Westwood Holdings Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Westwood manages investment assets and provides advisory, trust and custodial services through its subsidiaries. Revenue is primarily based on assets under management (AUM), making results sensitive to market performance, client flows and fee pressure. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial Results and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $16.7 million | $23.9 million | Down 30% |
| Asset-based advisory fees | $11.1 million | $16.4 million | Down 32% |
| Trust fees | $6.0 million | $6.5 million | Down 9% |
| Net operating income | $0.4 million | $1.5 million | Down 72% |
| Net income | $1.1 million | $0.4 million | Up 181% |
| Diluted EPS | $0.13 | $0.05 | Up $0.08 |
| Economic Earnings | $4.2 million | $4.1 million | Up 2% |
| Economic EPS | $0.50 | $0.49 | Up $0.01 |
| Operating margin | 2.5% | 6.3% | Down 3.8 points |
| Net margin | 6.6% | 1.6% | Up 5.0 points |
Operating expenses declined 27% to $16.3 million, primarily due to lower employee compensation, mutual fund expenses and general and administrative costs. Information technology and professional services expenses increased modestly. The reported net loss before taxes of $1 thousand included a $2.9 million foreign-currency gain, a $1.0 million unrealized loss on a private investment and $0.5 million of investment income. A $1.1 million income tax benefit, primarily related to CARES Act deferred-tax remeasurement, drove reported net income above pretax income.
AUM was $11.6 billion at March 31, 2020, down 31% from $16.8 billion at March 31, 2019. First-quarter AUM declined by $3.6 billion, consisting of $3.0 billion of market depreciation and $0.6 billion of net client outflows. Average AUM was $13.4 billion versus $16.7 billion in the prior-year quarter.
Cash flow from operations was $11.5 million, compared with $10.6 million in Q1 2019. Operating cash flow included $12.9 million of proceeds from selling current investments and was partly offset by a $7.4 million reduction in compensation and benefits payable. Investing activities used $16 thousand. Financing activities used $13.1 million, including $7.3 million of dividends and $4.6 million of treasury-stock purchases. Cash and cash equivalents were $45.1 million at March 31, 2020, compared with $49.8 million at December 31, 2019; cash and short-term investments totaled $82.4 million.
The company had no debt at March 31, 2020. Working capital was $84.7 million, and management stated that existing cash, short-term investments and operating cash flow should fund ordinary operating and capital requirements for at least the next twelve months. Westwood Trust held approximately $6.8 million above its $4.0 million minimum restricted-capital requirement.
Material Changes Versus the Prior Comparable Period
- AUM decreased 31%, with declines across institutional, wealth-management and mutual-fund assets. Mutual-fund AUM fell 53% to $1.5 billion.
- Revenue declined 30%, principally because lower average AUM reduced asset-based advisory and trust fees.
- Employee compensation and benefits expense decreased 13%, reflecting lower incentive compensation and headcount.
- Foreign-currency results shifted from an $0.8 million loss in Q1 2019 to a $2.9 million gain in Q1 2020, primarily due to Canadian-dollar fluctuations.
- The company recorded a $1.0 million unrealized loss on its Charis private investment, reflecting a lower valuation multiple amid COVID-19-related weakness in the banking industry.
- Net income increased despite weaker operating results because of the foreign-currency gain and a $1.1 million tax benefit. Economic Earnings increased only 2% and excludes certain non-cash expenses.
- The quarterly dividend declared was $0.43 per share, compared with $0.72 per share in Q1 2019.
- The company repurchased 272,059 shares for $4.9 million during the quarter. In April 2020, it repurchased an additional 407,697 shares for approximately $8.1 million, completed the prior authorization and received a new $10.0 million authorization.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that technology investments and cloud-based systems enabled employees to work remotely and continue serving clients during the COVID-19 pandemic. The company is monitoring the pandemic, particularly its effect on global markets and AUM.
- COVID-19 could adversely affect markets, AUM, client flows, operations, vendors, financial reporting, cash flows and overall financial condition; the ultimate impact could not be reasonably estimated at the filing date.
- Results remain exposed to market volatility, client redemptions, revenue concentration, fee compression, competition and the ability to attract and retain personnel.
- Foreign-currency exposure, private-investment valuations and investments in foreign companies may create earnings and equity volatility.
- The company depends on subsidiaries for operating cash and may need additional financing if operating conditions, dividends, strategic initiatives or capital requirements change.
- Approximately $32 million of undistributed income at Westwood International Advisors was held outside the United States and could incur a 5% incremental Canadian withholding tax if repatriated.
- No material legal proceedings were reported, and management concluded that disclosure controls and procedures were effective.
Investor Verification Checklist
- Verify the sustainability of operating performance excluding the $2.9 million foreign-currency gain and $1.1 million tax benefit.
- Monitor AUM, net client flows, market effects and fee rates, particularly in LargeCap Value, Income Opportunity and mutual-fund strategies.
- Assess the effect of continued COVID-19 market disruption on advisory and trust-fee revenue and private-investment valuations.
- Confirm the cash impact and authorization status of April 2020 share repurchases and the company’s capacity to maintain dividends.
- Review the valuation assumptions for the $3.0 million Level 3 private investment and related sensitivity to valuation multiples.
- Evaluate liquidity after dividends, repurchases and potential Canadian withholding taxes, notwithstanding the absence of debt.