Westwood Holdings Group, Inc. — Q2 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, client flows, fee pressure and client retention.
This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods. Westwood reported 8,460,050 common shares outstanding as of July 20, 2022.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $15.6 million | $17.5 million | $32.8 million | $35.8 million |
| Net operating income (loss) | $(0.4) million | $0.8 million | $0.0 million | $1.5 million |
| Net income (loss) | $(0.4) million | $1.0 million | $(0.3) million | $5.1 million |
| Diluted EPS | $(0.05) | $0.12 | $(0.04) | $0.64 |
| Economic Earnings | $1.6 million | $2.8 million | $3.5 million | $9.1 million |
| Economic EPS | $0.20 | $0.35 | $0.44 | $1.15 |
- Second-quarter operating margin was approximately negative 2.6%; six-month operating margin was approximately 0.1%. Net margin was approximately negative 2.4% for the quarter and negative 1.0% for the six months.
- Second-quarter revenue declined 11% year over year. Asset-based advisory fees decreased 4% and trust fees decreased 14%; other revenue was a $(0.7) million net amount.
- Six-month revenue declined 8%. Asset-based advisory fees increased 4%, but trust fees declined 10% and performance-based advisory fees fell by $2.0 million to zero.
- Six-month expenses decreased 4% to $32.8 million. Compensation and benefits declined 11%, partly offset by higher sales and marketing, mutual fund and general and administrative costs.
- AUM was $12.1 billion at June 30, 2022, down 16% from $14.4 billion a year earlier. The decline reflected $2.1 billion of market depreciation and $0.2 billion of net outflows during the first six months.
- Cash and cash equivalents were $22.0 million at June 30, 2022, compared with $15.2 million at December 31, 2021. Cash and short-term investments totaled $73.6 million.
- Operating cash flow was $12.1 million for the first six months, compared with cash used in operations of $1.2 million in the prior-year period. The 2022 amount included $12.4 million of net sales of current investments and a $5.6 million reduction in compensation and benefits payable.
- Investing cash flow was $(0.1) million, primarily for capital expenditures. Financing cash flow was $(5.3) million, including $3.3 million of dividends and $1.4 million of treasury-stock purchases.
- The company had no debt at June 30, 2022. Working capital was $75.7 million, and management stated that cash and short-term investments plus operating cash flow should fund ordinary operating and capital requirements for at least the next twelve months.
- Total assets were $129.9 million and stockholders’ equity was $115.7 million at June 30, 2022. Fair-value investments totaled $55.9 million, including $51.6 million of trading securities.
Material Changes Versus the Prior Comparable Period
- Profitability deteriorated from 2021: the company recorded a second-quarter net loss of $0.4 million versus $1.0 million of net income, and a six-month net loss of $0.3 million versus $5.1 million of net income.
- The prior-year six-month results benefited from an $8.4 million realized gain associated with the InvestCloud recapitalization. No comparable gain was recorded in 2022.
- Adverse market conditions reduced AUM across all major categories: institutional AUM declined 17%, wealth-management AUM declined 17%, and mutual-fund AUM declined 10% year over year.
- Second-quarter net client outflows were $0.2 billion, primarily related to the SmallCap strategy. Six-month outflows were also approximately $0.2 billion, primarily related to SmallCap and Enhanced Balance strategies.
- Compensation expense declined because of lower commissions and incentive compensation, while sales and marketing expense increased as in-person sales activity returned toward pre-pandemic levels.
- Quarterly dividends increased to $0.15 per share from $0.10 per share in the 2021 comparable quarter. The board declared another $0.15 per share dividend on July 27, 2022, payable October 1, 2022.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Westwood expected to close its acquisition of Salient Partners’ asset-management business in the second half of 2022, subject to customary conditions, fund shareholder approvals and other client approvals. Consideration includes $35.0 million payable at closing and up to $25.0 million of deferred payments tied to revenue retention and growth targets.
- The proposed acquisition is a material liquidity commitment relative to the company’s cash resources. The filing does not provide a financing plan or pro forma financial impact for the transaction.
- Management identified market volatility, AUM composition and value, client redemptions, fee pressure, competition, personnel retention, cybersecurity, technology and operational risks, regulation, litigation, concentration of revenue and the ability to execute strategic initiatives as material risks.
- Westwood Trust was required to maintain at least $4.0 million of restricted capital and had approximately $19.4 million above that minimum at June 30, 2022.
- The company had $3.2 million remaining under its share-repurchase authorization at June 30, 2022. It repurchased 93,875 shares during the second quarter for approximately $1.4 million, including program and open-market purchases.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, no material lease changes and no significant changes in market-risk disclosures.
- Disclosure controls were evaluated as effective, and no material changes to internal control over financial reporting were reported.
- Performance-based fee revenue is inherently variable and is recognized only when the applicable measurement period is complete; no such revenue was recognized in the 2022 periods presented.
Important Facts for Investors to Verify
- Closing timing, funding sources and final consideration for the Salient acquisition, including the potential $25.0 million of deferred payments.
- Whether AUM stabilizes or continues to decline because of market depreciation, client outflows or strategy-specific underperformance.
- The sustainability of dividends and share repurchases after funding the Salient transaction and considering weaker GAAP earnings.
- The distinction between GAAP net income and management’s non-GAAP Economic Earnings, which adds back stock-based compensation, intangible amortization and certain tax benefits.
- The extent to which operating cash flow depends on liquidating investments and favorable working-capital timing rather than recurring earnings.
- Future performance of the Charis and other private investments, which are subject to valuation uncertainty and generated unrealized losses in 2022.