Westwood Holdings Group, Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
Westwood is a Dallas-based investment management and trust company whose revenues are primarily fees based on assets under management (AUM). Its principal businesses are investment advisory services through Westwood Management and fiduciary, custodial and investment services through Westwood Trust. The filing covers the fiscal year ended December 31, 2021, with unaudited quarterly data for the fourth quarter.
- Total AUM was $14.5 billion at year-end, up 11% from $13.0 billion at December 31, 2020.
- Quarterly average AUM increased 15% to $14.3 billion, primarily from $2.2 billion of market appreciation and $0.8 billion of net client inflows.
- Westwood launched three mutual funds in 2021: Quality AllCap, Quality MidCap and SmallCap Growth.
- The Global Convertibles team transitioned back to Aviva Investors in April 2021, reducing AUM by approximately $1.6 billion.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $73.1 million | $65.1 million | Up 12% |
| Net operating income | $6.0 million | $(3.4) million | Improved |
| Income before taxes | $14.0 million | $(7.6) million | Improved |
| Net income | $9.8 million | $(8.9) million | Returned to profitability |
| Diluted EPS | $1.23 | $(1.12) | Improved |
| Economic Earnings | $17.5 million | $7.3 million | Up 140% |
| Cash flow from operations | $19.4 million | $(9.8) million | Improved |
Derived margins were approximately 8.2% for net operating income, 19.2% for pretax income and 13.4% for net income. Asset-based advisory fees increased 21% to $45.9 million, performance-based advisory fees increased 19% to $3.3 million, and trust fees increased 2% to $24.0 million.
Fourth-quarter 2021 revenue was $19.4 million, pretax income was $3.2 million, net income was $2.8 million and diluted EPS was $0.36. Fourth-quarter 2020 revenue was $17.1 million, net income was $2.8 million and diluted EPS was $0.36.
Liquidity, Capital and Balance Sheet
- Cash and short-term investments were $80.2 million at December 31, 2021, compared with $82.6 million at year-end 2020.
- Cash and cash equivalents were $15.2 million; total investments were approximately $69.5 million at fair value.
- The company had no debt at year-end 2021 or 2020.
- Working capital was $78.0 million, compared with $84.5 million in 2020.
- Total assets were $139.6 million and stockholders’ equity was $117.9 million.
- Westwood Trust had approximately $14.2 million of capital above its $4.0 million regulatory minimum.
- Financing cash outflows were $26.8 million, primarily reflecting $22.9 million of dividends and $3.0 million of share repurchases.
Management stated that existing cash, short-term investments and operating cash flow should be sufficient to meet ordinary operating and capital requirements for at least the next twelve months, although additional financing could be required depending on future results, investments and capital allocation decisions.
Material Changes Versus Prior Comparable Period
- Revenue increased 12% as higher average AUM more than offset the loss of the Global Convertibles mandates.
- Operating results improved substantially from the 2020 loss, which included a $3.4 million goodwill impairment and a $4.2 million foreign-currency translation reclassification related to the liquidation of Westwood International Advisors.
- 2021 included an approximately $8.4 million realized gain from the recapitalization of InvestCloud and a $1.8 million net unrealized depreciation on private investments.
- Westwood reinstated dividends after suspending them in the second quarter of 2020. Dividends declared were $2.95 per share, including a $2.50 per-share return-of-capital distribution.
- The company repurchased 182,549 shares for approximately $3.0 million at an average price of $16.38 per share.
- Mutual fund expenses increased 58% to $2.7 million, primarily due to one-time fund reorganization costs and a change in fund administrator.
- General and administrative expense declined approximately 10% following office-space reductions and related subleasing activity.
Outlook, Commentary, Risks and Unusual Items
Management did not provide quantitative revenue, earnings or AUM guidance. Its stated growth priorities include expanding existing and new investment strategies, increasing intermediary and wealth-management distribution, enhancing digital capabilities, attracting and retaining key personnel, and evaluating acquisitions or strategic alliances.
- Key risks include market-driven AUM volatility, investment underperformance, client redemptions, fee compression and intense competition from low-cost passive products.
- The ten largest clients represented approximately 22% of 2021 fee revenue, creating customer-concentration risk.
- Advisory and trust agreements generally may be terminated on short notice, and revenues depend heavily on market values and client retention.
- Material operational risks include cybersecurity incidents, systems failures, third-party vendor reliance, regulatory compliance failures, litigation and reputational damage.
- The company is a holding company dependent on dividends and other transfers from its operating subsidiaries. Westwood Trust’s dividends are subject to regulatory capital and Texas law restrictions.
- Contractual purchase obligations totaled $10.0 million, primarily for information-technology platforms and outsourcing services. The filing reports no off-balance-sheet arrangements.
- Goodwill was $16.4 million, all associated with the Trust reporting unit. No goodwill impairment was recorded in 2021, but valuation depends on projected cash flows, market multiples and discount rates.
- The company adopted a stockholder rights agreement in May 2021, which may deter unsolicited acquisitions. Its stock is described as thinly traded and potentially volatile.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021. The company was not required to obtain an external Section 404(b) attestation.
Important Facts for Investors to Verify
- Whether AUM growth is sustained through net inflows rather than market appreciation, particularly after the Global Convertibles transition.
- The recurring earnings power excluding the $8.4 million InvestCloud gain, private-investment valuation changes and other unusual items.
- The sustainability of the $2.95 per-share 2021 distribution, including the $2.50 return-of-capital component.
- Client retention, fee rates and performance of the largest strategies, including LargeCap Value, SmallCap Value, Alternative Income and Select Equity.
- The valuation and liquidity of private investments, including InvestCloud, Charis and Westwood Hospitality.
- Future effects of fund reorganization costs, technology investments, outsourcing obligations and stock-based compensation.
- The sensitivity of revenue to AUM declines; management estimated that a hypothetical 10% decrease in average 2021 AUM would have reduced revenue by approximately $7 million.
- Subsequent events: a February 2022 quarterly dividend of $0.15 per share and approximately $6.3 million of restricted stock granted to employees in March 2022.