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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______                 

Commission file number 001-38388

 

 

Victory Capital Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

32-0402956

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

15935 La Cantera Parkway, San Antonio, Texas

 

78256

(Address of principal executive offices)

 

(Zip Code)

 

(216) 898-2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 Par Value

VCTR

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  

The number of outstanding shares of the registrant’s Class A common stock, par value $0.01 per share and Class B common stock, par value $0.01 per share, as of July 31, 2020 were 16,447,829 and 51,229,882 respectively.

 

 

 

 


 

TABLE OF CONTENTS

 

Forward‑Looking Statements

This report includes forward-looking statements, including in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These forward‑looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward‑looking statements in this report.

Forward‑looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward‑looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following; reductions in assets under management (“AUM”) based on investment performance, client withdrawals, difficult market conditions and other factors such as a pandemic; the nature of our contracts and investment advisory agreements; our ability to maintain historical returns and sustain our historical growth; our dependence on third parties to market our strategies and provide products or services for the operation of our business; our ability to retain key investment professionals or members of our senior management team; our reliance on the technology systems supporting our operations; our ability to successfully acquire and integrate new companies; the concentration of our investments in long only small‑ and mid‑cap equity and U.S. clients; risks and uncertainties associated with non‑U.S. investments; our efforts to establish and develop new teams and strategies; the ability of our investment teams to identify appropriate investment opportunities; our ability to limit employee misconduct; our ability to meet the guidelines set by our clients; our exposure to potential litigation (including administrative or tax proceedings) or regulatory actions; our ability to implement effective information and cyber security policies, procedures and capabilities; our substantial indebtedness; the potential impairment of our goodwill and intangible assets; disruption to the operations of third parties whose functions are integral to our exchange traded fund (“ETF”) platform; our determination that we are not required to register as an “investment company” under the 1940 Act; the fluctuation of our expenses; our ability to respond to recent trends in the investment management industry; the level of regulation on investment management firms and our ability to respond to regulatory developments; the competitiveness of the investment management industry; the dual class structure of our common stock; the level of control over us retained by Crestview Partners II GP, L.P. (“Crestview GP”); our status as an emerging growth company and a controlled company; our ability to integrate the USAA Asset Management Company (“USAA Adviser”) and the Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services (together with USAA Adviser, the “USAA Acquired Companies”); and other risks and factors included, but not limited to, those listed under the caption “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020, which is accessible on the SEC’s website at www.sec.gov.

In light of these risks, uncertainties and other factors, the forward‑looking statements contained in this report might not prove to be accurate. All forward‑looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward‑looking statements, whether as a result of new information, future events or otherwise.

 

 

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Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares data)

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,184

 

 

$

37,121

 

Receivables

 

 

74,805

 

 

 

95,093

 

Prepaid expenses

 

 

6,252

 

 

 

4,852

 

Investments

 

 

18,507

 

 

 

19,076

 

Property and equipment, net

 

 

16,009

 

 

 

13,240

 

Goodwill

 

 

404,750

 

 

 

404,750

 

Other intangible assets, net

 

 

1,168,885

 

 

 

1,175,471

 

Other assets

 

 

3,448

 

 

 

3,706

 

Total assets

 

$

1,747,840

 

 

$

1,753,309

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

78,265

 

 

$

89,203

 

Accrued compensation and benefits

 

 

33,944

 

 

 

54,842

 

Consideration payable for acquisition of business

 

 

118,500

 

 

 

118,700

 

Deferred tax liability, net

 

 

14,785

 

 

 

5,486

 

Other liabilities

 

 

30,273

 

 

 

22,668

 

Long-term debt, net

 

 

857,233

 

 

 

924,539

 

Total liabilities

 

 

1,133,000

 

 

 

1,215,438

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Class A common stock, $0.01 par value per share: 2020 - 400,000,000 shares authorized, 18,717,074 shares issued and 16,335,021 shares outstanding; 2019 - 400,000,000 shares authorized, 18,099,772 shares issued and 16,414,617 shares outstanding

 

 

187

 

 

 

181

 

Class B common stock, $0.01 par value per share: 2020 - 200,000,000 shares authorized, 54,504,294 shares issued and 51,360,645 shares outstanding; 2019 - 200,000,000 shares authorized, 53,937,394 shares issued and 51,281,512 shares outstanding

 

 

545

 

 

 

539

 

Additional paid-in capital

 

 

636,386

 

 

 

624,766

 

Class A treasury stock, at cost: 2020 - 2,382,053 shares; 2019 - 1,685,155 shares

 

 

(33,104

)

 

 

(21,524

)

Class B treasury stock, at cost: 2020 - 3,143,649 shares; 2019 - 2,655,882 shares

 

 

(40,912

)

 

 

(31,386

)

Accumulated other comprehensive loss

 

 

(8,403

)

 

 

 

Retained earnings (deficit)

 

 

60,141

 

 

 

(34,705

)

Total stockholders' equity

 

 

614,840

 

 

 

537,871

 

Total liabilities and stockholders' equity

 

$

1,747,840

 

 

$

1,753,309

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Table of Contents

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

130,032

 

 

$

78,042

 

 

$

276,913

 

 

$

152,453

 

Fund administration and distribution fees

 

 

51,854

 

 

 

13,318

 

 

 

109,394

 

 

 

26,386

 

Total revenue

 

 

181,886

 

 

 

91,360

 

 

 

386,307

 

 

 

178,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel compensation and benefits

 

 

49,105

 

 

 

35,542

 

 

 

96,676

 

 

 

70,043

 

Distribution and other asset-based expenses

 

 

41,630

 

 

 

16,182

 

 

 

96,490

 

 

 

31,949

 

General and administrative

 

 

13,289

 

 

 

7,087

 

 

 

25,177

 

 

 

14,174

 

Depreciation and amortization

 

 

4,166

 

 

 

5,263

 

 

 

8,216

 

 

 

10,485

 

Change in value of consideration payable for acquisition of business

 

 

5,300

 

 

 

(14

)

 

 

(200

)

 

 

(14

)

Acquisition-related costs

 

 

(23

)

 

 

2,787

 

 

 

(92

)

 

 

5,564

 

Restructuring and integration costs

 

 

2,605

 

 

 

1,788

 

 

 

3,603

 

 

 

1,788

 

Total operating expenses

 

 

116,072

 

 

 

68,635

 

 

 

229,870

 

 

 

133,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

65,814

 

 

 

22,725

 

 

 

156,437

 

 

 

44,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and other (expense) income

 

 

2,966

 

 

 

656

 

 

 

(1,206

)

 

 

2,489

 

Interest expense and other financing costs

 

 

(9,710

)

 

 

(4,520

)

 

 

(21,118

)

 

 

(9,144

)

Gain (loss) on debt extinguishment

 

 

137

 

 

 

 

 

 

(917

)

 

 

 

Total other expense, net

 

 

(6,607

)

 

 

(3,864

)

 

 

(23,241

)

 

 

(6,655

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

59,207

 

 

 

18,861

 

 

 

133,196

 

 

 

38,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(14,487

)

 

 

(4,478

)

 

 

(31,310

)

 

 

(9,285

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

44,720

 

 

$

14,383

 

 

$

101,886

 

 

$

28,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.66

 

 

$

0.21

 

 

$

1.50

 

 

$

0.43

 

Diluted

 

$

0.61

 

 

$

0.20

 

 

$

1.38

 

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

67,821

 

 

 

67,583

 

 

 

67,806

 

 

 

67,552

 

Diluted

 

 

73,204

 

 

 

73,521

 

 

 

73,818

 

 

 

72,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

0.05

 

 

$

 

 

$

0.10

 

 

$

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Table of Contents

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

44,720

 

 

$

14,383

 

 

$

101,886

 

 

$

28,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on cash flow hedges

 

 

(3,529

)

 

 

 

 

 

(8,349

)

 

 

 

Net unrealized gain (loss) on foreign currency translation

 

 

13

 

 

 

(8

)

 

 

(54

)

 

 

4

 

Total other comprehensive (loss) income, net of tax

 

 

(3,516

)

 

 

(8

)

 

 

(8,403

)

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

41,204

 

 

$

14,375

 

 

$

93,483

 

 

$

28,914

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Table of Contents

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

Retained

 

 

 

 

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-In

 

 

Comprehensive

 

 

(Deficit)

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance, December 31, 2019

 

$

181

 

 

$

539

 

 

$

(21,524

)

 

$

(31,386

)

 

$

624,766

 

 

$

 

 

$

(34,705

)

 

$

537,871

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Share conversion - Class B to A

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of shares

 

 

 

 

 

 

 

 

(4,394

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,394

)

Shares withheld related to net settlement of equity awards

 

 

 

 

 

 

 

 

 

 

 

(8,787

)

 

 

 

 

 

 

 

 

 

 

 

(8,787

)

Vesting of restricted share grants

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

Exercise of options

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

1,690

 

 

 

 

 

 

 

 

 

1,693

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,887

)

 

 

 

 

 

(4,887

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,993

 

 

 

 

 

 

 

 

 

5,993

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,601

)

 

 

(3,601

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57,166

 

 

 

57,166

 

Balance, March 31, 2020

 

 

185

 

 

 

545

 

 

 

(25,918

)

 

 

(40,173

)

 

 

632,468

 

 

 

(4,887

)

 

 

18,860

 

 

 

581,080

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

32

 

Share conversion - Class B to A

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of shares

 

 

 

 

 

 

 

 

(7,186

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,186

)

Shares withheld related to net settlement of equity awards

 

 

 

 

 

 

 

 

 

 

 

(739

)

 

 

 

 

 

 

 

 

 

 

 

(739

)

Vesting of restricted share grants

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Exercise of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,516

)

 

 

 

 

 

(3,516

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,887

 

 

 

 

 

 

 

 

 

3,887

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,439

)

 

 

(3,439

)

Net income