Victory Capital Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 13, 2020. Victory Capital is an asset manager whose revenue is primarily tied to fees on assets under management (AUM). The year includes six months of results from the USAA Mutual Fund Business, acquired July 1, 2019.
Business context and key financial metrics
Unless indicated otherwise, amounts are U.S. dollars. The USAA acquisition materially enlarged the business and changed its asset, client and expense mix.
| Metric | 2019 | 2018 |
|---|---|---|
| Year-end AUM | $151.8 billion | $52.8 billion |
| Average AUM | $102.7 billion | $61.4 billion |
| Revenue | $612.4 million | $413.4 million |
| Operating income | $164.6 million | $114.5 million |
| GAAP operating margin | 26.9% | 27.7% |
| Net income | $92.5 million | $63.7 million |
| Diluted EPS | $1.26 | $0.90 |
| Adjusted EBITDA and margin | $268.8 million; 43.9% | $160.2 million; 38.7% |
| Adjusted net income | $172.8 million | $102.3 million |
| Cash from operating activities | $227.4 million | $134.3 million |
Adjusted EBITDA, adjusted EBITDA margin and adjusted net income are non-GAAP measures; the company excludes specified costs and other items. They should not be treated as substitutes for GAAP results.
- Revenue increased 48.1%. Investment management fees rose 32.4% to $466.8 million; fund administration and distribution fees increased to $145.6 million, including $42.8 million of USAA transfer-agent fees.
- AUM grew $99.1 billion, primarily from $81.1 billion acquired, $16.1 billion of market appreciation and $1.9 billion of positive net flows. Net flows improved from $2.4 billion of outflows in 2018. Solutions and fixed income drew net inflows, partly offset by outflows from several U.S. equity strategies.
- Revenue yield on average AUM declined to 59.6 basis points from 67.3 basis points, reflecting a shift in asset mix and lower realized fee rates. The company also adopted new revenue-recognition guidance in 2019: $18.7 million of fund waivers and reimbursements shifted to a reduction of revenue rather than expense; prior periods were not restated.
- Operating expenses rose to $447.8 million from $298.9 million. Acquisition-related, restructuring and integration costs included $22.3 million and $8.7 million, respectively; remeasurement of USAA contingent consideration added $19.9 million of expense.
- Fourth-quarter revenue was $218.6 million and net income was $37.6 million, versus $96.0 million and $13.9 million, respectively, in fourth-quarter 2018. The acquisition contributed to the year-over-year increase.
Debt, liquidity and capital allocation
- Year-end long-term debt, net of unamortized financing costs and discount, was $924.5 million; gross term-loan principal was $952.0 million. The seven-year term loan was due June 2026. Cash and cash equivalents were $37.1 million, and the $100 million revolving facility was undrawn.
- Operating cash flow of $227.4 million was more than offset by $849.8 million of investing outflows, mainly the $851.3 million cash paid for USAA, and partly funded by $608.0 million of financing inflows. Year-end accounts and other payables were $144.0 million.
- After year-end, the company repaid a further $38 million of debt and repriced its term loan effective January 17, 2020, reducing the LIBOR margin from 3.25% to 2.50%. Management estimated annual interest savings of about $7 million. The filing states that the company was in compliance with its financial covenant at year-end.
- Victory initiated quarterly dividends in 2019 and declared $0.10 per share for the year. In February 2020, the board declared a $0.05-per-share dividend payable in March. The board retains discretion over future dividends. The company repurchased $15.5 million of Class A shares in 2019.
Material changes, outlook and risks
- The $950.1 million USAA transaction added $81.1 billion of AUM, expanded fixed-income and solutions offerings, and established a direct USAA-member channel. USAA-related revenue for the six months after closing was $244.5 million; acquired-company net income for that period was not practicable for the company to determine.
- Management reported $117 million of net annual expense synergies achieved in 2019, approximately 28% of USAA Adviser’s 2018 expenses, and expected a further $3 million of annual synergies in 2020. It expected $23 million of additional one-time costs in 2020 to achieve synergies; $27 million of one-time costs were incurred in 2019.
- No formal revenue, earnings or AUM guidance is provided. Management describes organic growth and further disciplined acquisitions as priorities, while noting that acquisition opportunities, integration, investment performance and client flows are uncertain.
- Key risks include falling markets or AUM, weak relative investment performance and client redemptions; fee pressure and competition from passive products; dependence on key investment staff and third-party service providers; integration and realization of USAA synergies; and substantial debt service and covenant obligations. About 49% of year-end AUM was in the direct-member channel, 26% institutional and 25% retail. The company also identifies interest-rate, credit, cybersecurity, regulatory, operational and goodwill/intangible-asset impairment risks.
- USAA contingent consideration had an estimated year-end fair value of $118.7 million, with up to $150 million potentially payable over four years based on revenue conditions. Goodwill and intangible assets totaled approximately $1.6 billion; no impairments were reported for 2019.
- The company reported no material pending legal proceedings. Management concluded internal control over financial reporting was effective, but the auditor did not attest to it because Victory qualified for the emerging-growth-company exemption. The company’s dual-class shares and Crestview’s voting control are also relevant governance considerations.
Important facts for investors to verify
- How much of ongoing growth and earnings reflects USAA acquisition effects, market appreciation and synergies versus durable organic net inflows?
- Whether the reported $117 million of synergies are sustainable, and whether the additional expected synergies and 2020 integration costs were realized as described.
- How fee yield, client flows and channel concentration evolve, particularly for USAA-related assets and lower-fee products.
- Debt paydown, interest expense, covenant headroom and the actual benefit from the January 2020 refinancing.
- The assumptions behind the $118.7 million contingent-consideration estimate and the recoverability of the acquired goodwill and intangible assets.
- Comparability of reported revenue and expenses after the 2019 accounting-presentation change, and the definitions and adjustments in the non-GAAP measures.