Business Context and Reporting Period
Westwood Holdings Group, Inc. is an investment management and trust-services company operating through Advisory and Trust segments. Revenue is primarily based on assets under management (AUM). This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
- AUM was $11.9 billion at June 30, 2020, down 23% from $15.4 billion a year earlier.
- The decline reflected net client outflows and market depreciation during the first six months of 2020; second-quarter market appreciation partially offset net outflows.
- The UCITS Fund was liquidated in June 2020.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Total revenue | $15.9 million | $21.7 million | $32.5 million | $45.6 million |
| Net operating income (loss) | $(2.1) million | $2.6 million | $(1.7) million | $4.1 million |
| Net income (loss) | $(2.6) million | $1.9 million | $(1.5) million | $2.3 million |
| Diluted EPS | $(0.33) | $0.22 | $(0.18) | $0.27 |
| Economic Earnings | $0.2 million | $4.8 million | $4.4 million | $8.9 million |
| Operating margin | (13.4%) | 11.9% | (5.3%) | 8.9% |
| Net margin | (16.2%) | 8.6% | (4.5%) | 4.9% |
Asset-based advisory revenue declined 37% in the second quarter and 34% year to date, primarily because of lower average AUM. Trust fees declined 12% and 11%, respectively. Performance-based advisory fees increased to $0.7 million for both the quarter and year to date, compared with $0.1 million and $0.3 million in the prior-year periods.
- Operating expenses declined 6% in the quarter and 17% year to date, including lower compensation, travel, mutual-fund expenses and marketing costs.
- Second-quarter results included a $1.3 million foreign-currency loss, primarily related to Canadian-dollar fluctuations. The six-month period included a $1.6 million foreign-currency gain.
- Six-month results included a $0.8 million unrealized loss on private investments, primarily related to the Charis private-bank investment and COVID-19-related market effects.
- The effective tax rate was 19.0% for the first six months of 2020 versus 45.7% in 2019, influenced by CARES Act-related deferred-tax remeasurement effects.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $43.9 million at June 30, 2020, compared with $49.8 million at December 31, 2019.
- Cash and short-term investments totaled $74.2 million at June 30, 2020, versus $100.1 million at year-end 2019.
- Operating cash flow was $21.8 million for the first six months, compared with $21.1 million in 2019. The 2020 amount included $20.0 million from liquidation of current investments.
- Investing cash flow used $0.1 million, primarily for property and equipment.
- Financing cash flow used $25.8 million, including $13.0 million of share repurchases, $11.0 million of dividends paid and $1.1 million for restricted stock returned to satisfy taxes.
- The company had no debt at June 30, 2020. Working capital was $78.7 million, compared with $95.6 million at December 31, 2019.
- Management stated that cash, short-term investments and operating cash flow should be sufficient for ordinary operating and capital needs through at least the next twelve months, while noting that additional financing could become necessary.
- Approximately $31 million of undistributed income at Westwood International Advisors was held outside the United States and would incur a 5% incremental Canadian withholding tax if repatriated.
Material Changes, Outlook and Risks
- The company suspended its second-quarter 2020 dividend to preserve capital and flexibility amid COVID-19 uncertainty. No forward dividend guidance was provided.
- The board authorized additional share-repurchase capacity in February and April 2020. The company repurchased 679,756 shares for $13.0 million during the first six months.
- On July 27, 2020, after quarter-end, the board approved closure of Westwood International Advisors and the Toronto office. Management expects approximately $0.4 million of net expenses in the second half of 2020.
- Management continued remote-work and business-continuity measures and stated that cloud-based systems enabled employees to serve clients without material disruption.
- No formal revenue, earnings, AUM or dividend guidance was provided.
- Principal risks include COVID-19 effects, market volatility, AUM declines, client concentration and redemptions, fee pressure, competition, foreign-currency exposure, regulatory and litigation risks, cybersecurity, personnel retention and potential goodwill impairment.
- Management identified no material legal proceedings, no material changes in internal controls, and no goodwill or intangible-asset impairment through June 30, 2020.
Investor Verification Priorities
- Verify the sustainability of AUM, particularly institutional and mutual-fund outflows and the performance of LargeCap Value, Income Opportunity and Emerging Markets strategies.
- Assess whether the dividend suspension and share repurchases remain appropriate given reduced revenue and cash balances.
- Monitor the financial and operational effects of closing Westwood International Advisors and the Toronto office.
- Review the sensitivity of private-investment valuations, foreign-currency results and potential goodwill impairment to COVID-19 and market conditions.
- Reconcile operating cash flow to the $20.0 million liquidation of investments and determine the level of recurring cash generation.
- Confirm the company’s ability to access approximately $31 million of foreign subsidiary cash and the related tax cost if repatriation becomes necessary.