This Management's Discussion and Analysis of Financial Condition and Results of Operations relates to, and should be read in conjunction with the "Selected Financial Data" and our consolidated financial statements and related notes thereto included elsewhere in this report. In addition to historical information, this discussion and analysis contains forwardlooking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management's expectations. Please refer to the sections of this report entitled "ForwardLooking Statements" and "Risk Factors."
Overview
Our Business - We are a diversified global asset management firm with$147.2 billion in assets under management as ofDecember 31, 2020 . The Company operates a next-generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform. We provide specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors. With nine autonomous Investment Franchises and a Solutions Platform,Victory Capital offers a wide array of investment styles and investment vehicles including, actively managed mutual funds, separately managed accounts, rules-based, thematic and active ETFs, multi-asset class strategies, custom-designed solutions and a 529 College Savings Plan. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees. Franchises - Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. VCM employs all of ourU.S. investment professionals across our Franchises, which are not separate legal entities. Solutions - Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions. Our approach to rulesbased investing includes single and multifactor strategies designed to provide a variety of outcomes, including maximum diversification, dividend income, downside mitigation, minimum volatility, thematic and targeted factor exposure. 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 includingUSAA 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 inAugust 2013 to$147.2 billion atDecember 31, 2020 . We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct investor channels with deep penetration. USAA AMCO Acquisition - EffectiveJuly 1, 2019 , the Company completed the acquisition (the "USAA AMCO Acquisition") ofUSAA Asset Management Company ("USAA Adviser") andVictory Capital Transfer Agency, Inc. ("VCTA"), formally known as theUSAA Transfer Agency Company . The transformative acquisition increased AUM by$81.1 billion and significantly impacted our financial results. The acquisition not only increased AUM and revenue, but also introduced additional personnel expenses and new and additional operating expenses such as third party distribution costs, expenses related to a transfer services agreement withUSAA , 529 College Savings Plan, and direct investor channel expenses that the Company did not incur prior to the acquisition. In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, datedJuly 1, 2019 , and obtained a seven-year term 50
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loan in an aggregate principal amount of
The USAA AMCO Acquisition expanded and diversified our investment platform, particularly in the fixed income and solutions asset classes, and increased our size and scale. Additional products added to our investments platform include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds. We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs. Through the acquisition, the Company has the rights to offer products and services using the USAA brand for a period of time and the opportunity to offer its products toUSAA members through a direct investor channel. In addition, we have entered into a referral agreement withUSAA for members that are interested in investing in USAA Funds or theUSAA 529 College Savings Plan. Total consideration for the USAA AMCO Acquisition was$949.4 million , comprising of$851.3 million of cash paid at closing plus$98.8 million as the estimated fair value of contingent consideration as of the acquisition date less$0.7 million in net working capital adjustments settled in the first quarter of 2020. A maximum of$150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all "non-managed money"-related AUM in each of the first four years following the closing date. In 2020, we paid$37.5 million in cash to sellers for the first annual contingent payment. The estimated fair value of contingent consideration arrangements as ofDecember 31, 2020 was$92.5 million and consists of the USAA AMCO earn-out payment liability, which is included in consideration payable for acquisition of business in the Consolidated Balance Sheets. Refer to Note 4, Acquisitions, for further details on the USAA AMCO Acquisition.
Business Highlights in 2020
Assets under management:
• AUM at
to
driven by net outflows of
long-term net outflows and
partially offset by positive market action of
$35.9 billion in gross flows and$19.4 billion in net outflows for the year endedDecember 31, 2020 , compared to$32.1 billion in gross flows
and
experienced$14.8 billion in market appreciation for the year endedDecember 31, 2020 compared to$16.1 billion in market appreciation for the same period in 2019.
Investment performance:
• 44 of ourTotal Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 64% 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, 67% over a three-year period, 67% over
a five-year period and 76% over a ten-year period. On an equal-weighted
basis, 47% of our strategies have outperformed their respective
benchmarks over a one-year period, 47% over a three-year period, 52% over
a five-year period and 65% over a ten-year period.
2020 ESG initiatives:
•
responsible investing and formalizing what our autonomous Investment
Franchises and Solutions Platform have been doing for many years. Each of our Investment Franchises follows an approach to incorporating environmental, social and governance ("ESG") considerations that best suits its own investment process or the objectives of its clients.
• The Company launched a committee for diversity, inclusion, community and
equity ("DICE") to promote training and events to bring awareness to diversity and inclusion in the workplace and to engage employees in diversity and inclusion conversation and training. 51
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• Our CEO signed the CEO Action Pledge for diversity and inclusion.
Additionally, the Company joined the
joined Ceres Investor Network on Climate Risk and Sustainability.
Financial highlights:
• Total revenue for the year endedDecember 31, 2020 was$775.4 million compared to$612.4 million for the year endedDecember 31, 2019 . Net income was$212.5 million and$92.5 million , respectively, for the years endedDecember 31, 2020 and 2019.
• Earnings per diluted share were
2020 compared to
with tax benefit per diluted share was
the years endedDecember 31, 2020 and 2019. Refer to "Supplemental NonGAAP Financial Information" for more information about how we calculate Adjusted Net Income and a reconciliation of net income to Adjusted Net Income. • Adjusted EBITDA was$377.3 million or 48.7% for the year ended
for more information about how we calculate Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
• Adjusted Net Income was
2020 compared to$172.8 million for the year endedDecember 31, 2019 . Refer to "Supplemental NonGAAP Financial Information" for more information about how we calculate Adjusted Net Income and a reconciliation of net income to Adjusted Net Income.
Key Performance Indicators
The following table presents the key performance indicators we focus on when reviewing our results: Year Ended December 31, ($ in millions, except for basis points and percentages) 2020 2019 2018 AUM at period end$ 147,241 $ 151,832 $ 52,763 Average AUM 136,422 102,719 61,390 Gross flows 35,857 32,112 14,130 Net short term flows (8,441 ) 20 - Net long term flows (10,911 ) 1,840 (2,427 ) Net flows (19,352 ) 1,860 (2,427 ) Total revenue 775.4 612.4 413.4 Revenue on average AUM 56.8 bps 59.6 bps 67.3 bps Net income 212.5 92.5 63.7 Adjusted EBITDA(1) 377.3 268.8 160.2 Adjusted EBITDA margin(1)(2) 48.7 % 43.9 % 38.7 % Adjusted Net Income(1) 258.5 172.8 102.3 Tax benefit of goodwill and acquired intangibles(3) 27.0 20.3 13.3
(1) Our management uses Adjusted EBITDA and Adjusted Net Income to measure the
operating profitability of the business. These measures eliminate the
impact of onetime 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 NonGAAP 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
intangible assets and goodwill generated from prior acquisitions in which
we received a stepup in basis for tax purposes. Acquired intangible assets
and goodwill may be amortized for tax purposes, generally over a 15year
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 stepup 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. 52
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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 reopen 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.
Valuation of Assets Under Management
The fair value of assets under management of the Victory Funds, USAA Funds and VictoryShares is primarily determined using quoted market prices or independent third party pricing services or broker price quotes. In limited circumstances, a quotation or price evaluation is not readily available from a pricing service. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the sponsored products. The same prescribed valuation process is used to price securities in separate accounts and other vehicles for which a quotation or price evaluation is not readily available from a pricing service. For the periods presented, a de minimis amount of the AUM was priced in this manner. AUM by Asset Class - the following table presents our AUM by asset class as of the dates indicated: As of December 31, (in millions) 2020 2019(1) 2018 2017 2016(2) Fixed Income$ 36,599 $ 37,973 $ 6,836 $ 7,551 $ 7,726 Solutions 34,041 31,649 3,767 3,028 1,575 U.S. Mid Cap Equity 26,230 26,347 20,019 25,185 20,083 U.S. Small Cap Equity 18,368 17,346 12,948 15,308 14,090 U.S. Large Cap Equity 14,230 14,091 3,759 4,789 5,921 Global / Non-U.S. Equity 13,982 12,603 4,610 4,105 3,460 Other 257 236 824 1,805 2,111 Total Long-Term Assets$ 143,707 $ 140,245 $ 52,763 $ 61,771 $ 54,966 Money Market & Short-Term Assets 3,534 11,587 - - - Total$ 147,241 $ 151,832 $ 52,763 $ 61,771 $ 54,966
(1) Includes the impact of the USAA AMCO Acquisition, which closed on
2019, increasing our AUM by
assets invested throughUSAA's brokerage business. We did not acquire theUSAA brokerage business.
(2) Includes the impact of the RS Acquisition, which closed on
and increased our AUM by$16.7 billion . 53
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Asset Flows by Asset Class - the following table summarizes our asset flows by asset class for the periods indicated:
U.S. U.S. U.S. Mid Small Large Global / Money Cap Cap Fixed Cap Non-U.S. Total Market / (in millions) Equity Equity Income Equity Equity Solutions Other Long-term Short-term Total Year EndedDecember 31, 2020 Beginning AUM$ 26,347 $ 17,346 $
37,973
4,144 4,458 6,499 695 2,467 4,898 40 23,201 12,656 35,857 Gross client cash outflows (7,605 ) (5,201 )
(9,140 ) (2,631 ) (2,501 ) (6,974 ) (60 ) (34,112 ) (21,097 ) (55,209 ) Net client cash flows
(3,460 ) (742 )
(2,641 ) (1,936 ) (34 ) (2,076 ) (21 ) (10,911 )
(8,441 ) (19,352 ) Market appreciation / (depreciation) 3,436 1,959 1,505 1,935 1,403 4,457 40 14,736 58 14,794 Net transfers (93 ) (195 ) (239 ) 139 10 10 3 (364 ) 331 (33 ) Ending AUM$ 26,230 $ 18,368 $ 36,599 $ 14,230 $ 13,982 $ 34,041 $ 257 $ 143,707 $ 3,534 $ 147,241 Year EndedDecember 31, 2019 Beginning AUM$ 20,019 $ 12,948 $ 6,836 $ 3,759 $ 4,610 $ 3,767 $ 823 $ 52,763 $ -$ 52,763 Gross client cash inflows 5,663 3,338 6,489 480 1,457 5,696 171 23,293 8,820 32,112 Gross client cash outflows (6,663 ) (4,194 ) (4,186 ) (1,419 ) (1,538 ) (3,079 ) (375 ) (21,453 ) (8,800 ) (30,252 ) Net client cash flows (1,000 ) (856 ) 2,303 (939 ) (81 ) 2,617 (204 ) 1,840 20 1,860
Market appreciation / (depreciation) 5,511 3,728 1,158 1,263 1,609
2,739 (29 ) 15,980 85 16,065 Net transfers 1,817 1,526
27,677 10,007 6,465 22,525 (356 ) 69,662
11,482 81,143 Ending AUM$ 26,347 $ 17,346 $ 37,973 $ 14,091 $ 12,603 $ 31,649 $ 236 $ 140,245 $ 11,587 $ 151,832 Year EndedDecember 31, 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 4,530 3,198 1,514 259 2,488 1,713 428 14,130 - 14,130 Gross client cash outflows (7,207 ) (3,762 ) (2,303 ) (848 ) (1,003 ) (588 ) (846 ) (16,557 ) - (16,557 ) Net client cash flows (2,677 ) (564 ) (789 ) (589 ) 1,485 1,125 (418 ) (2,427 ) - (2,427 )
Market appreciation / (depreciation) (2,485 ) (1,792 )
67 (455 ) (972 ) (426 ) (510 ) (6,573 ) - (6,573 ) Net transfers (4 ) (4 ) 7 14 (8 ) 40 (53 ) (8 ) - (8 ) Ending AUM$ 20,019 $ 12,948 $ 6,836 $ 3,759 $ 4,610 $ 3,767 $ 824 $ 52,763 $ -$ 52,763
AUM by Distribution Channel - the following table presents our AUM by distribution channel as of the dates indicated:
As of December 31, 2020 2019 2018
(in millions) Amount % of total Amount % of total Amount % of total
Investor
46 %$ 74,118 49 % $ - - % Institutional 40,840 28 % 39,851 26 % 29,731 56 % Retail 37,651 26 % 37,863 25 % 23,032 44 % Total AUM(1)$ 147,241 100 %$ 151,832 100 %$ 52,763 100 %
(1) The allocation of AUM by distribution channel involves the use of estimates
and the exercise of judgment. 54
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Assets Flows by Vehicle - the following table summarizes our asset flows by vehicle for the periods indicated:
Separate Accounts and Other (in millions) Mutual Funds(1) ETFs(2) Vehicles(3) Total Year EndedDecember 31, 2020 Beginning AUM $ 118,605$ 4,213 $ 29,014$ 151,832 Gross client cash inflows 31,172 492 4,192 35,857 Gross client cash outflows (48,398 ) (913 ) (5,898 ) (55,209 ) Net client cash flows (17,226 ) (420 ) (1,705 ) (19,352 ) Market appreciation / (depreciation) 11,746 183 2,864 14,794 Net transfers (127 ) - 94 (33 ) Ending AUM $ 112,998$ 3,976 $ 30,267$ 147,241 Year EndedDecember 31, 2019 Beginning AUM $ 30,492$ 2,956 $ 19,315$ 52,763 Gross client cash inflows 21,560 843 9,709 32,112 Gross client cash outflows (25,239 ) (914 ) (4,099 ) (30,252 ) Net client cash flows (3,679 ) (71 ) 5,610 1,860 Market appreciation / (depreciation) 10,990 544 4,531 16,065 Net transfers 80,802 782 (441 ) 81,143 Ending AUM $ 118,605$ 4,213 $ 29,014$ 151,832 Year EndedDecember 31, 2018 Beginning AUM $ 37,967$ 2,250 $ 21,555$ 61,771 Gross client cash inflows 9,629 1,401 3,100 14,130 Gross client cash outflows (12,781 ) (341 ) (3,435 ) (16,557 ) Net client cash flows (3,152 ) 1,060 (335 ) (2,427 ) Market appreciation / (depreciation) (4,312 ) (354 ) (1,907 ) (6,573 ) Net transfers (11 ) - 3 (8 ) Ending AUM $ 30,492$ 2,956 $ 19,315$ 52,763
(1) Includes institutional and retail share classes and
Products or VIP funds.
(2) Excludes assets managed for other proprietary product (i.e. funds of funds)
in order to adjust for double counting.
(3) Includes collective trust funds, wrap program separate accounts and unified
managed accounts or UMAs.
December 31, 2020 AUM - Our total AUM atDecember 31, 2020 was$147.2 billion , a decrease of$4.6 billion , or 3.0%, compared to$151.8 billion atDecember 31, 2019 . The decrease in AUM during 2020 is due to net outflows of$19.4 billion partially offset by$14.8 billion in positive market movement. Short-term money market assets accounted for$3.5 billion , or 2.4% of the total AUM atDecember 31, 2020 . The net outflows were driven by$8.4 billion in money market and short-term strategies,$3.5 billion in ourU.S. mid cap equity strategies,$2.6 billion in our fixed income strategies,$2.1 billion in our Solutions Platform,$1.9 billion in our large cap equity strategies and$0.7 billion in ourU.S. small cap equity strategies.December 31, 2019 AUM - Our total AUM atDecember 31, 2019 was$151.8 billion , an increase of$99.1 billion , or 187.8%, compared to$52.8 billion atDecember 31, 2018 . The change in AUM during 2019 reflects$81.1 billion of acquired assets,$1.9 billion of positive net inflows, as well as$16.1 billion in positive market movement. Short-term money market assets accounted for$11.6 billion , or 7.6% of the total AUM atDecember 31, 2019 . The net inflows were driven by$2.6 billion in our Solutions Platform and$2.3 billion in our fixed income strategies, partially offset by net outflows of$1.0 billion in ourU.S. mid cap equity strategies,$0.9 billion in ourU.S. large cap equity strategies,$0.9 billion in ourU.S. small cap equity strategies,$0.2 billion in other and$0.1 billion in our global/non-U.S equity strategies. 55 --------------------------------------------------------------------------------December 31, 2018 AUM - Our total AUM atDecember 31, 2018 was$52.8 billion , a decrease of$9.0 billion , or 14.6%, compared to$61.8 billion atDecember 31, 2017 , reflected by$2.4 billion of negative net outflows and$6.6 billion in negative market movement. The net outflows were primarily a result of$2.7 billion in ourU.S. mid cap equity strategies,$0.8 billion in our fixed income strategies,$0.6 billion in ourU.S. large cap equity strategies,$0.6 billion in ourU.S. small cap equity strategies and$0.4 billion in our other strategies, partially offset by net inflows of$1.5 billion in our global non-U.S. equity strategies and$1.1 billion in our Solutions Platform.
GAAP Results of Operations
Our GAAP revenues principally consist of: (i) investment management fees, which are based on our overall weighted average fee rate charged to our clients and our level of AUM and (ii) fund administration and distribution fees, which are assetbased fees earned from openend mutual funds for administration and distribution services. Fund administration and fund distribution fees also include fund transfer agent fees (related to the USAA Funds), which are based on a contractual rate applied to average AUM or the number of accounts in these funds. The Company has contractual arrangements with third parties to provide certain advisory, administration, transfer agent and distribution services. Management considers whether we are acting as the principal service provider or as an agent to determine whether revenue should be recorded based on the gross amount payable by the customer or net of payments to third-party service providers, respectively. Victory is considered a principal service provider if we control the service that is transferred to the customer. We are considered an agent when we arrange for the service to be provided by another party and do not control the service. Investment Management Fees - Investment management fees are earned from managing clients' assets. Our investment management fee revenue fluctuates based on a number of factors, including the total value of our AUM, the composition of AUM across investment strategies and vehicles, changes in the investment management fee rates on our products and the extent to which we enter into fee arrangements that differ from our standard fee schedule as well as the extent to which our fund expenses exceed fund caps. Investment management fees are earned based on a percentage of AUM as delineated in the respective investment management agreements. Our investment management fees are calculated based on daily average AUM, monthly average AUM or point in time AUM.
Fund distribution fees are assetbased fees earned from openend funds for distribution services. Fund distribution fees fluctuate based on the level of average openend fund AUM and the composition of those assets across share classes that pay varying levels of fund distribution fees. The Company has contractual arrangements with a third party to provide certain sub-administration services. We are the primary obligor under the contracts with the Victory Funds, USAA Funds and VictoryShares and have the ability to select the service provider and establish pricing. As a result, fund administration fees and sub-administration expenses are recorded on a gross basis. VCS has contractual arrangements with third parties to provide certain distribution services. VCS is the primary obligor under the contracts with the Victory Funds and USAA Funds and has the ability to select the service provider and establish pricing. Substantially all of VCS's revenue is recorded gross of payments made to third parties.
Fund transfer agent fees are earned for providing mutual fund shareholder services. Transfer agent fees fluctuate based on the level of average AUM and the number of accounts in the USAA Funds.
The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. We are the primary obligor under the transfer agency contracts with the USAA Funds and have the ability to select the service provider and establish pricing. As a result, fund transfer agent fees and sub-transfer agent expenses are recorded on a gross basis. 56
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GAAP Expenses
Our GAAP expenses principally consist of: (i) personnel compensation and benefits; (ii) distribution and other assetbased expenses; (iii) general and administrative expenses; (iv) depreciation and amortization charges; and (v) acquisitionrelated expenses comprising of changes in the fair value of contingent acquisition payments and restructuring and acquisition costs. Personnel Compensation and Benefits - Personnel compensation and benefits is our most significant category of expense. Personnel compensation and benefits consists of (i) salaries, payroll related taxes and employee benefits, (ii) incentive compensation, (iii) salesbased compensation, (iv) compensation expense related to equity awards granted to employees and directors and (v) acquisitionrelated compensation in the form of cash retention bonuses. Incentive compensation is the largest component of the total compensation of our employees. The aggregate amount of cash incentive compensation is funded by a pool that is based on a percentage of total Company earnings (before taking into account incentive compensation). This incentive pool is used to pay the investment teams a percentage of the revenue earned by their respective Franchise on a quarterly basis. This incentive pool is also used to pay incentive compensation to senior management and other noninvestment employees on an annual basis. Incentive compensation paid to senior management and to other noninvestment employees is discretionary and subjectively determined based on Company and individual performance and the total amount of the incentive compensation pool.
Distribution and Other Assetbased Expenses - Distribution and other assetbased expenses consists of: (i) brokerdealer distribution fees and platform distribution fees, (ii) fund expense reimbursements to affiliates and (iii) subadministration, sub-transfer agent, subadvisory expenses and middleoffice expenses.
Brokerdealer distribution fees are paid by VCS as the brokerdealer for the Victory Funds and USAA Funds to thirdparty distributors. The Victory Funds and USAA Funds pay VCS for distribution services and VCS, in turn, pays thirdparty distributors. Platform distribution fees are paid by VCM as the investment adviser to the Victory Funds and USAA Funds. Platform distribution fees are paid to financial advisors, retirement plan providers and intermediaries for servicing and administering accounts invested in shares of the Victory Funds and USAA Funds. Distribution fees typically vary based on the level of AUM and the composition of those assets across share classes. Fund expense reimbursements (contra revenue) result from VCM, as investment adviser for the Victory Funds, VictoryShares and USAA Funds, agreeing to cap the annual operating expenses for certain share classes of the Victory Funds,USAA Funds and VictoryShares. VCM has contractually agreed to reimburse the Victory Funds, USAA Funds and VictoryShares for expenses in excess of these caps but may recoup these reimbursements for a period of time if the applicable Fund's share class expenses and/or VictoryShares ETF expenses fall below the cap. Following the Company's adoption of Accounting Standards Update ("ASU") 2014-09 onJanuary 1, 2019 , mutual fund and ETF waivers and expense reimbursements ($31.3 million in 2020 and$18.7 million in 2019) are recorded as a reduction to investment management fees. The comparative period of 2018 has not been restated and continues to be reported under the legacy guidance, as permitted by theFinancial Accounting Standards Board (the "FASB"). Subadministration, sub-transfer agent, subadvisory and middleoffice expenses consist of fees paid to our subadministrators of the Victory Funds, VictoryShares and USAA Funds, fees paid to our sub-transfer agent for theUSAA Funds, fees paid to subadvisers on certain Victory Funds and USAA Funds and fees paid to vendors to which we outsource middleoffice functions. 57 --------------------------------------------------------------------------------
• VCM acts as the administrator to the Victory Funds, VictoryShares and
USAA Funds. VCM has hired a subadministrator, the fees for which are
captured in subadministration expense. As administrator, VCM supervises
the operations of the Victory Funds, VictoryShares and USAA Funds,
including the services provided by the subadministrators. The
subadministrators are paid through a contractual arrangement based on
a percentage of the average fund AUM.
• VCTA acts as the transfer agent to the USAA Funds. VCTA has hired a
sub-transfer agent, the fees for which are captured in sub-administration
expense. As transfer agent, VCTA oversees the services provided by the
sub-transfer agent. The sub-transfer agent is paid through a contractual
arrangement based on a percentage of average fund AUM.
• VCM, as the investment adviser for the Victory Funds and USAA Funds, has
hired unaffiliated subadvisers to manage funds for which we do not have
inhouse capabilities. The fees paid to the subadvisers are contractual
based on a percentage of assets that they manage or based upon a percentage of revenue.
• We have outsourced middleoffice operations to achieve a scalable
operational infrastructure that utilizes a variablecost model. We have
selected to partner with toptier vendors who perform trade operations,
portfolio accounting and performance measurement with oversight from our
operations team. The fees paid to these vendors are variable and
structured based on the number of accounts, assets and specific services
performed.
General and Administrative Expenses - General and administrative expenses primarily consist of investment research and technology costs, professional and marketing fees, travel, rent and insurance expenses.
Depreciation and Amortization - Depreciation and amortization expense consists primarily of the depreciation of property and equipment as well as the amortization of acquired intangibles that have a definite life. These intangibles include customer relationships, investment advisory contracts, intellectual property and noncompete clauses acquired in connection with a business or asset acquisition. Both depreciation and amortization are recorded ratably over the assets' useful lives.
AcquisitionRelated Costs - Acquisitionrelated costs include legal fees, advisory services, mutual fund proxy voting costs and other onetime expenses related to acquisitions.
Restructuring and Integration Costs - Restructuring and integration costs include costs incurred in connection with business combinations, including the increase in the fair value of contingent acquisition payments, asset purchases and changes in business strategy. These include severance expenses related to onetime benefit arrangements, contract termination and other costs to integrate investment platforms, products and personnel into existing systems, processes and service provider arrangements and restructuring the business to capture operating expense synergies. Other nonoperating items of income and expense consist of: (i) interest income and other income (expense); (ii) interest expense and other financing costs; (iii) loss on debt extinguishment; and (iv) income tax expense. Interest Income and Other Income (Expense) - Interest income and other income (expense) consists primarily of interest income, gains (losses) on investments and dividend income on investments.
Interest Expense and Other Financing Costs - Interest expense and other financing costs consists primarily of interest expense attributable to longterm debt. Refer to "Liquidity and Capital Resources" for more information.
Loss on Debt Extinguishment - Loss on debt extinguishment consists of the write-off of unamortized debt issuance costs and unamortized debt discount as a result of debt refinancing, the acceleration of the paydown of debt principal and debt repurchased and retired in open market transactions. Income Tax Expense - The provision for income taxes includesU.S. federal, state and local taxes, and foreign income taxes payable by certain of our subsidiaries. The effective tax rate is primarily driven by state and local taxes and excess tax benefits on share-based compensation, and for 2019, expense related to recording a liability for uncertain tax positions. The portion of the effective income tax rate attributable to state and local income taxes varies from year to year depending on amounts of income apportioned to each jurisdiction, whether we file income tax returns on a unitary or separate return basis and with changes in tax laws. 58
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The following table presents our GAAP results of operations for the years ended
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2020 2019 2018 Revenue Investment management fees $ 562,036 $ 466,802 $ 352,683 Fund administration and distribution fees 213,315 145,571 60,729 Total revenue 775,351 612,373 413,412 Expenses Personnel compensation and benefits 197,158 179,809 145,880 Distribution and other asset-based expenses 175,687 146,622 94,680 General and administrative 51,218 46,568 30,005 Depreciation and amortization 16,381 23,873 23,277 Change in value of consideration payable for acquisition of business 11,300 19,886 (37 ) Acquisition-related costs 1,108 22,317 4,346 Restructuring and integration costs 7,786 8,678 742 Total operating expenses 460,638 447,753 298,893 Income from operations 314,713 164,620 114,519 Other income (expense) Interest income and other income (expense) 3,703 6,829 (2,856 ) Interest expense and other financing costs (37,005 ) (40,901 ) (20,694 ) Loss on debt extinguishment (2,871 ) (9,860 ) (6,058 ) Total other income (expense), net (36,173 ) (43,932 ) (29,608 ) Income before income taxes 278,540 120,688 84,911 Income tax expense (66,018 ) (28,197 ) (21,207 ) Net income $ 212,522 $ 92,491 $ 63,704 Earnings per share of common stock Basic $ 3.14 $ 1.37 $ 0.96 Diluted $ 2.88 $ 1.26 $ 0.90 Weighted average number of shares outstanding Basic 67,710 67,616 66,295 Diluted 73,719 73,466 70,511 Dividends declared per share of common stock $ 0.23 $ 0.10 $ - Investment Management Fees 2020 compared to 2019 - Investment management fees increased$95.2 million , or 20.4%, to$562.0 million in 2020 from$466.8 million in 2019 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$136.4 billion in 2020 compared to$102.7 billion in 2019, mostly attributable to the acquired assets in the USAA AMCO Acquisition. 2019 compared to 2018 - Investment management fees increased$114.1 million , or 32.4%, to$466.8 million in 2019 from$352.7 million in 2018 due to an increase in average AUM year over year, partially offset by a decrease in the 59
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realized fee rate due to a shift in asset mix. Average AUM was
The Company adopted Accounting Standards Update ("ASU") 2014-09 onJanuary 1, 2019 . Mutual fund and ETF waivers and expense reimbursements are recorded as a reduction to investment management fees under the new standard ($31.3 million and$18.7 million in 2020 and 2019, respectively). The comparative period has not been restated and continue to be reported under the legacy guidance, as permitted by theFinancial Accounting Standards Board (the "FASB").
2020 compared to 2019 - Fund administration and distribution fees totaled$213.3 million in 2020, an increase of$67.7 million , or 46.5%, from$145.6 million in 2019. Fund administration fees increased by$41.0 million , or 57.0%, due to an increase in average AUM year over year, mostly attributable to the USAA AMCO Acquisition and the addition of$74.0 million in transfer agent fees with the USAA Funds, partially offset by a decline in distribution fee realization due to a shift in the mix of assets to lower 12b-1 paying share classes. 2019 compared to 2018 - Fund administration and distribution fees totaled$145.6 million in 2019, an increase of$84.8 million , or 139.7%, from$60.7 million in 2018. Fund administration fees increased by$48.7 million , or 210.2%, due to an increase in average AUM year over year, mostly attributable to the USAA AMCO Acquisition and the addition of$42.8 million in transfer agent fees with the USAA Funds, partially offset by a reduction in fund distribution fees due to a shift in the mix of assets to lower 12b-1 paying share classes. Transfer agent fees represented a new revenue stream for VCTA in 2019 in accordance with a contract with the USAA Funds.
Personnel Compensation and Benefits
The following table presents the components of GAAP compensation expense for
the year ended
Year Ended December 31, (in thousands) 2020 2019 2018 Salaries, payroll related taxes and employee benefits$ 76,304 $ 62,298 $ 45,820 Incentive compensation 87,412 85,614 71,273 Sales-based compensation(1) 14,158 13,973 13,549 Equity awards granted to employees and directors(2) 18,096 16,303
15,238
Acquisition and transaction-related compensation 1,188 1,621 - Total personnel compensation and benefits expense$ 197,158 $ 179,809 $ 145,880
(1) Represents salesbased commissions paid to our distribution teams.
Salesbased compensation varies based on gross and net client cash flows
and revenue earned on sales. (2) Share-based compensation typically vests over several years based on
service and the achievement of specific business and financial targets. The
value of share-based compensation is recognized as compensation expense
over the vesting period.
2020 compared to 2019 - Personnel compensation and benefits were$197.2 million in 2020, an increase of$17.3 million , or 9.6%, from$179.8 million in 2019 primarily attributable to an increase in headcount due to the USAA AMCO Acquisition. Salaries, payroll related taxes and employee benefits were$76.3 million and$62.3 million , respectively, for the years endedDecember 31, 2020 and 2019. Incentive compensation and equity awards granted to employees and directors were$87.4 million and$18.1 million , respectively, for the year endedDecember 31, 2020 , compared to$85.6 million and$16.3 million , respectively, for the same period in 2019. 2019 compared to 2018 - Personnel compensation and benefits were$179.8 million in 2019, an increase of$33.9 million , or 23.3%, from$145.9 million in 2018 primarily attributable to an increase in headcount due to the USAA AMCO Acquisition, as well as a year over year increase in deferred compensation plan liabilities from favorable market action. The increase in incentive compensation was due to higher pre-incentive compensation earnings while performance award vestings in 2019 contributed to the increase in share-based compensation. The Company incurred$1.6 million in acquisition and transaction-related compensation expense in 2019 with no such expense incurred during the previous year. 60
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Distribution and Other Assetbased Expenses
The following table presents the components of distribution and other
assetbased expenses for the year ended
Year Ended December 31, (in thousands) 2020 2019 2018 Broker-dealer distribution fees$ 22,936 $ 27,753 $ 34,423 Platform distribution fees 115,614 90,706 27,177 Fund expense reimbursements - - 12,902 Sub-administration 15,144 11,115 6,763 Sub-advisory 12,174 8,399 6,452 Middle-office 9,820 8,649 6,963 Total distribution and other asset-based expenses$ 175,687 $ 146,622 $ 94,680 2020 compared to 2019 - Distribution and other assetbased expenses are primarily based on AUM. Distribution and other asset-based expenses were$175.7 million in 2020, an increase of$29.1 million , or 19.8%, from$146.6 million in 2019, primarily due to the USAA AMCO Acquisition which closed onJuly 1, 2019 . The acquisition introduced new operating expenses that the Company did not incur prior to the acquisition, such as platform distribution costs paid to third parties andUSAA , sub-transfer agent service costs and 529 College Savings Plan expenses. Also contributing to the overall change, but to a lesser extent, was the decrease in broker-dealer distribution fees due to the shift in the mix of assets to lower and non 12b-1 paying share classes. 2019 compared to 2018 - Distribution and other asset-based expenses were$146.6 million in 2019, an increase of$51.9 million , or 54.9%, from$94.7 million 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 platform distribution costs paid to third parties andUSAA , sub-transfer agent service costs and 529 College Savings Plan expenses. Fund expense reimbursements declined by$12.9 million due to the change in the classification of such reimbursements with the adoption of ASU 2014-09 onJanuary 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 and non 12b-1 paying share classes.
General and Administrative Expenses
2020 compared to 2019 - General and administrative expenses were$51.2 million in 2020 compared to$46.6 million in 2019. The increase of$4.7 million , or 10.0%, was primarily due to the addition of transition service agreement costs related to the USAA AMCO Acquisition. Also contributing, but to a lesser extent, were increases in facility, technology and professional fees mainly related to the USAA AMCO Acquisition. 2019 compared to 2018 - General and administrative expenses were$46.6 million in 2019 compared to$30.0 million in 2018. The increase of$16.6 million , or 55.2%, was primarily due to the addition of transition service agreement costs related to the USAA AMCO Acquisition, as well as one-time debt repricing expenses related to the 2019 Credit Agreement.
Depreciation and Amortization
2020 compared to 2019 - Depreciation and amortization decreased by$7.5 million , 31.4%, to$16.4 million in 2020, from$23.9 million in 2019, due to a reduction in amortization expense related to definite-lived intangible assets in connection with theMunder Capital Management acquisition that became fully amortized in the fourth quarter of 2019. 2019 compared to 2018 - Depreciation and amortization increased by$0.6 million , or 2.6%, to$23.9 million in 2019, from$23.3 million in 2018, due to the addition of definite-lived intangible assets acquired in connection with theUSAA 61
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AMCO Acquisition, partially offset by definite-lived assets acquired in connection with the CEMP Acquisition and the management-led buyout with Crestview GP becoming fully amortized in 2018.
Change in Value of Consideration Payable for Acquisition of Business
2020 compared to 2019 - The fair value of the contingent consideration associated with the USAA AMCO acquisition decreased by$8.6 million , resulting in a change in the estimated fair value of consideration payable of$8.6 million for the year endedDecember 31, 2020 . Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable. 2019 compared to 2018 - The$19.9 million of expense in 2019 relates to the fair value of the contingent consideration associated with the USAA AMCO acquisition. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.
AcquisitionRelated Costs
2020 compared to 2019 - Acquisition-related costs decreased$21.2 million , or 95%, to$1.1 million for the year endedDecember 31, 2020 compared to$22.3 million in the prior year. The decrease is due to the USAA AMCO Acquisition which closed onJuly 1, 2019 . The 2019 acquisition-related expenses include various transaction costs such as legal and filing fees and other professional fees. OnApril 22, 2019 , the Company andHarvest Volatility Management, LLC ("Harvest") entered into an agreement to mutually terminate the purchase agreement entered into onSeptember 21, 2018 . Neither the Company nor Harvest was responsible for any termination fee to the other party as a result of the termination. 2019 compared to 2018 - Acquisition-related costs were$22.3 million and$4.3 million , respectively, in 2019 and 2018, with the increase primarily due to the USAA AMCO Acquisition which closed onJuly 1, 2019 . The acquisition-related expenses include various transaction costs such as legal and filing fees and other professional fees. OnApril 22, 2019 , the Company andHarvest Volatility Management, LLC ("Harvest") entered into an agreement to mutually terminate the purchase agreement entered into onSeptember 21, 2018 . Neither the Company nor Harvest was responsible for any termination fee to the other party as a result of the termination.
Restructuring and Integration Costs
2020 compared to 2019 - Restructuring and integration costs decreased$0.9 million , or 10.3%, to$7.8 million for the year endedDecember 31, 2020 compared to$8.7 million in the prior year. The 2020 and 2019 expenses related to severance costs and integration and conversion costs associated with theUSAA AMCO Acquisition. 2019 compared to 2018 - Restructuring and integration costs were$8.7 million and$0.7 million , respectively, in 2019 and 2018, with the increase due to severance costs and integration and conversion costs related to the USAA AMCO Acquisition.
Interest Income and Other Income (Expense)
2020 compared to 2019 - Interest income and other income (expense) was income of$3.7 million in 2020, compared to income of$6.8 million in 2019. The decrease was due to the combination of a gain on sale of an equity method investment in Cerebellum of$2.9 million and higher yields on our cash invested in money market accounts in 2019. 62 -------------------------------------------------------------------------------- 2019 compared to 2018 - Interest income and other income (expense) was income of$6.8 million in 2019, compared to expense of$2.9 million in 2018. The increase was collectively due to a (i) gain on sale of an equity method investment in Cerebellum of$2.9 million , (ii) higher yields on our cash invested in money market accounts and (iii) net unrealized gains on deferred compensation plan investments.
Interest Expense and Other Financing Costs
2020 compared to 2019 - Interest expense and other financing costs decreased by$3.9 million , or 9.5%, to$37.0 million in 2020, from$40.9 million in 2019. The expense decrease is primarily due to a decrease in interest expense as a result of a lower debt principal balance over the comparable period. 2019 compared to 2018 - Interest expense and other financing costs increased by$20.2 million , or 97.6%, to$40.9 million in 2019, from$20.7 million in 2018 due to the Company entering into the 2019 Credit Agreement, datedJuly 1, 2019 , in conjunction with the USAA AMCO Acquisition. All indebtedness outstanding under the previous credit agreement was repaid and terminated as ofJuly 1, 2019 . Refer to Note 11, Debt, to the audited financial statements for further details on the 2019 Credit Agreement.
Loss on Debt Extinguishment
2020 compared to 2019 - Loss on debt extinguishment decreased$7.0 million , or 70.9%, to$2.9 million in 2020 compared to$9.9 million in the prior year. The decrease is due to the 2019 write-off of unamortized debt issuance costs and unamortized debt discount due to (i) the termination of the previous credit agreement, datedFebruary 2018 ($5.5 million ) and (ii) accelerating the paydown of debt principal under the 2019 Credit Agreement ($4.4 million ). 2019 compared to 2018 - Loss on debt extinguishment was$9.9 million in 2019. The Company wrote-off unamortized debt issuance costs and unamortized debt discount due to (i) the termination of the previous credit agreement, datedFebruary 2018 ($5.5 million ) and (ii) accelerating the paydown of debt principal under the 2019 Credit Agreement ($4.4 million ). The Company also paid down$148.0 million of debt in 2019 under the 2019 Credit Agreement. Refer to Note 11, Debt, to the audited financial statements for further details on the 2019 Credit Agreement. The Company incurred a$6.1 million loss on debt extinguishment in 2018 due to the termination of a previous credit agreement, datedOctober 2014 . Income Tax Expense 2020 compared to 2019 - Our effective tax rate was relatively flat increasing 0.4% from 23.4% in 2019 to 23.7% in 2020. Refer to Note 10, Income Taxes, to the audited financial statements for further details on income taxes. 2019 compared to 2018 - Our effective tax rate was 23.4% and 25.0% in 2019 and 2018, 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. Refer to Note 10, Income Taxes, to the audited financial statements for further details on income taxes.
Effects of Inflation
Inflation did not have a material effect on our consolidated results of operations. Inflationary pressures can result in increases to our cost structure, especially to the extent that large expense components such as compensation are impacted. To the degree that these expense increases are not recoverable or cannot be counterbalanced through price increases due to the competitive environment, our profitability could be negatively impacted. In addition, the value of the fixed income assets that we manage may be negatively impacted when inflationary expectations result in a rising interest rate environment. Declines in the values of AUM could lead to reduced revenues as investment management fees are generally earned as a percentage of AUM.
Supplemental NonGAAP Financial Information
We report our financial results in accordance with GAAP. Our management uses nonGAAP performance measures to evaluate the underlying operations of our business. NonGAAP financial measures are used to supplement GAAP results to provide a more complete understanding of the factors and trends affecting our business than GAAP results alone. 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 nonGAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. 63 -------------------------------------------------------------------------------- NonGAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our nonGAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures. Specifically, we make use of the nonGAAP financial measures "Adjusted EBITDA" and "Adjusted Net Income."
The following table sets forth a reconciliation from GAAP financial measures to nonGAAP measures for the periods indicated:
Year Ended December 31, (in thousands) 2020 2019 2018 Reconciliation of non-GAAP financial measures: Net income (GAAP)$ 212,522 $ 92,491 $ 63,704 Income tax expense (66,018 ) (28,197 ) (21,207 ) Income before income taxes$ 278,540 $ 120,688 $ 84,911 Interest expense(1) 33,724 40,706 20,173 Depreciation(2) 3,551 2,995 2,956 Other business taxes(3) (2,556 ) 1,484 1,505
Amortization of acquisition-related intangible assets(4) 12,830
20,878 20,321 Share-based compensation(5) 15,020 14,849 15,238 Acquisition, restructuring and exit costs(6) 29,463 56,751 6,389 Debt issuance costs(7) 6,546 13,119 7,807 Pre-IPO governance expenses(8) - - 138 Losses (earnings) from equity method investments(9) 193 (2,683 ) 730 Adjusted EBITDA$ 377,311 $ 268,787 $ 160,168 Year Ended December 31, (in thousands) 2020 2019 2018 Reconciliation of non-GAAP financial measures: Net income (GAAP)$ 212,522 $ 92,491 $ 63,704 Adjustments to reflect the operating performance of the Company: i. Other business taxes(3) (2,556 ) 1,484 1,505 ii. Amortization of acquisition-related intangible assets(4) 12,830 20,878 20,321 iii. Share-based compensation(5) 15,020
14,849 15,238 iv. Acquisition, restructuring and exit costs(6) 29,463 56,751
6,389 v. Debt issuance costs(7) 6,546 13,119 7,807 vi. Pre-IPO governance expenses(8) - - 138 Tax effect of above adjustments(10) (15,326 ) (26,769 ) (23,678 ) viii. Remeasurement of net deferred taxes (11) - - (2,422 ) Adjusted Net Income$ 258,499 $ 172,803 $ 89,002 Tax benefit of goodwill and acquired intangibles(12)$ 26,992 $ 20,324 $ 13,278
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 acquisitionrelated intangible assets.
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(5) Adding back share-based compensation associated with equity awards issued
from pools created in connection with the managementled buyout and various
acquisitions and as a result of equity grants related to the initial public
offering of our Class A common stock (the "IPO").
(6) Adding back direct incremental costs of acquisitions and the IPO, including
restructuring costs.
(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 losses (earnings) on equity method investments.
(10) Subtracting an estimate of income tax expense applied to the sum of the adjustments above.
(11) Remeasurement of our
tax expense of
22, 2017. (12) Represents the tax benefits associated with deductions allowed for
intangibles and goodwill generated from acquisitions in which we received a
stepup in basis for tax purposes. Acquired intangible assets and goodwill
may be amortized for tax purposes, generally over a 15year 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 stepup
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.
The following table presents the components of acquisition, restructuring and exit costs for the periods indicated:
Year Ended December 31, (in thousands) 2020 2019 2018 Acquisition-related costs$ 1,108 $ 22,317 $ 4,346 Change in value of consideration payable for acquisition of business 11,300 19,886 - Restructuring and integration costs 7,786 8,678 742 General and administrative 8,081 4,249 303 Personnel compensation and benefits 1,188 1,621 - Interest income and other income - - 998
Total acquisition, restructuring and exit costs
Liquidity and Capital Resources
Sources and Uses of Cash - We generate strong cash flows from operations that allow us to meet our cash requirements. Our primary uses of cash include: (i) repayment of our debt obligations, (ii) funding of acquisitions, (iii) payment of contingent consideration for previous acquisitions, and (iv) working capital needs. Cash flows from operations also allow us to meet certain other cash requirements such as quarterly cash dividends and the repurchase of our Class A common stock. We believe we have sufficient liquidity and capital resources to continue to paydown our debt obligations as well as to continue focusing on acquisition candidates that increase our size, scale, asset class and client diversification. The following table presents our liquidity position as ofDecember 31, 2020 and 2019: December 31, December 31, (in thousands) 2020 2019 Cash and cash equivalents(1) $ 22,744$ 37,121 Accounts and other receivables(2) 88,182
95,093
Undrawn commitment on revolving credit facility(3) 100,000
100,000
Accounts and other payables(4) (89,422 ) (144,045 )
(1) We manage our cash balances in order to fund our day-to-day operations and
invest excess cash into money market funds and other short-term investments. (2) Our accounts receivables consist primarily of investment management, fund administrative and distribution fees that have been earned but not yet
received from clients. We perform a review of our receivables on a monthly
basis to access collectability.
(3) Revolving credit facility of
which had
(4) Accounts and other payables consist primarily of various payables related
to operations, transaction costs and interest payable on the term loan, as
well as accrued compensation and benefits. 65
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Excludes long-term debt, net due to the Company satisfying the required
principal amortization of 1.00% per annum through the term loan,
As previously noted, the USAA AMCO Acquisition introduced additional personnel expenses and new and additional operating expenses such as expenses related to a transfer services agreement withUSAA , 529 College Savings Plan, and direct member channel expenses that the Company did not incur prior to the acquisition.
Excludes
2019 Credit Agreement and 2020 and 2021 Debt Repricings - In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, datedJuly 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 ofJuly 1, 2019 . As ofDecember 31, 2020 , the Company has repaid or repurchased and retired$311.8 million of the outstanding term loans under the 2019 Credit Agreement. As ofDecember 31, 2020 , we were in compliance with our financial performance covenant. Refer to Note 4, Acquisitions, to the consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 11, Debt, for further information on the 2019 Credit Agreement. OnJanuary 17, 2020 , we entered into the First Amendment (the "First Amendment") to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the First Amendment, the Company refinanced the existing term loans (the "2019 Term Loans") with replacement term loans in an aggregate principal amount of$952.0 (the "2020 Term Loans"). The 2020 Term Loans provide for substantially the same terms as the 2019 Term Loans, including the same maturity date ofJuly 1, 2026 , except that the 2020 Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The applicable margin on LIBOR under the 2020 Term Loans is 2.50%, compared to 3.25% under the 2019 Term Loans. The Company incurred costs of$0.9 million related to the First Amendment which were recorded in general and administrative expense in the Consolidated Statements of Operations. Refer to Note 11, Debt, for further information on the repricing. InApril 2020 , the Company established a trading account to opportunistically take advantage of potential short-term trading arbitrage with respect to our term loan. An alternative to principal prepayments, this allows us to buy back our outstanding term loan in the open market and retire the debt. This alternative is preferable to principal prepayments when our debt trades at a discount to par. A total of$163.8 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired in 2020. The Company repaid$38.0 million in outstanding term loans in the first three months of 2020 and recorded a$1.0 million loss on debt extinguishment. During the three months endedJune 30, 2020 , the Company repaid or repurchased and retired$33.3 million in outstanding term loans and recorded a$0.1 million gain on debt extinguishment. During the three months endedSeptember 30, 2020 , the Company repaid or repurchased and retired$43.5 million in outstanding term loans and recorded a$0.8 million loss on debt extinguishment. During the three months endedDecember 31, 2020 , the Company repaid$49.0 million in outstanding term loans. Subsequent toDecember 31, 2020 , we reduced the outstanding term loan principal by an additional$47.5 million through prepayments, for a total debt reduction of$359.3 million sinceJuly 1, 2019 . OnFebruary 18, 2021 , we entered into the Second Amendment (the "Second Amendment") to the 2019 Credit Agreement, as amended, with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company refinanced the 2020 Term Loans with replacement term loans in an aggregate principal amount of$755.7 (the "Repriced Term Loans"). The Repriced Term Loans provide for substantially the same terms as the 2020 Term Loans, including the same maturity date ofJuly 1, 2026 , except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25%, compared to 2.50% under the First Amendment. 2020 Swap Transaction - OnMarch 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 ofJuly 2026 . AtDecember 31, 2020 , the$450 million notional value Swap had a fair value of$10.0 million , which was included in other liabilities on the Consolidated Balance Sheets. For the three and twelve months endedDecember 31, 2020 , the Company recognized a (gain) loss, net of tax, of($1.4) million and$7.6 million , respectively, in accumulated other comprehensive loss. For the three and twelve months endedDecember 31, 2020 , the Company reclassified a loss of$0.8 million and$1.0 million , respectively, from accumulated other comprehensive loss to interest expense and other financing costs on the Consolidated Statements of Operations. Refer to Note 12, Derivatives, for further information on the Swap. 66 -------------------------------------------------------------------------------- Capital Requirements - VCS is a registered brokerdealer subject to theUniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain nonU.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents. VCS and our nonU.S. subsidiaries were in compliance with these requirements as of and for the years endedDecember 31, 2020 , 2019 and 2018.
Cash Flows - the following table is derived from our Consolidated Statements of
Cash Flows for the year ended
Year Ended December 31, (in thousands) 2020 2019 2018 Net cash provided by operating activities$ 250,616 $ 227,384 $ 134,345 Net cash used in investing activities (12,340 ) (849,812 ) (11,549 ) Net cash (used in) provided by financing activities (252,696 ) 608,016 (84,161 )
Operating Activities
2020 compared to 2019 - Cash provided by operating activities was$250.6 million in 2020, compared to$227.4 million in 2019. The$23.2 million net increase in cash provided by operating activities was primarily due to a$120.0 million increase in net income partially offset by a$113.4 million net decrease in working capital as a result of timing of accrued expenses and compensation. Also contributing were adjustments for certain non-cash items which contributed$16.6 million to the increase in cash provided by operating activities.
The USAA AMCO Acquisition increased revenue and introduced new operating
expenses that the Company did not incur prior to the acquisition, such as
distribution costs paid to third parties and
2019 compared to 2018 - Cash provided by operating activities was$227.4 million in 2019, compared to$134.3 million in 2018. The$93.0 million net increase in cash provided by operating activities was primarily due to a$48.2 million net increase in working capital as a result of timing of accrued expenses and compensation and a$28.8 million increase in net income, as well as adjustments for certain non-cash items which contributed$16.1 million to the increase in cash provided by operating activities.
Investing Activities
2020 compared to 2019 - Cash used in investing activities decreased by$837.5 million to$12.3 million in 2020, from$849.8 million in 2019. The decrease was primarily due to$851.3 million paid in cash at theJuly 1, 2019 closing of the USAA AMCO Acquisition. 2019 compared to 2018 - Cash used in investing activities increased by$838.3 million to$849.8 million in 2019, from$11.5 million in 2018. The increase was primarily due to$851.3 million paid in cash at theJuly 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.
Financing Activities
2020 compared to 2019 - Cash used financing activities decreased$860.7 million to$252.7 million in 2020 compared to cash provided of$608.0 million in 2019. The decrease was due to$1,069.0 million of net proceeds from the 2019 Credit Agreement received in 2019, which was partially offset by the repayment and termination of the previous credit agreement (datedFebruary 2018 ) of$280.0 million . The repurchase of our Class A common stock and payment of dividends contributed$29.9 million and$16.2 million , respectively, in cash used in financing activities during 2020. 2019 compared to 2018 - Cash provided by financing activities was$608.0 million in 2019 and consisted of$1,069.0 million of net proceeds from the 2019 Credit Agreement, partially offset by the repayment and termination of the previous credit agreement (datedFebruary 2018 ) of$280.0 million and repayment of long-term debt under the 2019 Credit Agreement in the third and fourth quarter of 2019 of$148.0 million . The repurchase of our Class A common 67
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stock and payment of dividends contributed
Cash used in financing activities was$84.2 million in 2018 and consisted of the repayment of$499.7 million of term loans under a previous credit agreement (datedOctober 2014 ) and the repayment of long-term debt under a previous credit agreement (datedFebruary 2018 ) of$80.0 million , partially offset by$360.0 million of net proceeds from a previous credit agreement (datedFebruary 2018 ) and the generation of$156.5 million of net IPO proceeds.
Contractual Obligations
The following summarizes our contractual obligations as ofDecember 31, 2020 : Payments Due 2026 and (in thousands) Total 2021 2022-2023 2024-2025 Thereafter Principal payments on borrowings(1)$ 788,239 $ - $ - $ -$ 788,239 Interest payable(1)(2) 142,083 21,850 43,700 43,760 32,775 Contingent consideration payable for acquisition(3) 97,740 37,225 60,515 - - Lease obligations(4) 16,668 4,958 6,499 3,426 1,785 Total$ 1,044,730 $ 64,033 $ 110,714 $ 47,186 $ 822,799 (1) The total principal payments on borrowings reflects the gross amount of
principal outstanding on the term loans under the 2019 Credit Agreement as
of
amortization of 1.00% per annum through the term of the loan,
Subsequent to
million of principal outstanding on the term loans under the 2019 Credit
Agreement.
(2) The total interest payable reflects the interest obligation over the life
of the loans calculated based on the principal amount of the term loans
outstanding under the 2019 Credit Agreement as of
the 2.73400% interest rate in effect on that date.
The Company entered into the First Amendment to the Credit Agreement onJanuary 17, 2020 . Pursuant to the First Amendment, the Company refinanced the Existing Term Loans with Repriced Term Loans in an aggregate principal amount of$952.0 million . The Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points (2.50% compared to 3.25%).
(3) Represents the undiscounted contingent consideration that is estimated to
be payable over the next three years resulting from the USAA AMCO
Acquisition. At
payments was
per year) is potentially payable to the sellers.
(4) Operating leases include the minimum rent commitments under non-cancelable
operating leases, net of cash expected to be received under the sub-lease.
OffBalance Sheet Arrangements
In connection with dividends declared inFebruary 2017 andDecember 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 theDecember 2017 dividend was declared are entitled to receive a cash bonus equivalent of theDecember 2017 dividend as and when their stock options vest. These amounts are not recorded as a liability until and unless the awards vest in accordance with their respective agreements. 68 -------------------------------------------------------------------------------- The Company announced the initiation of quarterly cash dividends inAugust 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 ofDecember 31, 2020 , the cash bonuses and distributions related to dividends on restricted shares and options that are expected to vest in the future totaled$1.2 million . OnSeptember 20, 2020 , the Company acquired, through a wholly owned subsidiary, a 15% interest in Alderwood and made a capital contribution of$1.5 million in cash. Alderwood's operating entity,Alderwood Capital , is aLondon -based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. The Company has commitments to contribute additional capital of$4.5 million to Alderwood and$50 million to a private fund to be launched by Alderwood, upon the satisfaction of certain conditions. Until these conditions are satisfied, the Company does not have an obligation to contribute the additional capital and has not met the recognition criteria for a liability. Refer to Note 13,Equity Method Investment , for further discussion regarding the investment.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions that in certain circumstances affect amounts reported in the audited consolidated financial statements. In preparing these financial statements, our estimates and judgements are based on historical experience, information from third-party valuation professionals and various other assumptions, giving due consideration to materiality. We consider the accounting policies discussed below to be critical to the understanding of our consolidated financial statements. Actual results could differ from our estimates and assumptions, and any such difference could be material to our consolidated financial statements. Significant accounting policies are described more fully in Note 2, Significant Accounting Policies, to the audited consolidated financial statements. Business Combinations - We recognize and measure identifiable assets acquired and liabilities assumed in business combinations as of the acquisition date at fair value. The process of determining the fair value of identifiable intangible assets at the date of acquisition utilizes an income approach and requires significant estimates and judgment as to expectations for earnings on the related managed assets acquired, redemption rates, growth rates from sales efforts, the effects of market conditions and a discount rate. The process for estimating the fair value of acquired trade names considers comparable royalty rates and projected revenue streams. We typically utilize an independent valuation expert to assist with these valuations. We recognize and measure contingent consideration liabilities at fair value as of the acquisition date using an option pricing model and Monte Carlo simulation. These valuations require significant estimates and judgments related to projected revenue growth rates, adjustments for market-based risk, volatility and discount rates. The fair value of contingent consideration liabilities is remeasured at each reporting period, typically using the same methodology used to determine the acquisition date fair value. Any change in the fair value estimate subsequent to the acquisition date is recorded in the earnings of that period.Goodwill and Indefinitelived Intangible Assets - The accounting for goodwill and indefinitelived intangible assets requires significant estimates and judgment in the ongoing evaluation for impairment, and for indefinite-lived intangible assets, reconsideration of an asset's useful life. Changes in these assumptions or estimates could materially affect the determination of the fair value of goodwill and indefinite-lived intangible assets.Goodwill and indefinitelived intangible assets are reviewed for impairment annually as ofOctober 1 using a qualitative approach which requires the weighing of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that the asset is impaired. For goodwill, we consider the Company's performance relative to historical or projected future operating results, significant changes in the Company's use of the acquired assets in a business combination or strategy for the Company's overall business, market cap and significant industry or economic trends. If, after considering various factors, management determines that it is more likely than not that goodwill is impaired, a two-step process to test for and measure impairment is performed which begins with a quantitative assessment to estimate the fair value of the Company. The assumptions used to estimate fair value for goodwill include management's estimates of future growth rates, operating cash flows, discount rates and terminal value. 69 -------------------------------------------------------------------------------- Because the advisory, distribution and transfer agent contracts are with the funds, renewable annually and have a history of being renewed, industry practice under GAAP is to consider the contract lives to be indefinite and, as a result, not amortizable. For these fund contracts as well as the trade name indefinite-lived intangible assets, we consider (i) macroeconomic and entityspecific factors, including changes to legal, regulatory or contractual provisions of the renewable advisory and distribution contracts, (ii) the effects of obsolescence, demand, competition and other economic factors that could impact the funds' projected performance and (iii) the existence or expectation of significant changes in the level and mix of managed assets.
In addition, for indefinite-lived intangible assets, we consider whether events or circumstances continue to support an indefinite useful life. Indicators monitored by us that may indicate an indefinite useful life is no longer supported generally include (i) changes in the use of the asset, (ii) a significant decline in the level of managed assets and (iii) significant reductions in underlying operating cash flows.
Indefinite-lived intangible assets are combined into a single unit of accounting for purposes of testing impairment if they operate as a single asset and represent as a group the highest and best use of the assets. If actual changes in the underlying managed assets or other conditions, such as redemption rates or changes to contractual provisions, indicate that it is more likely than not that the asset is impaired, or if the estimated useful life is reduced, we perform a quantitative approach to estimate the fair value of the intangible asset. The process of estimating the fair value of the intangible asset requires us to estimate the level and mix of managed assets, considering future redemption rates, growth rates, market appreciation/depreciation and a discount rate. If the carrying value of the intangible asset exceeds its fair value, we recognize an impairment charge equal to that excess. InJanuary 2017 , the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (step two) to measure a goodwill impairment charge and requires a prospective approach to adoption.Goodwill impairment will be based upon the results of step one of the impairment test, which is defined as the excess of the carrying amount of a reporting unit over its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. The effective date for calendar-year public business entities wasJanuary 1, 2020 . The Company adopted ASU 2017-04 onJanuary 1, 2021 . There was no impact to the Company's consolidated financial statements on the adoption date; the future impact of the new guidance will depend upon the performance of our one reporting unit and the market conditions impacting its fair value.
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