# Victory Capital Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2019

- Company: [Victory Capital Holdings, Inc.](/companies/vctr.md) (CIK 1570827)
- Form: 10-Q
- Filed: 2019-05-15
- Accepted by EDGAR: May 15, 2019, 10:17 ET
- Period: 2019-03-31
- Accession: 0001558370-19-005060
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1570827/000155837019005060/vctr-20190331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1570827/000155837019005060/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $87.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2019-01-01 to 2019-03-31 | $22.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-01-01 to 2019-03-31 | $4.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-01-01 to 2019-03-31 | $14.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 72,281,878 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $17.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $484.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2019-01-01 to 2019-03-31 | $41.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2019-01-01 to 2019-03-31 | $1.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-03-31 | $66.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-03-31 | $813.9m | us-gaap:Assets |
| Total liabilities | at 2019-03-31 | $343.8m | us-gaap:Liabilities |
| Long-term debt | at 2019-03-31 | $269.3m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2019-03-31 | $470.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,202 characters.

***The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Form 10-K. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period.***

### Overview

We are an investment management firm operating a next generation, integrated multi-boutique model with $58.1 billion in AUM as of March 31, 2019. Our differentiated model features a scalable operating platform that provides centralized distribution, marketing and operations infrastructure to our Franchises and Solutions. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees.

Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated multi-boutique model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. VCM employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities.

Solutions consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer Solutions through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions.

We sell our products through our centralized distribution model with 92 professionals across both our institutional and retail distribution channels and marketing organization. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $58.1 billion at March 31, 2019. We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing retail and institutional distribution channels with deep penetration.

### USAA AMCO Acquisition

On November 6, 2018, we entered into an agreement to acquire the USAA Acquired Companies and their Mutual Fund and ETF businesses and the USAA 529 College Savings Plan. The USAA Acquired Companies have proven expertise in managing fixed income, global multi-asset and equity strategies through both internal investment teams and external subadvisors. We expect the USAA AMCO Acquisition will diversify our AUM, expand our investment capabilities, increase our size and scale and introduce a new and unique USAA direct-member distribution channel to our existing distribution platform.

The USAA AMCO Acquisition is expected to close on July 1, 2019. See Note 4 of the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition and Part II – Other Information - Item 1A “Risk Factors” for further discussion of the risks related to this acquisition.

### Harvest Purchase Agreement

On April 22, 2019, we, Harvest and the Members’ Representative entered into the Harvest Termination Agreement to mutually terminate the Harvest Purchase Agreement as of that date. Neither we nor Harvest will be responsible for any termination fee to the other party as a result of the termination.

### Business Highlights

- AUM was $58.1 billion at March 31, 2019 compared to $52.8 billion at December 31, 2018, up 10% driven by market movement partially offset by net outflows. Our Global / Non-U.S. Equity asset class saw net inflows during the quarter while U.S. Mid Cap Equity and U.S Large Cap Equity accounted for the majority of the net outflows. We generated $3.0 billion in gross flows and ($1.1) billion in negative net flows for the three months ended March 31, 2019 compared to $3.7 billion and ($0.6) billion, respectively, for the three months ended March 31, 2018.
- Our Franchises and Solutions had strong investment performance. As of March 31, 2019, 24 of our mutual funds and ETFs have overall Morningstar ratings of four or five stars and 67% of our fund and ETF AUM were rated four or five stars by Morningstar. As of March 31, 2019, 60% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 75% over a three-year period, 74% over a five-year period and 90% over a ten-year period. On an equal-weighted basis, 55% of our strategies have outperformed their benchmarks over a one-year period, 55% over a three-year period, 63% over a five-year period and 81% over a ten-year period.
- The industry recognized us for our achievements. For the fourth consecutive year, eVestment ranked us in the top 5 in their 2018 Institutional Brand Awareness by AUM category. We ranked 9th in “*Barron’s Best Fund Families of 2018”* for the one-year period ended December 31, 2018. We also ranked 4th in the mixed asset category and 5th in the taxable bond category. This is the 2nd consecutive year that we have been ranked among the top 10 best fund families and the 5th consecutive year that we have been ranked among the top 25 best fund families by *Barron’s.*
- Total revenue for the three months ended March 31, 2019 was $87.5 million compared to $105.0 million for the three months ended March 31, 2018.
- Net income was $14.5 million for the three months ended March 31, 2019 compared to net income of $10.5 million for the three months ended March 31, 2018.
- Adjusted EBITDA was $33.6 million for the three months ended March 31, 2019 compared to $39.8 million for the three months ended March 31, 2018. As a percentage of revenue, Adjusted EBITDA margin was 38.4% in the first quarter of 2019, compared with 37.9% in the first quarter of 2018. See “—Supplemental Non-GAAP Financial Information” for more information about how we calculate Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
- Adjusted Net Income was $21.9 million for the three months ended March 31, 2019 compared to $23.1 million for the three months ended March 31, 2018. See “—Supplemental Non-GAAP Financial Information” for more information about how we calculate Adjusted Net Income and a reconciliation of net income to Adjusted Net Income.

### Key Performance Indicators

When we review our performance we focus on the indicators described below:

*($ in millions)*

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| AUM at period end | $58,119 | $60,855 |
| Average AUM | 57,043 | 62,020 |
| Gross flows | 3,038 | 3,685 |
| Net flows | (1,105) | (633) |
| Total revenue (1) | 87.5 | 105.0 |
| Revenue on average AUM(1) | 62 bps | 69 bps |
| Net income | 14.5 | 10.5 |
| Adjusted EBITDA(2) | 33.6 | 39.8 |
| Adjusted EBITDA Margin(1)(3) | 38.4% | 37.9% |
| Adjusted Net Income(2) | 21.9 | 23.1 |
| Tax benefit of goodwill and acquired intangibles(4) | 3.4 | 3.3 |

(1) On January 1, 2019, the Company adopted ASU 2014-09 and now records all Mutual Fund and ETF waivers and expense reimbursements as a reduction of reported revenue and not as an expense item. The impact in the three months ended March 31, 2019 was a $4.1 million decrease in revenue and operating expenses. Because the Company adopted the new guidance using the modified retrospective method, prior periods have not been restated.

(2) Our management uses Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the business. These measures eliminate the impact of one‑time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail and reconciled to net income calculated in accordance with GAAP in “—Supplemental Non‑GAAP Financial Information.”

(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

(4) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit.

### Assets Under Management

Due to rounding, AUM numbers presented in the tables below may not add up precisely to the totals provided.

Our profitability is largely affected by the level and composition of our AUM (including asset class and distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will continue to be, influenced by a number of factors, including:

- investment performance, including fluctuations in the financial markets and the quality of our investment decisions;
- client flows into and out of our various strategies and investment vehicles;
- industry trends toward products or strategies that we either do or do not offer;
- our ability to attract and retain high quality investment, distribution, marketing and management personnel;
- our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest of our clients or conversely to re‑open strategies in part or entirely; and
- general investor sentiment and confidence.

Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle. The chart below sets forth our AUM by Franchise and Solutions as of March 31, 2019:

The following table presents our AUM by asset class as of the dates indicated:

*(in millions)*

|  | As of March 31, 2019 | 2018 |
| --- | ---: | ---: |
| U.S. Mid Cap Equity | $22,169 | $24,205 |
| U.S. Small Cap Equity | 14,714 | 15,095 |
| Fixed Income | 6,973 | 7,311 |
| U.S. Large Cap Equity | 4,117 | 4,635 |
| Global / Non-U.S. Equity | 5,234 | 4,334 |
| Solutions | 3,996 | 3,563 |
| Commodity | 493 | 1,298 |
| Other | 425 | 414 |
| **Total** | **$58,119** | **$60,855** |

29

The following table summarizes our asset flows by asset class for the periods indicated:

*(in millions)*

| For Three Months Ended March 31, 2019 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Commodity | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $20,019 | $12,948 | $6,836 | $3,759 | $4,610 | $3,767 | $469 | $355 | $52,763 |
| Gross client cash inflows | 993 | 992 | 303 | 26 | 365 | 279 | 56 | 25 | 3,038 |
| Gross client cash outflows | (1,786) | (1,059) | (383) | (183) | (277) | (349) | (80) | (27) | (4,143) |
| Net client cash flows | (793) | (67) | (79) | (158) | 88 | (70) | (24) | (2) | (1,105) |
| Net transfers | 2 | (1) | — | (1) | — | 1 | — | (1) | — |
| Market appreciation / (depreciation) | 2,942 | 1,834 | 216 | 516 | 535 | 297 | 47 | 73 | 6,460 |
| Ending AUM | $22,169 | $14,714 | $6,973 | $4,117 | $5,234 | $3,996 | $493 | $425 | $58,119 |
| **For Three Months Ended March 31, 2018** |  |  |  |  |  |  |  |  |  |
| Beginning AUM | $25,185 | $15,308 | $7,551 | $4,789 | $4,105 | $3,028 | $1,419 | $386 | $61,771 |
| Gross client cash inflows | 1,203 | 776 | 394 | 55 | 443 | 606 | 127 | 81 | 3,685 |
| Gross client cash outflows | (2,080) | (922) | (640) | (211) | (220) | (77) | (146) | (22) | (4,318) |
| Net client cash flows | (877) | (146) | (246) | (156) | 223 | 529 | (19) | 59 | (633) |
| Net transfers | — | — | — | (1) | (8) | 40 | — | (39) | (8) |
| Market appreciation / (depreciation) | (103) | (67) | 6 | 3 | 14 | (34) | (102) | 8 | (275) |
| Ending AUM | $24,205 | $15,095 | $7,311 | $4,635 | $4,334 | $3,563 | $1,298 | $414 | $60,855 |

The following table presents our AUM by distribution channel as of the dates indicated:

*(in millions)*

|  | As of March 31, 2019 Amount | % of total | 2018 Amount | % of total |
| --- | ---: | ---: | ---: | ---: |
| Institutional | $32,714 | 56% | $35,116 | 58% |
| Retail | 25,405 | 44% | 25,739 | 42% |
| Total AUM(1) | $58,119 | 100% | $60,855 | 100% |

(1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.

The following table summarizes our asset flows by vehicle for the periods indicated:

*(in millions)*

| Three Months Ended March 31, 2019 | Mutual Funds(1) | ETFs | Separate Accounts and Other Vehicles(2) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $30,492 | $2,956 | $19,315 | $52,763 |
| Gross client cash inflows | 2,379 | 242 | 417 | 3,038 |
| Gross client cash outflows | (2,887) | (299) | (957) | (4,143) |
| Net client cash flows | (508) | (58) | (540) | (1,105) |
| Net transfers | — | — | — | — |
| Market appreciation / (depreciation) | 3,801 | 224 | 2,435 | 6,460 |
| Ending AUM | $33,786 | $3,123 | $21,210 | $58,119 |
| **Three Months Ended March 31, 2018** |  |  |  |  |
| Beginning AUM | $37,967 | $2,250 | $21,555 | $61,771 |
| Gross client cash inflows | 2,626 | 481 | 578 | 3,685 |
| Gross client cash outflows | (3,266) | (29) | (1,023) | (4,318) |
| Net client cash flows | (640) | 452 | (445) | (633) |
| Net transfers | (31) | — | 22 | (8) |
| Market appreciation / (depreciation) | (307) | (28) | 60 | (275) |
| Ending AUM | $36,989 | $2,674 | $21,192 | $60,855 |

(1) Includes institutional and retail share classes and Variable Insurance Products or VIP funds.

(2) Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.

At March 31, 2019, our total AUM was $58.1 billion, an increase of $5.3 billion, or 10% compared to $52.8 billion at December 31, 2018. The increase in AUM reflects net market appreciation of $6.5 billion and net outflows of ($1.1) billion. The net outflows were primarily a result of ($0.8) billion in our U.S. mid cap equity strategies, ($0.2) billion in our U.S. large cap equity strategies and ($0.1) billion in each of our U.S. small cap equity strategies, Solutions and fixed income strategies, partially offset by $0.1 billion in our global / non-U.S. equity strategies.

### GAAP Results of Operations

Our GAAP results of operations were as follows for the three months ended March 31, 2019 and 2018.

*(in thousands, except for shares)*

| Revenue | Three Months Ended March 31, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $74,411 | $89,130 | $(14,719) | -17% |
| Fund administration and distribution fees | 13,068 | 15,834 | (2,766) | -17% |
| **Total revenue** | **87,479** | **104,964** | **(17,485)** | **-17%** |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | 34,501 | 36,803 | (2,302) | -6% |
| Distribution and other asset-based expenses | 15,767 | 25,161 | (9,394) | -37% |
| General and administrative | 7,087 | 9,056 | (1,969) | -22% |
| Depreciation and amortization | 5,222 | 6,412 | (1,190) | -19% |
| Acquisition-related costs | 2,777 | — | 2,777 | n/m |
| Restructuring and integration costs | — | 264 | (264) | -100% |
| **Total operating expenses** | **65,354** | **77,696** | **(12,342)** | **-16%** |
| **Income from operations** | **22,125** | **27,268** | **(5,143)** | **-19%** |
| **Other income (expense)** |  |  |  |  |
| Interest income and other income/(expense) | 1,833 | (37) | 1,870 | 5,054% |
| Interest expense and other financing costs | (4,624) | (7,092) | 2,468 | 35% |
| Loss on debt extinguishment | — | (6,058) | 6,058 | 100% |
| **Total other income (expense), net** | **(2,791)** | **(13,187)** | **10,396** | **79%** |
| **Income before income taxes** | **19,334** | **14,081** | **5,253** | **37%** |
| **Income tax expense** | **(4,807)** | **(3,557)** | **(1,250)** | **-35%** |
| **Net income** | **$14,527** | **$10,524** | **$4,003** | **38%** |
| **Earnings per share of common stock** |  |  |  |  |
| Basic | $0.22 | $0.17 | $0.05 | 29% |
| Diluted | $0.20 | $0.16 | $0.04 | 25% |
| **Weighted average number of shares outstanding** |  |  |  |  |
| Basic | 67,520,883 | 61,599,057 | 5,921,826 | 10% |
| Diluted | 72,281,878 | 66,283,621 | 5,998,257 | 9% |
| **Dividends declared per share of common stock** | $— | $— | $— | n/m |

#### Investment Management Fees

Investment management fees decreased by $14.7 million, or 17%, to $74.4 million for the three months ended March 31, 2019 from $89.1 million for the three months ended March 31, 2018 due to a decrease in average AUM year over year and a change in presentation of mutual fund and ETF waivers and expense reimbursements as a reduction of investment management fees instead of as distribution and other asset-based expense upon adoption of ASU 2014-09 on January 1, 2019. This reduced first quarter 2019 reported revenue by $4.1 million; prior periods have not been restated. Average AUM decreased by $5.0 billion to $57.0 billion for the three months ended March 31, 2019 from $62.0 billion for the three months ended March 31, 2018.

#### Fund Administration and Distribution Fees

Fund administration and distribution fees totaled $13.1 million for the three months ended March 31, 2019, a decrease of $2.7 million, or 17%, when compared to the three months ended March 31, 2018 due mainly to the change in fund distribution fees, which were impacted by lower average mutual fund AUM and a shift in the mix of assets to lower 12b-1 paying share classes.

#### Personnel Compensation and Benefits

The following table presents the components of GAAP personnel compensation and benefits expense for the three months ended March 31, 2019 and 2018:

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $14,904 | $12,923 |
| Incentive compensation | 14,662 | 17,165 |
| Sales-based compensation(1) | 3,388 | 3,393 |
| Equity awards granted to employees(2) | 1,547 | 3,322 |
| **Total personnel compensation and benefits expense** | **$34,501** | **$36,803** |

(1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales.

(2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards is recognized as compensation expense over the vesting period.

Personnel compensation and benefits was $34.5 million for the three months ended March 31, 2019, a decrease of $2.3 million, or 6%, from $36.8 million for the three months ended March 31, 2018. Salaries and benefits was $14.9 million for the three months ended March 31, 2019, an increase of $2.0 million, or 16%, from $12.9 million for the three months ended March 31, 2018. This increase is primarily due to a $1.5 million increase in deferred compensation plan liabilities from favorable market action on the related investments during the quarter and higher employer payroll taxes. Incentive compensation was $14.7 million for the three months ended March 31, 2019, a decrease of $2.5 million, or 15%, from $17.2 million for the three months ended March 31, 2018, due to lower earnings. Sales-based compensation was $3.4 million for the three months ended March 31, 2019, unchanged for the three months ended March 31, 2018. Equity award expense was $1.5 million for the three months ended March 31, 2019, a decrease of $1.8 million, or 55%, from $3.3 million for the three months ended March 31, 2018, due to the reversal of expense in 2019 related to equity awards forfeited during the quarter.

#### Distribution and Other Asset‑based Expenses

The following table presents the components of distribution and other asset-based expenses for the three months ended March 31, 2019 and 2018:

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Broker-dealer distribution fees | $6,979 | $9,338 |
| Platform distribution fees | 4,583 | 7,723 |
| Fund expense reimbursements | — | 2,933 |
| Sub-administration | 1,682 | 1,534 |
| Sub-advisory | 847 | 1,838 |
| Middle-office | 1,676 | 1,795 |
| **Total distribution and other asset-based expenses** | **$15,767** | **$25,161** |

33

Distribution and other asset-based expenses are primarily based on AUM. Distribution and other asset-based expenses were $15.8 million for the three months ended March 31, 2019, a decrease of $9.4 million, or 37%, from $25.2 million for the three months ended March 31, 2018. Middle-office expenses decreased year over year due to the decrease in AUM. Broker-dealer distribution fees and platform distribution fees decreased due to the mix of mutual fund assets and share classes and lower mutual fund average AUM. Fund expense reimbursements declined by $2.9 million due to the adoption of ASU 2014-09 on January 1, 2019 and the resulting change in presentation of these reimbursements as a reduction of revenue instead of as operating expense. Sub-administration expenses increased due to the impact of the tiered fee schedule resulting in a higher basis point fee being charged on lower mutual fund average AUM. The decrease in sub-advisory expense is a result of a decline in the assets included under our two sub-advisory relationships.

#### General and Administrative Expenses

General and administrative expenses decreased by $2.0 million, or 22%, to $7.1 million for the three months ended March 31, 2019, from $9.1 million for the three months ended March 31, 2018. The decrease was due mainly to one-time expenses recognized in 2018 related to the IPO and concurrent debt refinancing.

#### Depreciation and Amortization

Depreciation and amortization decreased by $1.2 million, or 19%, to $5.2 million for the three months ended March 31, 2019, from $6.4 million for the three months ended March 31, 2018, as definite-lived intangible assets acquired in connection with the management-led buyout with Crestview GP and CEMP Acquisition became fully amortized in 2018.

#### Acquisition‑Related Costs

Acquisition costs for the three months ended March 31, 2019 increased to $2.8 million primarily due to the pending USAA AMCO Acquisition.

#### Restructuring and Integration Costs

Restructuring and integration costs decreased by $0.3 million for the three months ended March 31, 2019 the three months ended March 31, 2018 due to severance costs recorded in 2018 related to changes in the operational platform.

#### Interest Income and Other Income/(Expense)

The net interest income and other income/(expense) increased by $1.9 million for the three months ended March 31, 2019 due to unrealized gains on deferred compensation plan investments and interest income on higher cash and cash equivalents balances.

#### Interest Expense and Other Financing Costs

Interest expense and other financing costs decreased by $2.5 million, or 35%, to $4.6 million for the three months ended March 31, 2019, from $7.1 million for the three months ended March 31, 2018 due to the debt refinancing in February 2018 that resulted in a lower interest rate paid and subsequent term loan principal pre-payments in 2018.

#### Loss on Debt Extinguishment

During the three months ended March 31, 2019, the Company had no losses on debt extinguishment compared to the $6.1 million loss on debt extinguishment recorded during the three months ended March 31, 2018.

#### Income Tax Expense

The provision for income taxes for the three months ended March 31, 2019 and 2018 includes U.S. federal, state and local taxes and foreign income taxes payable by certain of our subsidiaries. The difference between our effective tax rate and the statutory federal rate of 21% is due to state, local and foreign income taxes, excess tax benefits on share-based compensation and non-deductible expenses. Our effective tax rate for the three months ended March 31, 2019 was 24.9%, down from 25.3% for the three months ended March 31, 2018 as a result of higher excess tax benefits on share-based compensation.

### Supplemental Non‑GAAP Financial Information

We use non-GAAP performance measures to evaluate the underlying operations of our business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP measures that we believe distort the economic value of our organization and we believe that many investors use this information when assessing the financial performance of companies in the investment management industry. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net Income.

The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated:

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| **Net income (GAAP)** | **$14,527** | **$10,524** |
| Income tax expense | (4,807) | (3,557) |
| **Income before taxes** | **$19,334** | **$14,081** |
| Interest expense(1) | 3,853 | 8,094 |
| Depreciation(2) | 571 | 736 |
| Other business taxes(3) | 555 | 375 |
| Amortization of acquisition-related intangibles(4) | 4,651 | 5,676 |
| Stock-based compensation(5) | 1,478 | 3,322 |
| Acquisition, restructuring and exit costs(6) | 2,777 | 518 |
| Debt issuance costs(7) | 364 | 6,702 |
| Pre-IPO governance expenses(8) | — | 141 |
| Losses on equity method investments(9) | 4 | 137 |
| **Adjusted EBITDA** | **$33,587** | **$39,782** |

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| **Net income (GAAP)** | **$14,527** | **$10,524** |
| Adjustments to reflect the operating performance of the Company: |  |  |
| i. Other business taxes(3) | 555 | 375 |
| ii. Amortization of acquisition-related intangibles(4) | 4,651 | 5,676 |
| iii. Stock-based compensation(5) | 1,478 | 3,322 |
| iv. Acquisition, restructuring and exit costs(6) | 2,777 | 518 |
| v. Debt issuance costs(7) | 364 | 6,702 |
| vi. Pre-IPO governance expenses(8) | — | 141 |
| Tax effect of above adjustments(10) | (2,456) | (4,183) |
| **Adjusted Net Income** | **$21,896** | **$23,075** |
| Tax benefit of goodwill and acquired intangibles(11) | $3,361 | $3,320 |

(1) We add back interest paid on debt and other financing costs, net of interest income; interest expense is included in “Interest expense and other financing costs” and the write-off of debt discount is shown in “Loss on debt extinguishment” in our unaudited condensed consolidated financial statements, while interest income is shown in “Interest income and other income/(expense)” in our unaudited condensed consolidated financial statements.

(2) We add back depreciation on property and equipment; included in “Depreciation and amortization” in our unaudited condensed consolidated financial statements.

(3) We add back other business taxes; other business taxes are included in “General and administrative” in our unaudited condensed consolidated financial statements.

(4) We add back amortization of acquisition‑related intangibles; included in “Depreciation and amortization” in our unaudited condensed consolidated financial statements.

(5) We add back the expense associated with stock‑based compensation associated with equity issued from pools that were created in connection with the management‑led buyout with Crestview GP from KeyCorp, the Munder Acquisition and the RS Acquisition and as a result of IPO‑related equity grants; included in “Personnel compensation and benefits” in our unaudited condensed consolidated financial statements. Stock-based compensation expense related to director compensation is excluded from this adjustment.

(6) We add back direct incremental costs of acquisitions and the IPO, including expenses associated with third‑party advisors, proxy solicitations of mutual fund shareholders for transaction consents, and severance. Severance is included in “Restructuring and integration costs” in our unaudited condensed consolidated financial statements, costs associated with professional services incurred in connection with IPO readiness are included in “General and administrative”; all other incremental costs are included in “Restructuring and integration costs” or “Acquisition‑related costs.”

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Restructuring and integration costs | $— | $264 |
| General and administrative | — | 254 |
| Acquisition-related costs | 2,777 | — |
| **Total acquisition, restructuring and exit costs** | **$2,777** | **$518** |

(7) We add back debt issuance costs; included in “Interest expense and other financing costs”, “General and administrative” and “Loss on debt extinguishment” in our unaudited condensed consolidated financial statements. See “—Liquidity and Capital Resources” for more information.

(8) We add back pre‑IPO governance expenses paid to Crestview and Reverence Capital, included in “General and administrative” in our unaudited condensed consolidated financial statements. These payments terminated as of the completion of the IPO.

(9) We adjust for earnings/losses on equity method investments, included in “Interest income and other income/(expense)” in our unaudited condensed consolidated financial statements.

(10) For the three months ended March 31, 2019 and March 31, 2018, reflects income taxes of 25% applied to the sum of line items i. to vi.; 25% represents statutory federal income tax rate of 21% plus an estimate for state, local and foreign income taxes.

(11) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit.

Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures.

### Liquidity and Capital Resources

Our primary uses of cash relate to repayment of our debt obligations and funding working capital needs and are expected to be met primarily through cash generated from our operations. The following table shows our liquidity position as of March 31, 2019 and December 31, 2018.

*(in thousands)*

|  | March 31, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| Cash and cash equivalents | $66,261 | $51,491 |
| Accounts and other receivables | 42,783 | 44,120 |
| Undrawn commitment on revolving credit facility | 100,000 | 100,000 |
| Accounts and other payables | (44,311) | (50,578) |

We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consist primarily of investment management fees that have been earned but not yet received from clients. Included in other receivables are income and other taxes receivable and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to access collectability.

We maintained a $100.0 million revolving credit facility at March 31, 2019 and December 31, 2018 which had $100.0 million undrawn as of March 31, 2019 and December 31, 2018.

#### Debt Refinancing

On February 12, 2018, concurrently with the closing of the IPO, we entered into the Existing Credit Agreement under which we received seven-year term loans in an original aggregate principal amount of $360.0 million and established a five-year revolving credit facility (which was unfunded as of closing) with aggregate commitments of $50.0 million. On May 3, 2018, the Company signed an amendment to the Existing Credit Agreement increasing the revolving credit facility from $50.0 million to $100.0 million.

A total of $80.0 million of the outstanding term loans under the Existing Credit Agreement was repaid in 2018. No debt repayments were made in the three months ended March 31, 2019, as the Company accumulated cash on-hand to support financing acquisitions.

#### The Harvest Commitment Letter

In connection with entering into the Harvest Purchase Agreement, the Company entered into the Harvest Commitment Letter pursuant to which Royal Bank of Canada (“RBC”) and Barclays Bank PLC (“Barclays”) committed to provide, and agreed to arrange and syndicate, the Harvest Facility. The Harvest Commitment Letter automatically terminated in accordance with its terms upon execution of the Harvest Termination Agreement.

#### USAA AMCO Credit Facilities Commitment Letter

In connection with entering into the USAA Stock Purchase Agreement, on November 6, 2018 the Company entered into a the USAA AMCO Credit Facilities Commitment letter (the “USAA AMCO Credit Facilities Commitment Letter”) with Barclays and RBC, pursuant to which the Barclays and RBC committed to provide, and agreed to arrange and syndicate, a new seven-year senior secured first lien term loan facility (the “USAA AMCO Term Loan Facility”) in an aggregate principal amount of up to $1.395 billion and a new five-year senior secured first lien revolving credit facility (together with the USAA AMCO Term Loan Facility, the “USAA AMCO Credit Facilities”) in an aggregate principal amount of up to $100 million.

Proceeds from the USAA AMCO Term Loan Facility, together with cash on the Company’s balance sheet, will be used to refinance in full all debt outstanding under the Company’s Existing Credit Agreement, finance the USAA AMCO Acquisition and finance the Harvest Acquisition, thus effectively replacing the Harvest Commitment Letter.

As a result of entering into the Harvest Termination Agreement on April 22, 2019, the commitments under the USAA AMCO Credit Facilities Commitment Letter attributable to the financing for the Harvest Acquisition automatically terminated in accordance with their terms, thereby reducing the size of the USAA AMCO Term Loan Facility to $1.130 billion.

#### Capital Requirements

VCA is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents.

#### Cash Flows for the three months ended March 31, 2019 and 2018

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $17,938 | $25,872 |
| Net cash used in investing activities | (1,447) | (2,719) |
| Net cash used in financing activities | (1,742) | (23,817) |

Operating activities provided net cash of $17.9 million and $25.9 million for the three months ended March 31, 2019 and 2018, respectively. The $7.9 million decrease in net cash provided by operating activities was primarily due to a decrease in revenues from lower average AUM.

Investing activities consist primarily of purchases and sales of property and equipment, the purchases and sales of trading securities related to our deferred compensation plan and other investing activities related to our business operations. Investing activities used net cash of $1.4 million and $2.7 million for the three months ended March 31, 2019 and 2018, respectively. The $1.3 million decrease in the net cash used in investing activities was due to the $1.0 million additional equity investment in Cerebellum Capital during the three months ended March 31, 2019.

Financing activities consist primarily of proceeds received or paid from the issuance or repurchase of equity, debt-related activity and dividend payments to our stockholders. For the three months ended March 31, 2019, financing activities consisted mainly of repurchases of the Company’s Class A common stock. For the three months ended March 31, 2018, financing activities included, but were not limited to, the generation of net IPO proceeds of $156.5 million: $143.0 million received at the closing of the IPO and $13.5 million received at the subsequent closing of the underwriters’ exercise of their option, the incurrence of $360.0 million of term loans under the Existing Credit Agreement, the repayment of $499.7 million of term loans under the 2014 Credit Agreement and the repayment of long-term debt under the Existing Credit Agreement of $80.0 million.

### Contractual Obligations

There have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2018 as disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7 of our Form 10-K for the year ended December 31, 2018.

### Off‑Balance Sheet Arrangements

In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017 dividend were declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest. These amounts are not recorded as a liability until and unless the awards vest in accordance with their respective agreements. As of March 31, 2019, the cash bonuses and distributions related to the February 2017 and December 2017 dividends on unvested and outstanding restricted shares and options totaled $1.8 million.

### Critical Accounting Policies and Estimates

Our financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Form 10-K. A complete description of our significant accounting policies is included in our 2018 audited consolidated financial statements and accompanying notes included in our 2018 Form 10-K. No changes have been made to these policies excepted as noted below.

On January 1, 2019, the Company adopted ASU 2014-09 and updated its revenue recognition accounting policies. See Notes 2 and 3 of the unaudited condensed consolidated financial statements.

## Market risk

As filed, 5,514 characters.

#### Market Risk

Substantially all of our revenues are derived from investment management, fund administration and distribution fees, which are based on the market value of our AUM. Accordingly, our revenues and net income may decline as a result of our AUM decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their assets in favor of other investment alternatives that they perceive to offer higher returns or lower risk, which could cause our revenues and net income to decline further.

The value of our AUM was $58.1 billion at March 31, 2019. A 10% increase or decrease in the value of our AUM, if proportionately distributed over all of our strategies, products and client relationships, would cause an annualized increase or decrease in our revenues of approximately $36.0 million at our weighted-average fee rate of 62 basis points for the quarter ended March 31, 2019. Because of declining fee rates from larger relationships and differences in our fee rates across investment strategies, a change in the composition of our AUM, in particular, an increase in the proportion of our total AUM attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted-average fee rate. The same 10% increase or decrease in the value of our total AUM, if attributed entirely to a proportionate increase or decrease in the AUM of the Victory Funds, to which we provide a range of services in addition to those provided to institutional separate accounts, would cause an annualized increase or decrease in our revenues of approximately $45.3 million at the Victory Funds’ aggregate weighted-average fee rate of 78 basis points for the quarter ended March 31, 2019. If the same 10% increase or decrease in the value of our total AUM was attributable entirely to a proportionate increase or decrease in the assets of our institutional separate accounts, it would cause an annualized increase or decrease in our revenues of approximately $25.0 million at the weighted-average fee rate across all of our institutional separate accounts of 43 basis points for the quarter ended March 31, 2019.

As is customary in the investment management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of those asset classes. We believe our clients invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may implement their own risk management program or procedures. We have not adopted a corporate‑level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall AUM and related revenues. Some of these risks, such as sector and currency risks, are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular risks. While negative returns in our strategies and net client cash outflows do not directly reduce the assets on our balance sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our AUM would result in a reduction in our revenues.

#### Exchange Rate Risk

A portion of the accounts that we advise hold investments that are denominated in currencies other than the U.S. dollar. To the extent our AUM are denominated in currencies other than the U.S. dollar, the value of that AUM will decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar. Each investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the portfolios they manage. We believe many of our clients invest in those strategies in order to gain exposure to non‑U.S. currencies, or may implement their own hedging programs. As a result, we generally do not hedge an investment portfolio’s exposure to non‑U.S. currency.

We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 9% of our AUM are invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of any hedging arrangement, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of our AUM by $523.1 million, which would cause an annualized increase or decrease in revenues of approximately $3.2 million at our weighted-average fee rate for the business of 62 basis points for the quarter ended March 31, 2019.

We operate in several foreign countries and incur operating expenses associated with these operations. In addition, we have revenue and revenue-sharing arrangements that are denominated in non-U.S. currencies. We do not believe foreign currency fluctuations materially affect our results of operations.

#### Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. At March 31, 2019, we were exposed to interest rate risk as a result of the amounts outstanding under the Existing Credit Agreement. See Note 9 to the unaudited condensed consolidated financial statements for a description of the amounts outstanding as of such date and the applicable interest rate.

## Controls and procedures

As filed, 1,431 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) at March 31, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

### Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 367 characters.

For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC and the information contained in this report. There have been no material changes to the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2018.

Filed May 15, 2019.
Source: SEC EDGAR, the filing index for accession 0001558370-19-005060. Last ingested by Listed: Nov 6, 2026, 17:29 ET. No prices; not investment advice.