Westwood Holdings Group, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Westwood manages investment assets and provides investment advisory, trust, and custodial services through Westwood Management and Westwood Trust. Revenue is primarily based on assets under management (AUM), making results sensitive to market performance, asset mix, client flows, fee rates, and client retention. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $17.2 million | $18.3 million | Down 6% |
| Net operating income | $0.4 million | $0.8 million | Down 46% |
| Income before taxes | $0.6 million | $7.0 million | Down 92% |
| Net income | $0.05 million | $4.1 million | Down 99% |
| Diluted EPS | $0.01 | $0.52 | Down 98% |
| Economic Earnings | $1.9 million | $6.3 million | Down 70% |
| Economic EPS | $0.24 | $0.79 | Down 70% |
| Cash flow from operating activities | $8.8 million | $(7.0) million | Improved $15.8 million |
- Asset-based advisory fees increased 13% to $11.8 million, while performance-based advisory fees fell to zero from $2.0 million.
- Trust fees decreased 6% to $5.7 million. Other revenue was negative $0.3 million.
- Total expenses declined 4% to $16.8 million, primarily because employee compensation and benefits decreased 11% to $10.3 million. Sales and marketing increased 110% to $0.5 million as in-person sales activity resumed.
- Net operating margin was approximately 2.4%, compared with 4.2% in the prior-year quarter. Net margin was approximately 0.3%, compared with 22.4% in Q1 2021.
- Q1 2021 included an $8.3 million realized gain from the recapitalization of InvestCloud and a $2.3 million net unrealized loss related to private investments. Q1 2022 included no realized gain and a $0.04 million net unrealized gain.
- At March 31, 2022, cash and cash equivalents were $21.1 million, compared with $15.2 million at December 31, 2021. Cash and short-term investments totaled $73.5 million, compared with $80.2 million at year-end.
- Working capital was $77.0 million at March 31, 2022, versus $78.0 million at December 31, 2021. The company reported no debt.
- Total assets were $131.0 million and total stockholders’ equity was $117.3 million at March 31, 2022.
- Westwood Trust had approximately $19.5 million in excess of its $4.0 million minimum restricted capital requirement.
Material changes versus the prior comparable period
- AUM declined 4% to $13.9 billion from $14.5 billion at March 31, 2021. The decline reflected $0.6 billion of market depreciation and $0.1 billion of net client outflows.
- Institutional AUM declined 11% to $6.7 billion, wealth management AUM declined 4% to $4.2 billion, and mutual fund AUM increased 15% to $3.0 billion.
- Average AUM for Q1 2022 was $14.2 billion, up from $13.8 billion in Q1 2021, despite lower ending AUM.
- Operating cash flow turned positive primarily because the company sold $12.4 million of current investments and collected accounts receivable; this was partly offset by a $7.2 million reduction in compensation and benefits payable.
- Financing cash outflows were $2.8 million, including $2.0 million of dividends, $0.6 million of restricted stock surrendered for taxes, and $0.2 million of treasury stock repurchases.
- The company repurchased 12,202 shares at an average price of $16.39 per share during the quarter. Approximately $6.9 million remained available under the repurchase authorization.
- The quarterly dividend was $0.15 per share, compared with $0.10 per share declared in Q1 2021. On April 27, 2022, the board declared another $0.15 per share dividend payable July 1, 2022.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide quantitative earnings, revenue, or AUM guidance. Management stated that existing cash and short-term investments, together with cash generated from operations, are expected to meet ordinary operating and capital requirements for at least the next twelve months, although additional financing could become necessary.
- Results remain exposed to financial-market volatility, AUM composition, market depreciation, client outflows, fee pressure, and termination of client agreements.
- Other identified risks include competition, concentration of revenues among a small number of customers, personnel retention, cybersecurity, information systems, third-party vendors, regulatory changes, litigation, activist investors, thin trading in the company’s stock, and the continuing effects of COVID-19.
- Distributions may include a return of capital, and the ability to declare and pay dividends depends on future operating results and liquidity.
- Private investment valuations include significant judgment. The $4.3 million Level 3 private equity balance was valued using unobservable price-to-tangible-book multiples; changes in those multiples could materially affect fair value.
- The effective income tax rate was 91.6% in Q1 2022, primarily because of permanent differences involving restricted stock expense and a decrease in the company’s stock price between grant and vesting dates.
- No material legal proceedings, lease changes, goodwill impairment, or intangible asset impairments were reported. Management concluded that disclosure controls were effective and that there were no material changes in internal controls.
Important facts for investors to verify
- Whether market conditions and client flows continue to reduce AUM, particularly in institutional and wealth management strategies.
- Whether recurring asset-based fees can offset the absence or volatility of performance-based fees.
- The sustainability of positive operating cash flow, given its reliance in Q1 on investment sales and working-capital movements.
- The valuation and sensitivity of the company’s Level 3 private investments, including Charis and other private equity holdings.
- The company’s capacity to maintain the $0.15 per share dividend and continue share repurchases without weakening liquidity.
- Whether the company’s no-debt position and reported liquidity remain sufficient if operating results deteriorate or strategic capital needs increase.