Victory Capital(VCTR) - 2019 Q4 - Annual Report

Part I Business Victory Capital is a diversified global asset manager with $151.8 billion AUM, operating a multi-boutique model and growing through strategic acquisitions - As of December 31, 2019, Victory Capital is a diversified global asset management firm with $151.8 billion in Assets Under Management (AUM)[17] - The business model combines nine autonomous Investment Franchises and a Solutions Platform with a fully integrated, centralized operating and distribution platform[17][18] - The transformative acquisition of the USAA Mutual Fund Business (USAA AMCO) on July 1, 2019, increased AUM by $81.1 billion and significantly diversified the company's investment platform, particularly in fixed income and solutions[24][25] - The company has grown AUM from $17.9 billion in August 2013 to $151.8 billion as of December 31, 2019, primarily through four completed acquisitions[27] AUM Diversification by Channel (as of Dec 31, 2019) | Channel | AUM Percentage | | :--- | :--- | | Direct Member | 49% | | Institutional | 26% | | Retail | 25% | - A high degree of employee ownership is a key cultural attribute, with approximately 87% of employees beneficially owning about 23% of the company's shares as of December 31, 2019[25] Risk Factors The company faces multiple risks including AUM dependency, operational challenges, intense competition, and concentrated voting control - Substantially all revenues are based on AUM, which can decline due to poor investment performance, client withdrawals, or adverse market conditions, thereby reducing profitability[116] - Most client contracts, including those for registered funds, are terminable on short or no notice, posing a risk to revenue stability[118][120] - The business depends on key investment professionals and senior management; their departure could lead to AUM reduction and an inability to execute business strategy[138][139][140] - The company's growth strategy is partly dependent on making and successfully integrating new acquisitions, which involves risks such as integration difficulties, unexpected liabilities, and failure to realize projected synergies[147][148] - The investment management industry is intensely competitive, with pressure from firms with greater resources, a trend toward lower-fee passive products, and the need to retain talent[214][200] - The dual-class stock structure concentrates 96.5% of voting power with holders of Class B common stock, particularly Crestview GP, which controls 62.6% of the total voting power[221][223] - The success of the USAA AMCO Acquisition is subject to risks including difficulties in integrating personnel and operations, retaining clients and key employees, and realizing anticipated benefits and synergies[245][246] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - There are no unresolved staff comments[249] Properties The company leases its principal executive offices in San Antonio, TX, and maintains additional leased office spaces across the United States and internationally - The Company's principal executive offices are leased and located in San Antonio, TX[249] - Additional office space is leased in various U.S. cities (Brooklyn, OH; New York, NY; Birmingham, MI; Boston, MA; Rocky River, OH; Cincinnati, OH; Denver, CO; Des Moines, IA; San Francisco, CA) and internationally (Singapore, Hong Kong, London)[249] Legal Proceedings The company states that it is not currently a party to any material legal proceedings - The Company is not currently a party to any material legal proceedings[250] Mine Safety Disclosures This item is not applicable to the company - Not applicable[251] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on NASDAQ, initiated a quarterly cash dividend, and has an active share repurchase program - The Company's Class A common stock is listed on NASDAQ under the symbol "VCTR"[252] - In August 2019, the company initiated a quarterly cash dividend policy[257] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | Approx. Dollar Value Remaining Under Program (in millions) | | :--- | :--- | :--- | :--- | | Oct 2019 | 146,930 | $15.29 | $11.3 | | Nov 2019 | 80,570 | $18.33 | $9.8 | | Dec 2019 | 65,230 | $20.85 | $8.5 | | Total | 292,730 | $17.37 | $8.5 | - A share repurchase program for up to $15.0 million of Class A common stock was authorized in August 2019, with $8.5 million remaining available as of December 31, 2019[256] Selected Financial Data This section presents the company's historical consolidated financial data, showing significant growth in revenue, assets, and debt, largely driven by acquisitions Selected Financial Data (2015-2019) | ($ in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenue | $612,373 | $413,412 | $409,629 | $297,883 | $240,763 | | Income from operations | $164,620 | $114,519 | $90,168 | $24,485 | $33,220 | | Net income (loss) | $92,491 | $63,704 | $25,826 | $(6,071) | $3,800 | | Diluted earnings (loss) per share | $1.26 | $0.90 | $0.43 | $(0.12) | $0.08 | | Total assets | $1,753,309 | $801,511 | $792,622 | $850,951 | $620,389 | | Total debt | $924,539 | $268,857 | $483,225 | $418,528 | $311,898 | - Financial results for 2019 reflect six months of operations from the USAA AMCO acquisition, which was completed on July 1, 2019[262] - Financial results for 2016 reflect five months of operations from the RS Investments acquisition, which closed on July 29, 2016[261] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, emphasizing the transformative USAA AMCO acquisition's impact on AUM, revenue, and cash flow - The USAA AMCO acquisition, effective July 1, 2019, was transformative, increasing AUM by $81.1 billion and significantly impacting 2019 financial results[272] Key Performance Indicators (2017-2019) | ($ in millions, except bps) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | AUM at period end | $151,832 | $52,763 | $61,771 | | Average AUM | $102,719 | $61,390 | $57,823 | | Net flows | $1,860 | $(2,427) | $(853) | | Total revenue | $612.4 | $413.4 | $409.6 | | Adjusted EBITDA | $268.8 | $160.2 | $149.1 | | Adjusted EBITDA margin | 43.9% | 38.7% | 36.4% | - Total revenue for 2019 was $612.4 million, a 48% increase from $413.4 million in 2018, primarily due to higher average AUM from the USAA AMCO acquisition[280][327] - Net income increased to $92.5 million in 2019 from $63.7 million in 2018, with diluted EPS at $1.26 in 2019 compared to $0.90 in 2018[280] - The company generated $227.4 million in net cash from operating activities in 2019, a significant increase from $134.3 million in 2018[375][376] - Subsequent to year-end, on January 17, 2020, the company repriced its term loan, reducing the interest rate by 75 basis points, estimated to save approximately $7.0 million in annual interest expense[284][372] Qualitative and Quantitative Disclosures Regarding Market Risk The company's primary market risk is AUM decline due to market depreciation, with additional exposure to exchange rate and interest rate fluctuations - The company's revenues are highly sensitive to market fluctuations; a 10% increase or decrease in AUM would cause an annualized revenue change of approximately $91.1 million, based on the 2019 weighted-average fee rate of 60 basis points[401] - Exchange rate risk exists as approximately 8% of AUM is invested in non-U.S. dollar-denominated securities; a 10% change in the U.S. dollar's value would impact AUM by $1.2 billion and annualized revenue by about $7.3 million[403][405] - The company is exposed to interest rate risk due to outstanding variable-rate debt under its 2019 Credit Agreement[407] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for 2019, including the unqualified audit opinion from Ernst & Young LLP and detailed financial notes - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified audit opinion on the consolidated financial statements[410] Consolidated Balance Sheet Highlights (as of Dec 31) | ($ in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $1,753,309 | $801,511 | | Goodwill | $404,750 | $284,108 | | Other intangible assets, net | $1,175,471 | $387,679 | | Long-term debt, net | $924,539 | $268,857 | | Total liabilities | $1,215,438 | $345,963 | | Total stockholders' equity | $537,871 | $455,548 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | ($ in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenue | $612,373 | $413,412 | $409,629 | | Income from operations | $164,620 | $114,519 | $90,168 | | Net income | $92,491 | $63,704 | $25,826 | - The notes to the financial statements provide detailed information on accounting policies, the USAA AMCO acquisition, revenue recognition, goodwill and intangible assets, debt, share-based compensation, and other key financial components[428] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[673] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[675] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[676] - No changes in internal control over financial reporting occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, internal controls[677] Other Information The company reports no other information for this item - None[678] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of shareholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's proxy statement for the 2020 Annual Stockholders' Meeting[679][680][681] Part IV Exhibits and Financial Statement Schedules This section lists the exhibits filed as part of the Form 10-K, with financial statements contained in Item 8 and no separate schedules provided - This section contains the Exhibit Index, which lists all documents filed with the Form 10-K[685] - Financial statements are referenced to Item 8, and no financial statement schedules were filed[687] Form 10-K Summary The company indicates there is no Form 10-K summary - None[685]