Victory Capital Holdings, Inc. — 2018 Form 10-K
Business context and reporting period: This annual report covers the fiscal year ended December 31, 2018; it is not a standalone quarterly filing. Victory is an investment manager operating a multi-boutique platform, with $52.8 billion in AUM at year-end across 71 investment strategies. Its revenue is primarily asset-based fees. The filing also reports unaudited fourth-quarter results.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $413.4 million | $409.6 million |
| Operating income / margin | $114.5 million / 27.7% | $90.2 million / 22.0% |
| Net income | $63.7 million | $25.8 million |
| Diluted EPS | $0.90 | $0.43 |
| Adjusted EBITDA / margin | $160.2 million / 38.7% | $149.1 million / 36.4% |
| Adjusted Net Income | $102.3 million | $62.0 million |
| Operating cash flow | $134.3 million | $96.2 million |
Adjusted EBITDA and Adjusted Net Income are non-GAAP measures; the company cautions they are not substitutes for GAAP results.
- Fourth quarter: Revenue was $96.0 million versus $105.6 million in Q4 2017; operating income was $25.8 million versus $26.9 million; net income was $13.9 million versus $11.2 million. Diluted EPS was $0.19 versus $0.19.
- AUM and flows: Year-end AUM fell 15% to $52.8 billion from $61.8 billion. The decline reflected $6.6 billion of market depreciation and $2.4 billion of net outflows. Average AUM nevertheless increased to $61.4 billion from $57.8 billion.
- Fees and margins: Investment management fees rose 3% to $352.7 million, while the weighted-average fee rate declined 3.5 basis points to 67.3 bps, mainly due to asset mix. Operating expenses declined 6% to $298.9 million.
- Debt and liquidity: Gross term-loan principal was $280.0 million at year-end ($268.9 million net of unamortized discount and issuance costs); cash was $51.5 million and the $100 million revolver was undrawn. Management reported net debt to Adjusted EBITDA of 1.5x. Operating cash flow increased; investing used $11.5 million and financing used $84.2 million.
Material changes versus prior period
- Revenue increased 1%, while operating income rose 27% and net income rose 147%. Lower interest expense after refinancing, lower distribution and administrative costs, and lower amortization contributed to improved earnings; the comparison also reflects a 2017 tax benefit from the Tax Act.
- Market depreciation and net outflows reduced year-end AUM despite higher average AUM. Mid-cap equity, fixed income, large-cap equity, small-cap equity and commodity strategies had net outflows; global/non-U.S. equity and Solutions had inflows.
- The February 2018 IPO generated $156.5 million of net proceeds. Together with new term loans, proceeds refinanced the prior $499.7 million debt balance. The company repaid a further $80 million under the new facility during 2018.
- The company repurchased 856,275 Class A shares for $8.0 million during 2018 under a $15 million authorization; $7.0 million remained available at year-end.
Outlook, commentary, risks and unusual items
- Acquisitions pending at filing: Victory agreed to acquire Harvest for $255 million cash, stock consideration and contingent earn-outs, and USAA Asset Management and related businesses for $850 million cash plus contingent payments. Both were expected to close in Q2 2019, subject to closing conditions and required client consents. These transactions had not closed as of December 31, 2018.
- Financing commitments contemplated up to $1.395 billion in term loans and a $100 million revolver to refinance existing debt and fund the acquisitions. The resulting leverage, covenant limits and integration demands are significant risks; financing and acquisition closings remained subject to conditions.
- Management described organic growth, acquisitions and operating leverage as growth drivers, but gave no specific financial guidance in the supplied filing text. It reported 78% of AUM in its stated focus asset classes and approximately $76 million in net annualized expense synergies from prior acquisitions.
- Principal risks include AUM declines from market losses or redemptions, investment underperformance, fee pressure and passive-product competition, reliance on intermediaries and key investment staff, operational and cyber risks, regulation, and substantial potential acquisition-related debt. Most revenue depends on AUM, and advisory agreements can generally be terminated on short or no notice.
- Unusual or nonrecurring items included $6.1 million of debt-extinguishment loss from refinancing, $4.3 million of acquisition-related costs, and a one-time 2017 tax benefit of $2.4 million. No material legal proceedings were reported. No regular cash dividend was planned.
Important facts for investors to verify
- Whether Harvest and USAA transactions closed, required client consents were obtained, and the stated purchase-price or earn-out terms changed.
- Post-acquisition debt, leverage, interest costs, covenant headroom and cash available for operations or further acquisitions.
- Whether net outflows and market-driven AUM losses continued, especially in U.S. equity strategies, and how these affected fee rates and earnings.
- The assumptions and exclusions behind Adjusted EBITDA, Adjusted Net Income and reported acquisition synergies; compare these with GAAP cash generation and earnings.
- Governance and dilution exposure: Class B shares carry ten votes per share, and Crestview GP held 64.6% of total voting power at December 31, 2018.