Westwood Holdings Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2019, filed April 24, 2019. Westwood provides investment advisory, trust, custodial and related services to institutional, mutual fund, private wealth and financial intermediary clients. Revenue is primarily based on assets under management (AUM).
The financial statements are unaudited. Westwood operated through Advisory and Trust segments and had 8,971,173 common shares outstanding as of April 19, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $23.9 million | $33.6 million | Down 29% |
| Net operating income | $1.5 million | $10.0 million | Down 85% |
| Net income | $0.4 million | $8.0 million | Down 95% |
| Diluted EPS | $0.05 | $0.93 | Down $0.88 |
| Economic Earnings | $4.1 million | $12.6 million | Down 67% |
| Economic Earnings per diluted share | $0.49 | $1.48 | Not separately quantified as a percentage change |
| Operating margin | 6.3% | 29.7% | Down approximately 23.4 percentage points |
| Net margin | 1.6% | 23.8% | Down approximately 22.2 percentage points |
| Cash flow from operations | $10.6 million | $1.4 million | Up $9.2 million |
Asset-based advisory fees were $16.4 million, performance-based fees were $0.2 million and trust fees were $6.5 million. Employee compensation and benefits were $14.6 million, including $3.3 million of stock-based compensation.
At March 31, 2019, cash and cash equivalents were $52.4 million, investments at fair value were $49.6 million, and total assets were $181.1 million. The company reported no debt. Working capital was $106.7 million, and total liabilities were $25.0 million. Stockholders’ equity was $156.1 million.
Total AUM was $16.8 billion at March 31, 2019, compared with $22.6 billion a year earlier. First-quarter AUM increased $165 million from December 31, 2018, as $1.5 billion of market appreciation exceeded $1.3 billion of net outflows.
Material Changes Versus the Prior Comparable Period
- Total revenue declined $9.7 million, primarily because average AUM was lower.
- Asset-based advisory fees declined 33%, trust fees declined 14%, and performance-based fees declined 87%.
- Employee compensation declined 18%, partially offsetting the revenue decline; total expenses declined only 5% because the company recorded an $820,000 foreign-currency loss compared with a $1.1 million gain in the prior-year quarter.
- The prior-year period included a $524,000 gain on the sale of the Omaha-based Wealth Management operation; no comparable gain was recorded in Q1 2019.
- The effective tax rate increased to 73.8% from 23.9%, including a $638,000 discrete tax expense related to the tax treatment of restricted stock expense.
- Cash flow from operations increased to $10.6 million, partly because of $16.5 million of sales of trading investments. The prior-year investing cash flow benefited from $10.0 million of proceeds from the Omaha divestiture.
- The company paid $7.7 million of dividends and used $11.1 million in financing activities. It declared a subsequent quarterly dividend of $0.72 per share, payable July 1, 2019.
- Westwood adopted the new lease accounting standard on January 1, 2019, recognizing $8.7 million of right-of-use assets and related lease liabilities at December 31, 2018, as restated for presentation.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no specific revenue, earnings or AUM guidance. Management stated that existing cash, short-term investments and operating cash flow are expected to fund ordinary operating and capital requirements for at least the next twelve months.
- Revenue and profitability remain sensitive to market values, AUM composition, client flows and performance-based fee results. Management identified $1.3 billion of net AUM outflows in Q1 2019, including pressure in Emerging Markets and Income Opportunity strategies.
- Approximately $33.0 million of cash and cash equivalents represented undistributed income from Westwood International. Repatriation to U.S. operations could incur a 5% Canadian withholding tax; management currently intends to keep these funds permanently invested outside the United States.
- Westwood Trust held approximately $17.3 million above its $4.0 million minimum restricted-capital requirement.
- Reported risks include competition and fee pressure, client and revenue concentration, market volatility, foreign investments and currency movements, personnel retention, cybersecurity, operational and information-system failures, third-party vendors, litigation, conflicts of interest, regulatory changes and execution of strategic initiatives.
- The company reported no legal proceedings and no material changes to contractual obligations outside the ordinary course. A state tax audit covering 2015–2017 returns was ongoing; management did not expect a material impact.
- Westwood had $10.5 million of operating lease liabilities at March 31, 2019 and total undiscounted future operating lease payments of $12.6 million.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting other than implementation of lease-related controls.
Important Facts for Investors to Verify
- Whether net AUM outflows continue, particularly in Emerging Markets and Income Opportunity strategies, and whether market appreciation offsets future withdrawals.
- The sustainability of dividends and share repurchases given the sharp decline in GAAP earnings and the company’s dependence on operating cash flow.
- The impact of the 73.8% effective tax rate, including whether the $638,000 restricted-stock-related tax expense is nonrecurring.
- The composition, liquidity and performance of the $49.6 million trading-investment portfolio and the company’s private investments.
- The extent to which stock-based compensation, intangible amortization and other add-backs make Economic Earnings differ from GAAP net income.
- Potential effects of Canadian withholding taxes if Westwood International funds must be repatriated.
- Customer concentration, competitive fee pressure, cybersecurity, regulatory and operational risks described in the filing.