Westwood Holdings Group, Inc. 2018 Form 10-K Summary
Business Context and Reporting Period
Westwood Holdings Group, Inc. is an asset management and trust services holding company operating through Westwood Management, Westwood International Advisors and Westwood Trust. Revenue is primarily based on fees calculated as a percentage of assets under management (AUM). The filing covers the fiscal year ended December 31, 2018, with unaudited fourth-quarter information also presented. AUM was $16.6 billion at year-end, including institutional, wealth management and mutual fund assets.
- Common stock trades on the New York Stock Exchange under the symbol WHG.
- Westwood managed approximately $16.6 billion of AUM at December 31, 2018, down from $24.2 billion at December 31, 2017.
- The company had 182 full-time employees at year-end.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $122.3 million | $133.8 million | Down 9% |
| Asset-based advisory fees | $89.4 million | $99.2 million | Down 10% |
| Performance-based fees | $3.0 million | $1.4 million | Up 111% |
| Trust fees | $29.0 million | $31.6 million | Down 8% |
| Income before taxes | $36.5 million | $33.9 million | Up 8% |
| Net income | $26.8 million | $20.0 million | Up 34% |
| Net margin | 21.9% | 14.9% | Up approximately 7.0 points |
| Diluted EPS | $3.13 | $2.38 | Up 32% |
| Economic Earnings | $43.9 million | $38.9 million | Up 13% |
| Operating cash flow | $31.5 million | $48.0 million | Down $16.5 million |
Results benefited from a $2.8 million foreign currency transaction gain, the absence of the $4.0 million net legal settlement charge recorded in 2017, lower compensation costs and a reduced effective tax rate. The effective tax rate declined to 26.6% from 41.0%, primarily reflecting the Tax Cuts and Jobs Act.
Fourth-quarter 2018 revenue was $26.1 million, income before taxes was $7.9 million, net income was $5.4 million, basic EPS was $0.65 and diluted EPS was $0.64. Fourth-quarter revenue declined from $33.9 million in the comparable 2017 quarter.
Liquidity, Capital and Balance Sheet
- Cash and short-term investments were $118.2 million at December 31, 2018, compared with $105.6 million at year-end 2017.
- Cash and cash equivalents were $52.4 million; investments at fair value were $65.8 million.
- Total assets were $190.5 million and stockholders’ equity was $161.1 million.
- The company had no debt at December 31, 2018 or December 31, 2017.
- Working capital was $114.0 million, compared with $106.6 million in 2017.
- Cash flow from investing activities was $3.6 million, including $10.0 million of proceeds from the Omaha divestiture and a $5.4 million private equity investment.
- Cash used in financing activities was $34.1 million, including $24.6 million of dividends and $4.0 million of share repurchases.
- Westwood Trust exceeded its $4.0 million minimum regulatory capital requirement by approximately $18.6 million.
Management stated that cash, short-term investments and internally generated cash flows should be sufficient to fund ordinary operating and capital requirements for at least the next twelve months, although additional financing could be required depending on operating results, capital expenditures, strategic initiatives and dividend policy.
Material Changes Versus the Prior Comparable Period
- AUM declined 31%, or $7.6 billion, primarily due to $6.2 billion of net outflows and $1.4 billion of market depreciation. Institutional AUM declined 35%, wealth management AUM declined 27% and mutual fund AUM declined 24%.
- Quarterly average AUM declined 8% to $21.4 billion, contributing to lower asset-based advisory and trust fees.
- The company completed the sale of its Omaha-based wealth management operations on January 12, 2018, receiving $10.0 million of net proceeds and recording a $0.5 million gain. The divestiture contributed approximately $1.1 billion of AUM outflows.
- Employee compensation and benefits declined 8% to $60.0 million, while information technology expense increased 17% to $9.1 million due to technology infrastructure and research investments.
- The company recorded a $2.8 million foreign currency gain in 2018 compared with a $1.6 million loss in 2017.
- The company repurchased 108,289 shares for $4.0 million and increased its quarterly dividend from $0.68 to $0.72 per share during 2018. Dividends declared totaled $2.76 per share for the year.
- The company adopted revenue recognition guidance under Topic 606 using the modified retrospective method; management reported no material adjustment to opening retained earnings.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management’s strategy emphasizes improving institutional and intermediary distribution, expanding wealth management, enhancing digital capabilities, developing or acquiring investment strategies and pursuing international growth.
- Major risks include market declines, continued client redemptions, weak investment performance, fee compression and competition from lower-cost passive products.
- Revenue concentration increased: the ten largest clients represented approximately 24% of fee revenue in 2018, compared with 20% in each of the prior two years. No individual client accounted for 10% or more of fee revenue.
- Approximately 20% of AUM was managed for non-U.S. clients and approximately 24% of AUM was invested in strategies with global or emerging-market exposure, creating foreign exchange, political, regulatory and market risks.
- A hypothetical 10% decrease in average AUM during 2018 would have reduced reported revenue by approximately $12 million.
- A hypothetical 10% devaluation of the Canadian dollar would have reduced 2018 income before taxes by approximately $1.5 million.
- The company faces cybersecurity, systems, third-party vendor, regulatory, litigation, reputational and key-employee risks.
- The company committed to $11.7 million of purchase obligations and had $13.2 million of operating lease obligations at year-end.
- The company made a $5.4 million strategic private-company investment, including an additional $425,000 investment to cover an investor shortfall. The investment had no readily determinable fair value and no impairment indicators were identified.
- The long-running AGF litigation was settled in 2017. The company received the remaining $4.0 million insurance proceeds in 2018 and had no related receivable at year-end.
- Beginning January 1, 2019, the company expected to recognize approximately $9 million of additional lease assets and net lease liabilities under the new lease accounting standard, with no material expected impact on the income statement or cash flows.
Most Important Facts for Investors to Verify
- Whether client flows and investment performance stabilize after the $6.2 billion of 2018 net outflows.
- Whether lower AUM results in further pressure on advisory and trust revenue and operating margins.
- The sustainability of the $0.72 quarterly dividend given operating cash flow of $31.5 million and annual dividends declared of $24.8 million.
- The extent to which reported earnings benefited from the $2.8 million foreign currency gain, tax-rate reduction and non-recurrence of the 2017 legal settlement charge.
- Progress and returns from technology investments, new distribution initiatives and the $5.4 million private-company investment.
- Client concentration, fee pressure and exposure to passive products and international markets.
- Future tax, regulatory and liquidity implications of approximately $33 million of undistributed foreign subsidiary earnings that the company intends to permanently reinvest outside the United States.
- The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2018.