Victory Capital(VCTR) - 2021 Q4 - Annual Report

PART I Item 1. Business Victory Capital Holdings, Inc. is a diversified global asset management firm with $183.7 billion in AUM as of December 31, 2021, operating a unique business model combining boutique investment managers with a centralized platform - Total Assets Under Management (AUM) as of December 31, 2021, was $183.7 billion - Victory Capital operates with 12 autonomous Investment Franchises and a Solutions Platform, offering 130 diversified investment strategies to institutions, intermediaries, retirement platforms, and individual investors[18][19] - The company's growth strategy is dual-pronged: organic growth through value-added strategies and enhanced existing franchises, and inorganic growth through strategic acquisitions that add high-quality investment teams and expand distribution capabilities[22][23][25] - Since its management-led buyout in 2013, AUM has grown over 10-fold from $17.9 billion to $183.7 billion by December 31, 2021, primarily through seven acquisitions and two minority investments[28] Item 1A. Risk Factors The company faces a broad range of risks, including market and investment performance risks tied to AUM fluctuations, business risks related to key personnel and growth, and merger and acquisition risks concerning integration and contingent liabilities - Revenues are substantially based on AUM, making the company highly susceptible to reductions in AUM due to poor investment performance, client withdrawals, or adverse market conditions[131][134][136] - The company's growth strategy relies heavily on successful strategic acquisitions and integration, which carry risks of unforeseen liabilities, operational strain, and failure to realize anticipated synergies[159][184] - Substantial indebtedness of $1,151 million as of December 31, 2021, exposes the company to risks from adverse economic conditions and restrictive covenants, potentially limiting financial flexibility[187][188] - The investment management industry is intensely competitive, with challenges from larger competitors, low entry costs for new firms, and a trend towards lower fees and passive products, which could reduce AUM and net income[235][238][239] - Operational and cybersecurity risks, including system disruptions, human error, and cyber-attacks, pose significant threats to business continuity, client information confidentiality, and could result in financial losses, regulatory actions, or reputational damage[246][248][250] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[271] Item 2. Properties The company leases its principal executive offices in San Antonio, TX, and additional office spaces across several U.S. states and internationally, deeming its current facilities adequate for business needs - The company leases its principal executive offices in San Antonio, TX, and other offices in Brooklyn, OH; Birmingham, MI; Boston, MA; Rocky River, OH; Cincinnati, OH; Charlotte, NC; Denver, CO; Des Moines, IA; Hanover, NH; Norwalk, CT; San Francisco, CA; Singapore; and Hong Kong[271] - Existing facilities are considered adequate to meet current and future business requirements[271] Item 3. Legal Proceedings The company is not currently a party to any material legal proceedings, though it may face legal proceedings and claims in the ordinary course of business - The company is not currently a party to any material legal proceedings[272] - The company may be subject to legal proceedings and claims in the ordinary course of business[272] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant[273] PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Victory Capital's Class A Common Stock trades on NASDAQ under 'VCTR', and as of December 31, 2021, the company eliminated its dual-class share structure, converting all Class B shares to Class A, resulting in a single class of common stock with identical economic and voting rights - Victory Capital's Class A Common Stock is listed and trades on NASDAQ under the symbol 'VCTR'[274] - Effective November 23, 2021, the company eliminated its dual-class share structure, converting all Class B common stock into Class A common stock, resulting in a single class of Common Stock with identical economic and voting rights[275] Equity Securities Purchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Publicly Announced Plans or Programs | | :------------------ | :--------------------- | :--------------------------- | :------------------------------------------------------------- | | October 1-31, 2021 | 45,260 | $36.28 | 45,260 | | November 1-30, 2021 | 60,255 | $36.06 | 23,355 | | December 1-31, 2021 | 53,685 | $35.26 | 53,685 | | Total | 159,200 | $35.85 | 122,300 | - The quarterly cash dividend increased by approximately 143% in 2021, from $0.07 per share in Q4 2020 to $0.17 per share in Q4 2021[280] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Victory Capital's financial condition, results of operations, liquidity, and cash flows for the year ended December 31, 2021, highlighting AUM growth, strong investment performance, and key financial metrics - AUM increased by $36.5 billion (24.7%) to $183.7 billion at December 31, 2021, primarily due to $20.3 billion from net acquired assets and $20.6 billion from market appreciation, partially offset by $4.5 billion in net outflows[306] Key Financial Highlights (2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (%) | | :-------------------------------- | :----------------- | :----------------- | :--------- | | Total Revenue | $890.3 | $775.4 | +14.8% | | Net Income | $278.4 | $212.5 | +31.0% | | GAAP Diluted EPS | $3.75 | $2.88 | +30.2% | | Adjusted EBITDA | $449.0 | $377.3 | +19.0% | | Adjusted EBITDA Margin | 50.4% | 48.7% | +1.7 pp | | Adjusted Net Income | $329.0 | $258.5 | +27.3% | - Investment performance was strong, with 64% of strategies by AUM outperforming their benchmarks over a one-year period, and 77%, 82%, and 77% over three, five, and ten-year periods, respectively[308] - The company completed three acquisitions in 2021: THB Asset Management (March 1), New Energy Capital (November 1), and WestEnd Advisors (December 31), significantly expanding its investment platform and alternative asset capabilities[294][296][300] Item 7A. Qualitative and Quantitative Disclosures Regarding Market Risk The company's revenues are highly sensitive to market risk, as they are primarily based on AUM, with fluctuations significantly impacting revenues, and it also faces exchange rate and interest rate risks, partially mitigated by an interest rate swap - A 10% increase or decrease in AUM would cause an annualized revenue change of approximately $103.0 million, based on a weighted-average fee rate of 56 basis points for 2021[433] - Approximately 9% of AUM is invested in non-U.S. securities, exposing the company to foreign currency exchange risk, where a 10% change in the U.S. dollar's value could impact revenues by about $10.1 million[436][437] - The company uses a floating-to-fixed interest rate swap to hedge $450 million of its outstanding Term Loan, fixing the rate at 3.215% through July 2026, to manage interest rate risk[439] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for Victory Capital Holdings, Inc. and its subsidiaries for the years ended December 31, 2021, 2020, and 2019, including balance sheets, statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes Consolidated Balance Sheet Highlights (as of Dec 31, 2021 vs. 2020) | Metric (in thousands) | 2021 | 2020 | | :-------------------- | :---------- | :---------- | | Total Assets | $2,579,746 | $1,730,729 | | Total Liabilities | $1,649,819 | $1,023,188 | | Total Stockholders' Equity | $929,927 | $707,541 | | Cash and Cash Equivalents | $69,533 | $22,744 | | Long-term Debt, net | $1,127,924 | $769,009 | Consolidated Statements of Operations Highlights (Year Ended Dec 31) | Metric (in thousands) | 2021 | 2020 | 2019 | | :-------------------- | :---------- | :---------- | :--------- | | Total Revenue | $890,265 | $775,351 | $612,373 | | Total Operating Expenses | $516,420 | $460,638 | $447,753 | | Income from Operations | $373,845 | $314,713 | $164,620 | | Net Income | $278,389 | $212,522 | $92,491 | | Diluted EPS | $3.75 | $2.88 | $1.26 | Consolidated Statements of Cash Flows Highlights (Year Ended Dec 31) | Metric (in thousands) | 2021 | 2020 | 2019 | | :-------------------- | :---------- | :---------- | :--------- | | Net cash provided by operating activities | $376,196 | $250,616 | $227,384 | | Net cash used in investing activities | $(556,588) | $(12,340) | $(849,812) | | Net cash provided by (used in) financing activities | $227,217 | $(252,696) | $608,016 | - Goodwill increased significantly from $404.75 million in 2020 to $981.81 million in 2021, primarily due to the NEC and WestEnd acquisitions[650] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure were reported[748] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021, and internal control over financial reporting was also deemed effective, with no material changes identified - As of December 31, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level[750] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, providing reasonable assurance regarding financial reporting reliability[751] - No changes in internal control over financial reporting were identified during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[752] Item 9B. Other Information The company reported no other information required by this item - No other information was reported under this item[754] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for the 2022 annual meeting of shareholders - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders[755] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2022 annual meeting of shareholders - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders[756] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership of certain beneficial owners and management, and related shareholder matters, is incorporated by reference from the company's definitive proxy statement for the 2022 annual meeting of shareholders - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders[757] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the company's definitive proxy statement for the 2022 annual meeting of shareholders - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders[758] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for the 2022 annual meeting of shareholders - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders[759] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the exhibits and financial statement schedules filed as part of the Form 10-K, including the financial statements, various corporate documents, and agreements - The financial statements are contained in Item 8 of Part II of this report[762] - A detailed exhibit index is provided, listing corporate documents, plans, agreements, and certifications[761] Item 16. Form 10‑K Summary The company did not provide a separate Form 10-K summary - No Form 10-K Summary was provided[760] Signatures The report is duly signed on behalf of Victory Capital Holdings, Inc. by its Chief Executive Officer and Chairman, David C. Brown, and President, Chief Financial Officer, and Chief Administrative Officer, Michael D. Policarpo, along with other directors, as of March 14, 2022 - The report was signed by David C. Brown (CEO and Chairman) and Michael D. Policarpo (President, CFO, and CAO) on March 14, 2022[768][769]