Westwood Holdings Group, Inc. — Fiscal 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017, with unaudited quarterly data for the fourth quarter. Westwood is an asset manager and trust company operating through Advisory and Trust segments. Revenue is primarily based on assets under management (AUM).
Business Context and Key Metrics
- AUM was $24.2 billion at December 31, 2017, up 14% from $21.2 billion at December 31, 2016.
- Average quarterly AUM increased 9% to $23.1 billion, primarily from market appreciation and the transition of approximately $713 million from assets under advisement to AUM.
- Institutional AUM increased 21% to $14.4 billion; private wealth AUM increased 1% to $5.6 billion; mutual fund AUM increased 11% to $4.2 billion.
- 2017 net client flows were negative $398 million, offset by $3.4 billion of market appreciation.
- The ten largest clients represented approximately 20% of fee revenue, and no single client represented 10% or more.
Financial Performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $133.8 million | $123.0 million | +9% |
| Asset-based advisory fees | $99.2 million | $91.5 million | +8% |
| Performance-based fees | $1.4 million | $0.6 million | +122% |
| Trust fees | $31.6 million | $30.3 million | +4% |
| Income before taxes | $33.9 million | $34.0 million | Approximately flat |
| Net income | $20.0 million | $22.6 million | -12% |
| Diluted EPS | $2.38 | $2.77 | -14% |
| Economic Earnings | $38.9 million | $41.1 million | -5% |
- Pre-tax margin was approximately 25.3%, compared with 27.6% in 2016. Net margin was approximately 14.9%, compared with 18.4% in 2016.
- Total expenses increased 12% to $99.9 million. Employee compensation increased 6% to $65.0 million, while general and administrative expense increased 24% to $11.2 million.
- The effective tax rate increased to 41.0% from 33.4%, principally because of $3.4 million of incremental tax expense related to the Tax Cuts and Jobs Act.
- Fourth-quarter revenue was $33.9 million versus $31.1 million in the prior-year quarter. Fourth-quarter net income was $2.9 million versus $7.6 million; the filing provides quarterly results but does not clearly isolate all drivers of the year-over-year decline.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $48.0 million, compared with $47.4 million in 2016.
- Investing cash flow was negative $1.2 million, primarily reflecting property and equipment purchases.
- Financing cash flow was negative $28.6 million, primarily reflecting cash dividends, employee-related share withholding and treasury-stock activity.
- Cash and investments totaled $105.6 million at year-end, including $54.2 million of cash and cash equivalents and $51.3 million of investments.
- The company had no debt at December 31, 2017. Stockholders’ equity was $156.4 million.
- Management stated that existing cash, short-term investments and operating cash flow should meet ordinary operating and capital requirements for at least the next twelve months.
- Annual dividends declared increased to $2.54 per share from $2.33, including an increase in the quarterly dividend to $0.68. Approximately $9.4 million remained available under the share repurchase program.
Material Changes and Unusual Items
- AGF litigation settlement: The company agreed to pay $10 million Canadian, with approximately half expected to be covered by insurance. It recorded a net $4.0 million charge in 2017 and a corresponding insurance receivable.
- Tax reform: The company provisionally recorded $3.4 million of incremental tax expense, including tax on deemed repatriation of Canadian earnings and remeasurement of deferred tax assets. The filing states that the accounting remained subject to completion when the 2017 tax return was filed.
- Foreign currency: A $1.6 million foreign currency transaction loss was recorded in general and administrative expense, primarily related to the Canadian dollar.
- Omaha divestiture: The Omaha-based private wealth business was sold on January 12, 2018 for $10.6 million. Management estimated a preliminary gain of approximately $520,000, to be recorded in the first quarter of 2018.
- The company adopted ASU 2016-09 for stock compensation in 2017 and adopted the new revenue standard effective January 1, 2018; management did not expect a material impact from the revenue-standard adoption.
Outlook, Commentary and Risks
- Management’s growth strategy centers on expanding existing strategies, mutual fund and private wealth distribution, international business, new investment products and potential acquisitions.
- Approximately 23% of AUM was managed for non-U.S. clients, and approximately 27% of AUM was invested in strategies with significant exposure to non-U.S. companies.
- Management highlighted strong performance in SmallCap Value, Income Opportunity and LargeCap Value strategies.
- Key risks include market declines, investment underperformance, client withdrawals, fee compression, industry competition, dependence on key employees and consultants, regulatory changes, foreign currency exposure, cybersecurity and operational failures.
- A hypothetical 10% decline in average AUM would have reduced 2017 revenue by approximately $13 million. A hypothetical 10% devaluation of the Canadian dollar would have reduced 2017 pre-tax income by approximately $1.6 million.
- The company is subject to $7.5 million of purchase obligations and $14.2 million of operating lease obligations as of year-end. It reported no off-balance-sheet arrangements.
- Management and Deloitte & Touche concluded that internal control over financial reporting was effective as of December 31, 2017, and Deloitte issued an unqualified audit opinion.
Important Facts for Investors to Verify
- Whether AUM growth can continue given the $398 million of 2017 net outflows and reliance on market appreciation.
- The sustainability of fee rates, performance-based fees and the approximately 20% concentration of fee revenue among the ten largest clients.
- The final tax effects of the Tax Cuts and Jobs Act and any remaining provisional accounting adjustments.
- Collection of the $4.0 million insurance receivable related to the AGF settlement and the final settlement cash payments.
- The financial and operating effects of the January 2018 Omaha divestiture, including the final gain and reduction in AUM.
- The impact of compensation costs, restricted-stock awards and competitive fee pressure on future margins and Economic Earnings.