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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 September 30, 2022

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

 

 

img130304454_0.jpg 

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 Common Stock, par value $0.01 per share as of October 31, 2022 was 68,509,826.

Auditor’s PCAOB ID Number: 42 Auditor Name: Ernst & Young LLP Auditor Location: Cleveland, Ohio

 

 

 

 


 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Information

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

Controls and Procedures

46

 

 

 

PART II OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

47

Item 6.

Exhibits

48

 

Signatures

49

 

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 level of control over us retained by Crestview Partners II GP, L.P. (“Crestview GP”); our status as an emerging growth company; 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, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2022, 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.

2


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)

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,669

 

 

$

69,533

 

Receivables

 

 

87,534

 

 

 

104,305

 

Prepaid expenses

 

 

7,321

 

 

 

6,654

 

Investments, at fair value

 

 

28,908

 

 

 

31,724

 

Property and equipment, net

 

 

23,124

 

 

 

25,295

 

Goodwill

 

 

981,805

 

 

 

981,805

 

Other intangible assets, net

 

 

1,323,828

 

 

 

1,349,797

 

Other assets

 

 

69,936

 

 

 

10,633

 

Total assets

 

$

2,589,125

 

 

$

2,579,746

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

50,145

 

 

$

62,102

 

Accrued compensation and benefits

 

 

52,951

 

 

 

53,905

 

Consideration payable for acquisition of business

 

 

267,900

 

 

 

309,380

 

Deferred tax liability, net

 

 

103,394

 

 

 

63,120

 

Other liabilities

 

 

47,883

 

 

 

33,388

 

Long-term debt, net

 

 

999,843

 

 

 

1,127,924

 

Total liabilities

 

 

1,522,116

 

 

 

1,649,819

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock, $0.01 par value per share: 2022 - 600,000,000 shares authorized, 80,288,530 shares issued and 68,481,824 shares outstanding; 2021 - 600,000,000 shares authorized, 77,242,372 shares issued and 68,662,779 shares outstanding

 

 

803

 

 

 

772

 

Additional paid-in capital

 

 

699,242

 

 

 

673,572

 

Treasury stock, at cost: 2022 - 11,806,706 shares; 2021 - 8,579,593 shares

 

 

(243,901

)

 

 

(153,200

)

Accumulated other comprehensive income

 

 

37,121

 

 

 

5,972

 

Retained earnings

 

 

573,744

 

 

 

402,811

 

Total stockholders' equity

 

 

1,067,009

 

 

 

929,927

 

Total liabilities and stockholders' equity

 

$

2,589,125

 

 

$

2,579,746

 

 

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

3


Table of Contents

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

160,770

 

 

$

171,355

 

 

$

508,364

 

 

$

499,672

 

Fund administration and distribution fees

 

 

46,490

 

 

 

54,935

 

 

 

144,921

 

 

 

161,471

 

Total revenue

 

 

207,260

 

 

 

226,290

 

 

 

653,285

 

 

 

661,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Personnel compensation and benefits

 

 

56,869

 

 

 

55,837

 

 

 

179,352

 

 

 

172,305

 

Distribution and other asset-based expenses

 

 

39,019

 

 

 

44,859

 

 

 

123,471

 

 

 

131,185

 

General and administrative

 

 

12,301

 

 

 

13,795

 

 

 

38,984

 

 

 

40,818

 

Depreciation and amortization

 

 

10,686

 

 

 

4,377

 

 

 

32,051

 

 

 

13,456

 

Change in value of consideration payable for acquisition of business

 

 

(10,500

)

 

 

2,400

 

 

 

(40,600

)

 

 

10,600

 

Acquisition-related costs

 

 

189

 

 

 

6,007

 

 

 

449

 

 

 

6,265

 

Restructuring and integration costs

 

 

56

 

 

 

18

 

 

 

73

 

 

 

2,493

 

Total operating expenses

 

 

108,620

 

 

 

127,293

 

 

 

333,780

 

 

 

377,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

98,640

 

 

 

98,997

 

 

 

319,505

 

 

 

284,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and other (expense) income

 

 

(1,446

)

 

 

(119

)

 

 

(5,096

)

 

 

4,547

 

Interest expense and other financing costs

 

 

(11,479

)

 

 

(5,853

)

 

 

(30,637

)

 

 

(18,853

)

Loss on debt extinguishment

 

 

(369

)

 

 

(669

)

 

 

(2,887

)

 

 

(4,596

)

Total other expense, net

 

 

(13,294

)

 

 

(6,641

)

 

 

(38,620

)

 

 

(18,902

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

85,346

 

 

 

92,356

 

 

 

280,885

 

 

 

265,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(12,582

)

 

 

(18,181

)

 

 

(57,643

)

 

 

(56,472

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

72,764

 

 

$

74,175

 

 

$

223,242

 

 

$

208,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.06

 

 

$

1.09

 

 

$

3.25

 

 

$

3.08

 

Diluted

 

$

1.01

 

 

$

1.00

 

 

$

3.07

 

 

$

2.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

68,609

 

 

 

67,980

 

 

 

68,625

 

 

 

67,840

 

Diluted

 

 

71,877

 

 

 

74,053

 

 

 

72,797

 

 

 

74,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

0.25

 

 

$

0.15

 

 

$

0.75

 

 

$

0.36

 

 

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

4


Table of Contents

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

72,764

 

 

$

74,175

 

 

$

223,242

 

 

$

208,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized income on cash flow hedges

 

 

10,024

 

 

 

1,276

 

 

 

31,514

 

 

 

9,078

 

Net unrealized loss on foreign currency translation

 

 

(78

)

 

 

(56

)

 

 

(365

)

 

 

(47

)

Total other comprehensive income, net of tax

 

 

9,946

 

 

 

1,220

 

 

 

31,149

 

 

 

9,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

82,710

 

 

$

75,395

 

 

$

254,391

 

 

$

217,678

 

 

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

5


Table of Contents

Victory Capital Holdings, Inc. and Subsidiaries

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

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Total

 

Balance, December 31, 2021

 

$

772

 

 

$

(153,200

)

 

$

673,572

 

 

$

5,972

 

 

$

402,811

 

 

$

929,927

 

Issuance of common stock

 

 

 

 

 

 

 

 

69

 

 

 

 

 

 

 

 

 

69

 

Repurchase of shares

 

 

 

 

 

(9,437

)

 

 

 

 

 

 

 

 

 

 

 

(9,437

)

Shares withheld related to net settlement of equity awards

 

 

 

 

 

(9,317

)

 

 

 

 

 

 

 

 

 

 

 

(9,317

)

Vesting of restricted share grants

 

 

5

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

Exercise of options

 

 

2

 

 

 

 

 

 

1,231

 

 

 

 

 

 

 

 

 

1,233

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

16,199

 

 

 

 

 

 

16,199

 

Share-based compensation

 

 

 

 

 

 

 

 

3,945

 

 

 

 

 

 

 

 

 

3,945

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,618

)

 

 

(17,618

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71,273

 

 

 

71,273

 

Balance, March 31, 2022

 

 

779

 

 

 

(171,954

)

 

 

678,812

 

 

 

22,171

 

 

 

456,466

 

 

 

986,274

 

Issuance of common stock

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

80

 

Repurchase of shares

 

 

 

 

 

(16,908

)

 

 

 

 

 

 

 

 

 

 

 

(16,908

)

Shares withheld related to net settlement of equity awards

 

 

 

 

 

(4,839

)

 

 

 

 

 

 

 

 

 

 

 

(4,839

)

Vesting of restricted share grants

 

 

1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Exercise of options

 

 

4

 

 

 

 

 

 

1,687

 

 

 

 

 

 

 

 

 

1,691

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

5,004

 

 

 

 

 

 

5,004

 

Share-based compensation

 

 

 

 

 

 

 

 

4,965

 

 

 

 

 

 

 

 

 

4,965

 

Dividends paid