | 782 | (441) | 81,147 |
| Ending AUM | $114,071 | $3,867 | $27,894 | $145,832 |
| **Three Months Ended September 30, 2018** |  |  |  |  |
| Beginning AUM | $37,818 | $2,906 | $21,532 | $62,256 |
| Gross client cash inflows | 2,098 | 305 | 493 | 2,896 |
| Gross client cash outflows | (2,950) | (18) | (600) | (3,568) |
| Net client cash flows | (852) | 287 | (107) | (672) |
| Market appreciation / (depreciation) | 1,223 | 102 | 731 | 2,056 |
| Net transfers | — | — | — | — |
| Ending AUM | $38,189 | $3,295 | $22,156 | $63,640 |

*(in millions)*

| Nine Months Ended September 30, 2019 | Mutual Funds(1) | ETFs | Separate Accounts and Other Vehicles(2) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $30,492 | $2,956 | $19,315 | $52,763 |
| Gross client cash inflows | 12,760 | 594 | 9,103 | 22,457 |
| Gross client cash outflows | (15,403) | (789) | (3,016) | (19,208) |
| Net client cash flows | (2,643) | (195) | 6,087 | 3,249 |
| Market appreciation / (depreciation) | 5,421 | 323 | 2,931 | 8,675 |
| Net transfers | 80,802 | 782 | (441) | 81,143 |
| Ending AUM | $114,071 | $3,867 | $27,893 | $145,832 |
| **Nine Months Ended September 30, 2018** |  |  |  |  |
| Beginning AUM | $37,967 | $2,250 | $21,555 | $61,771 |
| Gross client cash inflows | 7,279 | 1,082 | 1,741 | 10,102 |
| Gross client cash outflows | (8,924) | (143) | (2,443) | (11,510) |
| Net client cash flows | (1,645) | 939 | (702) | (1,408) |
| Market appreciation / (depreciation) | 1,878 | 106 | 1,301 | 3,285 |
| Net transfers | (11) | — | 3 | (8) |
| Ending AUM | $38,189 | $3,295 | $22,156 | $63,640 |

(1) Includes institutional and retail share classes and Variable Insurance Products or VIP funds.

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

*September 30, 2019 AUM compared to June 30, 2019 AUM*. At September 30, 2019, our total AUM was $145.8 billion, an increase of $81.8 billion, or 127.6%, from $64.1 billion at June 30, 2019, primarily due to $81.1 billion of acquired assets and positive net inflows of $0.7 billion. Short-term money market assets accounted for $11.5 billion, or 7.8%, of the total AUM of $145.8 billion at September 30, 2019. The net inflows were driven by $2.3 billion in our fixed income, partially offset by total net outflows of $0.5 billion in our U.S. mid cap equity strategies, $0.3 billion in our U.S. large cap equity strategies, $0.3 billion in our U.S. small cap equity strategies and $0.2 billion in our global equity strategies.

*September 30, 2019 AUM compared to December 31, 2018 AUM.* Total AUM increased by $93.1 billion, or 176.4%, to $145.8 billion at September 30, 2019 compared to $52.8 billion at December 31, 2018. The increase in AUM was primarily due to $81.1 billion of acquired assets, positive net inflows of $3.2 billion, as well as positive market movement of $8.7 billion. The net inflows were driven by $2.6 billion in our Solutions Platform and $2.4 billion in our fixed income, partially offset by total net outflows of $0.6 billion in our U.S. large cap equity strategies, $0.6 billion in our U.S. small cap equity strategies and $0.4 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 nine months ended September 30, 2019 and 2018. The financial results reflect the USAA AMCO Acquisition that closed on July 1, 2019. The acquisition significantly impacted our financial results for the three and nine months ended September 30, 2019.

*(in thousands, except per share data)*

| Revenue | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $155,406 | $92,525 | $307,859 | $270,653 |
| Fund administration and distribution fees | 59,574 | 15,557 | 85,960 | 46,792 |
| **Total revenue** | **214,980** | **108,082** | **393,819** | **317,445** |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | 55,556 | 38,027 | 125,599 | 111,970 |
| Distribution and other asset-based expenses | 57,202 | 24,269 | 89,151 | 73,557 |
| General and administrative | 17,654 | 6,951 | 31,828 | 23,095 |
| Depreciation and amortization | 7,768 | 5,574 | 18,253 | 17,917 |
| Change in value of consideration payable for acquisition of business | — | — | (14) | (4) |
| Acquisition-related costs | 16,386 | 1,451 | 21,950 | 1,446 |
| Restructuring and integration costs | 4,841 | — | 6,629 | 702 |
| **Total operating expenses** | **159,407** | **76,272** | **293,396** | **228,683** |
| **Income from operations** | **55,573** | **31,810** | **100,423** | **88,762** |
| **Other income (expense)** |  |  |  |  |
| Interest income and other income/(expense) | 2,742 | (200) | 5,231 | (229) |
| Interest expense and other financing costs | (16,856) | (4,458) | (26,000) | (16,256) |
| Loss on debt extinguishment | (7,409) | — | (7,409) | (6,058) |
| **Total other income (expense), net** | **(21,523)** | **(4,658)** | **(28,178)** | **(22,543)** |
| **Income before income taxes** | **34,050** | **27,152** | **72,245** | **66,219** |
| **Income tax expense** | **(8,058)** | **(6,562)** | **(17,343)** | **(16,430)** |
| **Net income** | **$25,992** | **$20,590** | **$54,902** | **$49,789** |
| **Earnings per share of common stock** |  |  |  |  |
| Basic | $0.38 | $0.30 | $0.81 | $0.76 |
| Diluted | $0.35 | $0.29 | $0.75 | $0.71 |
| **Weighted average number of shares outstanding** |  |  |  |  |
| Basic | 67,724 | 67,972 | 67,610 | 65,817 |
| Diluted | 73,671 | 71,864 | 73,300 | 70,168 |
| **Dividends declared per share of common stock** | $0.05 | $— | $0.05 | $— |

### Investment Management Fees

*Three months ended September 30, 2019 compared to September 30, 2018.* Investment management fees increased by $62.9 million, or 68.0%, to $155.4 million for the three months ended September 30, 2019 from $92.5 million for the same period in 2018 due to an increase in average AUM year over year, partially offset by a decrease in the realized fee rate due to a shift in asset mix. Average AUM was $145.9 billion for the three months ended September 30, 2019 compared to $63.4 billion for the same period in 2018, mostly attributable to acquired assets in the USAA AMCO Acquisition.

The Company adopted ASU 2014-09 on January 1, 2019. Mutual fund and ETF waivers and expense reimbursements are recorded as a reduction to investment management fees under the new standard ($5.2 million in the third quarter of 2019), whereas under legacy revenue recognition guidance these amounts were recorded as distribution and other asset-based expenses ($3.1 million in the third quarter of 2018). The comparative periods have not been restated and continue to be reported under the legacy guidance, as permitted by the FASB.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Investment management fees increased by $37.2 million, or 13.7%, to $307.9 million for the nine months ended September 30, 2019 from $270.7 million for the same period in 2018 due to the same factors as discussed above in the quarterly section. Average AUM was $87.7 million and $62.4 million, respectively, for the nine months ended September 30, 2019 and 2018. The adoption of ASU 2014-09, as discussed above in the quarterly section, reduced investment management fees by $13.4 million for the nine months ended September 30, 2019 compared to $9.4 million recorded as distribution and other asset-based expenses for the same period in 2018 under legacy revenue recognition guidance.

### Fund Administration and Distribution Fees

*Three months ended September 30, 2019 compared to September 30, 2018.* Fund administration and distribution fees increased by $44.0 million, or 282.9%, to $59.6 million for the three months ended September 30, 2019 from $15.6 million for the same period in 2018 due to an increase in average AUM year over year and the addition of $21.4 million in transfer agent fees with the USAA Funds related to the USAA AMCO Acquisition, partially offset by a shift in the mix of assets to lower 12b-1 paying share classes.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Fund administration and distribution fees increased by $39.2 million, or 83.7%, to $86.0 million for the nine months ended September 30, 2019 from $46.8 million for the same period in 2018 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 amd nine months ended September 30, 2019 and 2018:

*(in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $16,647 | $11,928 | $44,158 | $37,104 |
| Incentive compensation | 29,493 | 18,580 | 60,137 | 53,237 |
| Sales-based compensation(1) | 3,397 | 3,514 | 9,984 | 10,334 |
| Equity awards granted to employees(2) | 4,814 | 4,005 | 10,115 | 11,295 |
| Acquisition and transaction-related compensation | 1,205 | — | 1,205 | — |
| **Total personnel compensation and benefits expense** | **$55,556** | **$38,027** | **$125,599** | **$111,970** |

(1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales.

(2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards is recognized as compensation expense over the vesting period.

*Three months ended September 30, 2019 compared to September 30, 2018.* Personnel compensation and benefits were $55.6 million for the three months ended September 30, 2019, an increase of $17.5 million, or 46.1%, from $38.0 million for the same period in 2018 primarily attributable to an increase in the headcount due to the USAA AMCO Acquisition. Incentive compensation was $29.5 million for the three months ended September 30, 2019 compared to $18.6 million for the same period in 2018. Salaries, payroll related taxes and employee benefits were $16.6 million and $11.9 million, respectively, for the three months ended September 30, 2019 and 2018.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Personnel compensation and benefits increased by $13.6 million, or 12.2%, to $125.6 million for the nine months ended September 30, 2019 from $112.0 million for the same period in 2018 due to the same factors as discussed above in the quarterly section. Salaries, payroll related taxes and employee benefits were $44.2 million and $37.1 million, respectively, for the nine months ended September 30, 2019 and 2018. Incentive compensation was $60.1 million for the nine months ended September 30, 2019 compared to $53.2 million for the same period in 2018.

### Distribution and Other Asset‑Based Expenses

The following table presents the components of distribution and other asset-based expenses for the three and nine months ended September 30, 2019 and 2018:

*(in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Broker-dealer distribution fees | $6,974 | $8,689 | $20,914 | $26,832 |
| Platform distribution fees | 36,293 | 7,228 | 45,856 | 21,781 |
| Fund expense reimbursements | — | 3,072 | — | 9,352 |
| Sub-administration | 7,881 | 1,850 | 11,296 | 5,019 |
| Sub-advisory | 3,454 | 1,595 | 5,074 | 5,235 |
| Middle-office | 2,600 | 1,835 | 6,011 | 5,338 |
| **Total distribution and other asset-based expenses** | **$57,202** | **$24,269** | **$89,151** | **$73,557** |

*Three months ended September 30, 2019 compared to September 30, 2018.* Distribution and other asset-based expenses are primarily based on AUM. For the three months ended September 30, 2019, distribution and other asset-based expenses were $57.2 million, an increase of $32.9 million, or 135.7%, from $24.3 million for the same period in 2018, primarily due to the USAA AMCO Acquisition. The acquisition introduced new operating expenses that the Company did not incur prior to the acquisition, such as distribution costs paid to third parties and USAA, sub-transfer agent service costs, 529 College Savings Plan expenses, and direct member channel expenses.

Fund expense reimbursements declined by $3.1 million due to the change in the classification of such reimbursements with the adoption of ASU 2014-09 on January 1, 2019. Mutual fund and ETF waivers and expense reimbursements are recorded as a reduction to investment management fees under ASU 2014-09, whereas under legacy revenue recognition guidance these were recorded as a distribution and other asset-based expense. The comparative periods have not been restated and continue to be reported under the legacy guidance, as permitted by the FASB. Broker-dealer distribution fees decreased due to the shift in the mix of assets to lower 12b-1 paying share classes.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Distribution and other asset-based expenses were $89.2 million for the nine months ended September 30, 2019, an increase of $15.6 million, or 21.2%, from $73.6 million for the same period in 2018 due to the same factors as discussed above in the quarterly section.

### General and Administrative

*Three months ended September 30, 2019 compared to September 30, 2018*. General and administrative expenses were $17.7 million for the three months ended September 30, 2019 compared to $7.0 million for the same period in 2018. The increase of $10.7 million, or 154.0%, was primarily due to one-time debt repricing expenses of $4.3 million related to the 2019 Credit Agreement and the addition of transition service agreement costs related to the USAA AMCO Acquisition.

*Nine months ended September 30, 2019 compared to September 30, 2018.* For the nine months ended September 30, 2019 and 2018, general and administrative expenses were $31.8 million and $23.1 million, respectively, for a year over year increase of $8.7 million, or 37.8%. The increase was due to the same factors as discussed above in the quarterly section.

### Depreciation and Amortization

*Three months ended September 30, 2019 compared to September 30, 2018.* Depreciation and amortization increased by $2.2 million, or 39.4%, to $7.8 million for the three months ended September 30, 2019 from $5.6 million for the same period in 2018, due to the addition of definite-lived intangible assets acquired in connection with the USAA AMCO Acquisition.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Depreciation and amortization increased by $0.3 million, or 1.9%, to $18.3 million for the nine months ended September 30, 2019 from $17.9 million for the same period in 2018, due to the same factors as discussed above regarding the USAA AMCO Acquisition, partially offset by definite-lived intangible assets acquired in connection with the Compass Efficient Model Portfolios, LLC acquisition (the “CEMP Acquisition”) and the management-led buyout with Crestview GP became fully amortized in 2018.

### Acquisition‑Related Costs

*Three months ended September 30, 2019 compared to September 30, 2018.* Acquisition-related costs for the three months ended September 30, 2019 were $16.4 million and $1.5 million for the three months ended September 30, 2018. The increase was primarily due to the USAA AMCO Acquisition which closed on July 1, 2019 and includes various transaction costs such as legal and filing fees, other professional fees, as well as certain integration-related costs.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Acquisition-related costs for the nine months ended September 30, 2019 and 2018 were $22.0 million and $1.4 million, respectively. The increase was due to the same factors as discussed above in the quarterly section.

### Restructuring and Integration Costs

*Three months ended September 30, 2019 compared to September 30, 2018.* Restructuring and integration costs for the three months ended September 30, 2019 and 2018 were $4.8 million and $0.0 million, respectively. The increase is due to severance costs and integration and conversion costs recorded in the third quarter of 2019 related to the USAA AMCO Acquisition.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Restructing and integration costs were $6.6 million and $0.7 million, respectively, for the nine months ended September 30, 2019 and 2018, with the increase due to the same factors as discussed above in the quarterly section.

### Interest Income and Other Income/(Expense)

*Three months ended September 30, 2019 compared to September 30, 2018*. Interest income and other income/(expense) was income of $2.7 million for the three months ended September 2019 compared to expense of $0.2 million for the same period in 2018. The increase was primarily due to a gain on sale of an equity method investment in Cerebellum Capital, LLC (“Cerebellum Capital”).

*Nine months ended September 30, 2019 compared to September 30, 2018.* For the nine months ended September 30, 2019 and 2018, interest income and other income/(expense) was income of $5.2 million and expense of $0.2 million, respectively. The increase was primarily due to the same factors as discussed above in the quarterly section, as well as net unrealized gains on deferred compensation plan investments and higher yields on our cash invested in money market accounts.

### Interest Expense and Other Financing Costs

*Three months ended September 30, 2019 compared to September 30, 2018*. Interest expense and other financing costs were $16.9 million for the three months ended September 30, 2019, compared to $4.5 million for the same period in 2018 due to the Company entering into the 2019 Credit Agreement, dated July 1, 2019, inconjunction with the USAA AMCO Acquisition. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019. Refer to Note 9, Debt, to the accompanying financial statements for further details on the 2019 Credit Agreement.

*Nine months ended September 30, 2019 compared to September 30, 2018.* For the nine months ended September 30, 2019 and 2018, interest expense and other financing costs were $26.0 million and $16.3 million, respectively, primarily due to the same factors as discussed above in the quarterly section.

### Loss on Debt Extinguishment

*Three months ended September 30, 2019 compared to September 30, 2018*. Loss on debt extinguishment was $7.4 million and $0.0 million, respectively, for the three months ended September 30, 2019 and 2018. The Company wrote-off unamortized debt issuance costs and unamortized debt discount due to (i) the termination of the previous credit agreement, dated February 2018. ($5.5 million) and (ii) accelerating the paydown of debt principal under the 2019 Credit Agreement ($1.9 million). The Company paid down $63.0 million of debt during the third quarter of 2019. Refer to Note 9, Debt, to the accompanying financial statements for further details on the 2019 Credit Agreement.

*Nine months ended September 30, 2019 compared to September 30, 2018.* Loss on debt extinguishment was $7.4 million for the nine months ended September 30, 2019, due to the same factors as discussed above in the quarterly section. During the same period last year, the Company incurred a $6.1 million loss on debt extinguishment due to the termination of a previous credit agreement (dated October 2014).

### Income Tax Expense

*Three months ended September 30, 2019 compared to September 30, 2018*. The effective tax rate for the three months ended September 30, 2019 and 2018 was 23.7% and 24.2%, respectively. The decrease in the effective tax rate was primarily due to higher excess tax benefits on share-based compensation net of expense related to recognizing a liability for unrecorded tax benefits.

*Nine months ended September 30, 2019 compared to September 30, 2018.* For the nine months ended September 30, 2019 and 2018, the effective tax rate was 24.0% and 24.8%, respectively, 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.

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 September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$25,992** | **$20,590** | **$54,902** | **$49,789** |
| Income tax expense | (8,058) | (6,562) | (17,343) | (16,430) |
| **Income before income taxes** | **$34,050** | **$27,152** | **$72,245** | **$66,219** |
| Interest expense(1) | 18,388 | 4,053 | 25,854 | 16,376 |
| Depreciation(2) | 682 | 775 | 1,865 | 2,247 |
| Other business taxes(3) | 146 | 350 | 1,125 | 1,168 |
| Amortization of acquisition-related intangible assets(4) | 7,086 | 4,799 | 16,388 | 15,670 |
| Stock-based compensation(5) | 4,326 | 4,005 | 9,125 | 11,295 |
| Acquisition, restructuring and exit costs(6) | 24,452 | 1,647 | 31,804 | 2,725 |
| Debt issuance costs(7) | 10,002 | 373 | 10,732 | 7,436 |
| Pre-IPO governance expenses(8) | — | — | — | 138 |
| Earnings/losses from equity method investments(9) | (2,837) | 167 | (2,683) | 506 |
| **Adjusted EBITDA** | **$96,295** | **$43,321** | **$166,455** | **$123,780** |

42

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$25,992** | **$20,590** | **$54,902** | **$49,789** |
| Adjustments to reflect the operating performance of the Company: |  |  |  |  |
| i. Other business taxes(3) | 146 | 350 | 1,125 | 1,168 |
| ii. Amortization of acquisition-related intangible assets(4) | 7,086 | 4,799 | 16,388 | 15,670 |
| iii. Stock-based compensation(5) | 4,326 | 4,005 | 9,125 | 11,295 |
| iv. Acquisition, restructuring and exit costs(6) | 24,452 | 1,647 | 31,804 | 2,725 |
| v. Debt issuance costs(7) | 10,002 | 373 | 10,732 | 7,436 |
| vi. Pre-IPO governance expenses(8) | — | — | — | 138 |
| Tax effect of above adjustments(10) | (11,503) | (2,794) | (17,293) | (9,608) |
| **Adjusted Net Income** | **$60,501** | **$28,970** | **$106,783** | **$78,613** |
| Tax benefit of goodwill and acquired intangibles(11) | $6,802 | $3,318 | $13,523 | $9,958 |

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 and the IPO, including restructuring costs.

*(in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Acquisition-related costs | $16,386 | $1,451 | $21,950 | $1,446 |
| Restructuring and integration costs | 4,841 | — | 6,629 | 702 |
| General and administrative | 2,020 | — | 2,020 | 267 |
| Personnel compensation and benefits | 1,205 | — | 1,205 | — |
| Interest income and other income/(expense) | — | 196 | — | 310 |
| **Total acquisition, restructuring and exit costs** | **$24,452** | **$1,647** | **$31,804** | **$2,725** |

(7) Adding back debt issuance cost expense.

(8) Adding back pre‑IPO governance expenses paid to the Company’s private equity partners that terminated as of the completion of the IPO.

(9) Adjusting for earnings/losses on equity method investments.

(10) Subtracting an estimate of income tax expense applied to the sum of the adjustments above.

(11) 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, and beginning in the third quarter of 2019, 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 September 30, 2019 and December 31, 2018.

*(in thousands)*

|  | September 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| Cash and cash equivalents | $78,963 | $51,491 |
| Accounts and other receivables | 86,446 | 44,120 |
| Undrawn commitment on revolving credit facility | 100,000 | 100,000 |
| Accounts and other payables | (146,707) | (50,578) |

We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consist primarily of investment management fees that have been earned but not yet received from clients. Included in other receivables are 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 September 30, 2019 (under the 2019 Credit Agreement) and December 31, 2018 (under the previous credit agreement terminated on July 1, 2019) which had $100.0 million undrawn as of September 30, 2019 and December 31, 2018.

### 2019 Credit Agreement

On July 1, 2019, concurrent with the USAA AMCO Acquisition, the Company (i) entered into the 2019 Credit Agreement, (ii) repaid all indebtedness outstanding under the previous credit agreement (dated February 2018), and (iii) terminated the previous credit agreement.

The purchase price paid in cash at closing was financed using a combination of the 2019 Credit Agreement and the Company’s balance sheet resources. The 2019 Credit Agreement, dated as of July 1, 2019, was entered into among Victory, as borrower, the lenders from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent, pursuant to which we obtained a seven-year term loan in an aggregate principal amount of $1.1 billion and established a five-year revolving credit facility (which was unfunded as of the closing date) with aggregate commitments of $100.0 million (with a $10.0 million sub-limit for the issuance of letters of credit). Amounts outstanding under the 2019 Credit Agreement bear interest at an annual rate equal to, at the option of the Company, either LIBOR (adjusted for reserves) plus a margin of 3.25% or an alternate base rate plus a margin of 2.25%.

A total of $63.0 million of the outstanding term loans under the 2019 Credit Agreement was repaid in the third quarter of 2019. Subsequent to September 30, 2019 and through October 31, 2019, we repaid an additional $40.0 million, for a total principal debt reduction of $103.0 million since July 1, 2019, thus satisfying the required principal amortization of 1.00% per annum through the term of the loan, June 2026.

Refer to Note 4, Acquisitions, and Note 9, Debt, to the accompanying financial statements for further details on the USAA AMCO Acquisition and the 2019 Credit Agreement.

### Capital Requirements

VCA 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 accompanying unaudited Condensed Consolidated Statements of Cash Flows:

*(in thousands)*

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $167,685 | $99,897 |
| Net cash used in investing activities | (845,888) | (7,655) |
| Net cash provided by (used in) financing activities | 705,708 | (79,968) |

***Operating Activites –*** Cash provided by operating activities during the nine months ended September 30, 2019 was $167.7 million, compared to $99.9 million of cash provided by operating activities for the same period in 2018. The $67.8 million increase in cash provided by operating activities was primarily due to a $67.5 million net increase in working capital source of cash and a $5.1 million increase in net income, partially offset by a $4.9 million net decrease in certain non-cash items.

The net increase in working capital source of cash was primarily due to accounts payable and accrued expenses and compensation which was a $74.7 million source of cash for the nine months ended September 30, 2019 compared to a $2.7 million use of cash for the same period last year, due to the timing of new operating expenses as a result of the USAA AMCO Acquisition. The acquisition introduced new operating expenses that the Company did not incur prior to the acquisition, such as distribution costs paid to third parties and USAA, sub-transfer agent service costs, 529 College Savings Plan expenses, and direct member channel expenses.

Accounts receivables were an $11.4 million use of cash for the nine months ended September 30, 2019 compared to a $5.4 million source of cash for the nine months ended September 30, 2018 due to an increase in revenue.

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

For the nine months ended September 30, 2018, cash used in investing activities was $7.7 million and consisted of $3.0 million of additional equity investments in Cerebellum, net trading activity of $2.9 million and $1.7 million of property and equipment purchases. The nature of our trading activites are further described in Note 2, Significant Accounting Policies, to the condensed consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

***Financing Activities –*** Cash provided by financing activities during the nine months ended September 30, 2019 was $705.7 million and was mostly attributable to $1,069 million of net proceeds from the 2019 Credit Agreement, partially offset by the repayment and termination of the previous credit agreement (dated February 2018) of $280.0 million. Victory also paid $63.0 million of the outstanding term loans under the 2019 Credit Agreement in the third quarter of 2019. Subsequent to September 30, 2019 and through October 31, 2019, the Company repaid an additional $40.0 million, for a total principal debt reduction of $103.0 million since July 1, 2019, thus satisfying the required principal amortization of 1.00% per annum through the term of the loan, June 2026. The Company also paid a dividend in the third quarter of 2019 to stockholders in the amount of $3.4 million and $0.5 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards.

Cash used in financing activities for the same period in 2018 was $80.0 million and consisted of the repayment and termination of a previous credit agreement (dated October 2014) of $580.0 million, partially offset by $356.6 million of net proceeds from the previous credit agreement, dated February 2018, and $156.5 million in the generation of net IPO proceeds.

### Contractual Obligations

Effective July 1, 2019, we entered into the 2019 Credit Agreement in connection with our closing of the USAA AMCO Acquisition. In connection with our entry into the 2019 Credit Agreement, we repaid all indebtedness outstanding under the previous credit agreement (dated February 2018). The previous credit agreement and the credit documents entered in connection therewith were terminated on the closing date. A total of $63.0 million of the outstanding term loans under the 2019 Credit Agreement was repaid in the third quarter of 2019. Subsequent to September 30, 2019 and through October

31, 2019, we repaid an additional $40.0 million, for a total principal debt reduction of $103.0 million since July 1, 2019, thus satisfying the required principal amortization of 1.00% per annum through the term of the loan, June 2026. For further discussion regarding the USAA AMCO Acquisition and related entry into and termination of credit agreements, refer to Note 4, Acquisitions, to the accompanying financial statements.

In conjunction with the Company relocating its Corporate headquarters for the global investment management business from Brooklyn, Ohio to San Antonio, Texas, Victory entered into a lease agreement in mid-November to occupy the premises at 15935 La Cantera Parkway, San Antonio, Texas 78256 through January 15, 2027.

The Company recorded $102.8 million in contingent consideration arrangement liabilities representing the USAA AMCO Acquisition earn-out payment liability, which is included in “Consideration payable for acquisition of business” in the accompanying unaudited Condensed Consolidated Balance Sheets. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing.

There were no other significant changes to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

### Off‑Balance Sheet Arrangements

In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017 dividend was declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest.

The Company announced the initiation of quarterly cash dividends in August 2019 and paid the first quarterly dividend in September 2019. Holders of restricted stock awards that are unvested at the time the quarterly dividends are declared are entitled to be paid these dividends as and when the restricted stock vests.

As of September 30, 2019 and December 31, 2018, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.2 million and $1.8 million, respectively, which was not recorded as a liability as of the balance sheet date. A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

### Critical Accounting Policies and Estimates

Our financial statements and the accompanying 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, 5,587 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 $145.8 billion at September 30, 2019. 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 $85.3 million at our weighted-average fee rate of 58.5 basis points for the quarter ended September 30, 2019. 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 and USAA 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 $95.3 million at the Victory Funds’ and USAA Funds’ aggregate weighted-average fee rate of 65.3 basis points for the quarter ended September 30, 2019. 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 $51.9 million at the weighted-average fee rate across all of our institutional separate accounts of 35.6 basis points for the quarter ended September 30, 2019.

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 are 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 8% 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 $1,167 million, which would cause an annualized increase or decrease in revenues of approximately $6.8 million at our weighted-average fee rate for the business of 58.5 basis points for the quarter ended September 30, 2019.

We operate in several foreign countries and incur operating expenses associated with these operations. In addition, we have revenue and revenue-sharing arrangements that are denominated in non-U.S. currencies. We do not believe foreign currency fluctuations materially affect our results of operations.

### 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. At September 30, 2019, we were exposed to interest rate risk as a result of the amounts outstanding under the 2019 Credit Agreement. Refer to Note 9, Debt, to the accompanying financial statements for a description of the amounts outstanding as of such date and the applicable interest rate.

## Controls and procedures

As filed, 1,439 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) 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(e) and 15d-15(e) under the Exchange Act) at September 30, 2019. 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 and 15d-15 under the Exchange Act) during the quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 2,287 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, 2018 as filed with the SEC and the information contained in this report. There have been no material changes to the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2018, except for the initiation of a quarterly cash dividend of $0.05 per share of our common stock, beginning in the third quarter of 2019. 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) and legal, tax, regulatory and such other factors as we may deem relevant.

On June 5, 2019, the SEC adopted a package of rulemakings and interpretations, including Regulation Best Interest and the new Form CRS Relationship Summary (“Form CRS”) (collectively, the “Proposals”) which are intended to improve the retail investor experience and provide greater clarity and transparency regarding retail investors’ relationships with broker-dealers and investment advisers. Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations and requires compliance with disclosure, care, conflict of interest and compliance obligations. Form CRS requires broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors, including (i) the types of client and customer relationships and services we offer, (ii) the fees, costs, conflicts of interest and required standard of conduct associated with those relationships and services, (iii) whether we and any of our financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about us. The Proposals must be complied with by June 30, 2020 and may result in increased compliance and operational costs.

Filed Nov 13, 2019.
Source: SEC EDGAR, the filing index for accession 0001558370-19-010897. Last ingested by Listed: Nov 4, 2026, 18:36 ET. No prices; not investment advice.