Victory Capital(US:VCTR)2023-08-04 19:37PART I — FINANCIAL INFORMATION Financial Statements This section presents Victory Capital Holdings, Inc.'s unaudited condensed consolidated financial statements, highlighting $2.54 billion in total assets, decreased revenue and net income, and significant cash used in financing activities Condensed Consolidated Balance Sheets As of June 30, 2023, total assets were $2.538 billion, slightly down from year-end 2022, with significant goodwill and intangible assets, while total liabilities increased to $1.492 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $43,780 | $38,171 | | Goodwill | $981,805 | $981,805 | | Other intangible assets, net | $1,297,574 | $1,314,637 | | Total Assets | $2,538,421 | $2,540,899 | | Liabilities & Equity | | | | Consideration payable for acquisition of business | $239,300 | $230,400 | | Long-term debt, net | $987,376 | $985,514 | | Total Liabilities | $1,492,320 | $1,475,489 | | Total Stockholders' Equity | $1,046,101 | $1,065,410 | Condensed Consolidated Statements of Operations Q2 2023 total revenue decreased to $204.2 million from $216.0 million in Q2 2022, with net income falling to $56.7 million due to lower fees and acquisition-related expense swings Q2 and H1 2023 vs 2022 Performance (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $204,226 | $216,006 | $405,546 | $446,025 | | Income from Operations | $87,526 | $119,326 | $162,091 | $220,865 | | Net Income | $56,671 | $79,205 | $105,944 | $150,478 | | Diluted EPS | $0.83 | $1.09 | $1.53 | $2.05 | | Dividends Declared per Share | $0.32 | $0.25 | $0.64 | $0.50 | Condensed Consolidated Statements of Cash Flows Net cash from operations decreased to $141.6 million in H1 2023, with $132.0 million used in financing activities, primarily for share repurchases and dividends Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $141,562 | $165,055 | | Net cash used in investing activities | ($3,922) | ($7,152) | | Net cash used in financing activities | ($132,034) | ($184,585) | | Net increase (decrease) in cash | $5,609 | ($26,815) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, contingent consideration from acquisitions, fair value measurements, debt structure, a new $100.0 million share repurchase program, and interest rate swap hedging - Revenue primarily derives from investment management, fund administration, and distribution fees, recognized over time based on a percentage of Assets Under Management (AUM)373840 - Contingent consideration liabilities for USAA AMCO and WestEnd acquisitions, totaling $239.3 million as of June 30, 2023, are re-measured to fair value, impacting earnings8085 - A new $100.0 million share repurchase program was approved in March 2023, with $51.9 million remaining available as of June 30, 2023109111 - The company uses a floating-to-fixed interest rate swap with a notional value of $450 million to hedge long-term debt, fixing the rate at 3.149% through July 2026123124208 - On August 3, 2023, the Board declared a regular quarterly cash dividend of $0.32 per share134 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses performance, noting AUM increased to $161.6 billion despite net outflows, while revenue and net income decreased year-over-year due to lower average AUM and contingent consideration changes Overview Victory Capital is a diversified global asset management firm with $161.6 billion in AUM, operating a next-generation model with 12 Investment Franchises and a new direct investor platform - Victory operates a business model combining boutique investment qualities with an integrated, centralized operating and distribution platform138 - The company offers a wide array of investment products through 12 autonomous Investment Franchises and a Solutions Platform, managing 126 investment strategies139 - In April 2023, the company launched 'Victory Capital InVest', a new brand for its direct investor business, including an open architecture brokerage platform140 Assets Under Management Total AUM increased to $161.6 billion at June 30, 2023, driven by $5.5 billion in market appreciation despite $2.4 billion in net outflows, with Solutions and Retail as largest segments AUM and Flow Summary (in millions) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | AUM at period end | $161,622 | $154,947 | $161,622 | $154,947 | | Average AUM | $157,372 | $165,703 | $157,595 | $171,283 | | Net flows | ($2,422) | ($683) | ($3,667) | $2,307 | AUM by Asset Class as of June 30, 2023 (in millions) | Asset Class | AUM | | :--- | :--- | | Solutions | $55,836 | | U.S. Mid Cap Equity | $30,007 | | Fixed Income | $26,098 | | U.S. Small Cap Equity | $15,664 | | Global / Non-U.S. Equity | $15,392 | | U.S. Large Cap Equity | $12,170 | | Alternative Investments | $3,301 | | Money Market & Short-Term | $3,152 | | Total | $161,622 | Results of Operations Q2 2023 revenue decreased 5.5% to $204.2 million due to lower AUM, with operating income impacted by a $28.1 million unfavorable change in contingent consideration and increased interest expense - Q2 2023 investment management fees decreased 5.2% year-over-year to $159.4 million due to lower average AUM171 - Personnel compensation for Q2 2023 decreased by $2.6 million year-over-year, driven by lower incentive and sales-based compensation175 - The 'Change in value of consideration payable for acquisition of business' was an expense of $1.5 million in Q2 2023, a significant negative swing from a $26.6 million benefit in Q2 2022170183 - Interest expense increased to $14.9 million in Q2 2023 from $9.9 million in Q2 2022 due to higher average interest rates on debt188 Supplemental Non-GAAP Financial Information Non-GAAP measures show Q2 2023 Adjusted EBITDA at $104.0 million with a 50.9% margin, and Adjusted Net Income at $66.4 million, providing a clearer view of operating performance Non-GAAP Reconciliation Summary (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income (GAAP) | $56,671 | $79,205 | $105,944 | $150,478 | | Adjusted EBITDA | $104,015 | $106,189 | $203,167 | $220,564 | | Adjusted Net Income | $66,405 | $71,393 | $132,050 | $152,488 | - Adjusted EBITDA margin improved to 50.9% in Q2 2023 from 49.2% in Q2 2022157158 Liquidity and Capital Resources As of June 30, 2023, the company had $43.8 million in cash and a $100.0 million undrawn credit facility, using $132.0 million in H1 2023 financing activities for share repurchases and dividends - As of June 30, 2023, the company had $43.8 million in cash and access to a $100.0 million undrawn revolving credit facility201204 - In H1 2023, the company used $79.9 million to repurchase common stock and $43.6 million to pay dividends218 - Contingent consideration for the USAA AMCO and WestEnd acquisitions totaled an estimated $239.3 million as of June 30, 2023210 Quantitative and Qualitative Disclosures About Market Risk The company's revenues are highly sensitive to market risk, with a 10% AUM change impacting annualized revenue by $84.2 million, and exchange rate risk potentially affecting AUM by $1.6 billion and revenue by $8.3 million - A 10% increase or decrease in AUM would cause an annualized revenue change of approximately $84.2 million, based on the Q2 2023 weighted-average fee rate of 52 basis points223 - A 10% change in the U.S. dollar's value against other currencies would impact AUM by approximately $1.6 billion, causing an annualized revenue change of about $8.3 million226 - Interest rate risk on floating-rate debt is managed through a swap that effectively fixes the rate on $450 million of term loan debt at 3.15% through July 2026227 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023229 - No material changes to the company's internal control over financial reporting occurred during the second quarter of 2023230 PART II — OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings - The Company is not currently a party to any material legal proceedings232 Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors in the Annual Report on Form 10-K for the year ended December 31, 2022233 Unregistered Sales of Equity Securities and Use of Proceeds A new $100.0 million share repurchase program was approved in March 2023, with 1.4 million shares repurchased for $44.5 million in Q2 2023, leaving $51.9 million available - A new $100.0 million share repurchase program was authorized in March 2023, effective through March 31, 2025234 Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value Remaining Under Program (in millions) | | :--- | :--- | :--- | :--- | | April 1-30, 2023 | — | $— | $95.8 | | May 1-31, 2023 | 685,001 | $31.38 | $74.4 | | June 1-30, 2023 | 694,708 | $33.11 | $51.9 | | Total | 1,379,709 | $32.25 | $51.9 | Defaults Upon Senior Securities No defaults upon senior securities were reported - None238 Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable239 Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2023 - None of the Company's directors or officers adopted, modified or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fiscal quarter ended June 30, 2023239 Exhibits This section lists filed exhibits, including CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and iXBRL interactive data files - Exhibits filed include certifications from the Principal Executive Officer and Principal Financial Officer under Sarbanes-Oxley Sections 302 and 906241 - The filing includes financial statements and notes formatted in iXBRL (Inline eXtensible Business Reporting Language)241