Westwood Holdings Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The interim financial statements are unaudited and prepared under U.S. GAAP. Westwood manages investment assets and provides advisory, trust and custodial services through Westwood Management, Westwood Trust and Westwood International.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $23.0 million | $18.9 million | $66.6 million | $56.9 million |
| Income before taxes | $6.8 million | $4.3 million | $19.2 million | $14.2 million |
| Net income | $4.3 million | $2.5 million | $12.0 million | $8.5 million |
| Diluted EPS | $0.57 | $0.34 | $1.59 | $1.16 |
| Operating cash flow | Not separately presented for the quarter | $19.2 million | $9.1 million |
- Revenue increased 21% year over year in Q3 and 17% for the first nine months. Net income increased 72% in Q3 and 42% year to date.
- Calculated net margin was approximately 18.8% in Q3 2013 versus 13.2% in Q3 2012, and approximately 18.1% for the first nine months versus 14.9%.
- Asset-based advisory fees increased 24% in Q3 and 17% year to date. Trust fees increased 26% in Q3 and 23% year to date. Nine-month performance-based fees increased 105% to $2.6 million.
- Assets under management were $17.1 billion at September 30, 2013, up 21.7% from $14.1 billion a year earlier. The nine-month increase reflected $2.1 billion of market appreciation and $820 million of net inflows.
- Employee compensation and benefits increased 10% in Q3 and 13% year to date. Stock-based compensation was $8.6 million year to date, up from $7.6 million.
- Other revenue declined because the prior-year period included an $803,000 gain on the sale of an investment and 2013 included net unrealized investment losses.
Liquidity, Capitalization and Cash Flow
- Cash and cash equivalents were $12.0 million at September 30, 2013, compared with $3.8 million at December 31, 2012. Investments were $55.3 million, resulting in cash and investments of approximately $67.3 million.
- Working capital was $66.2 million. Total assets were $104.9 million and stockholders’ equity was $83.5 million.
- The company reported no long-term debt and no liabilities for borrowed money.
- Nine-month operating cash flow was $19.2 million. Investing cash flow was a use of $651,000, primarily for fixed-asset purchases, and financing cash flow was a use of $10.3 million, primarily dividends and treasury-stock purchases.
- Cash dividends paid were $6.3 million; dividends payable and accrued dividends totaled $4.6 million at September 30, 2013. Treasury-stock purchases totaled $4.7 million year to date.
- Management believed cash, short-term investments and operating cash flow would fund ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could become necessary.
Material Changes and Unusual Items
- Westwood International, established in 2012, generated $5.8 million of revenue and incurred $7.0 million of costs during the first nine months of 2013. Management reported more than $2.0 billion of related AUM at September 30, 2013.
- Three new mutual funds launched in late 2012 contributed to higher mutual-fund expenses, which increased 105% in Q3 and 89% year to date.
- Economic Earnings, a non-GAAP measure, increased 32% in Q3 to $7.3 million and 26% year to date to $21.0 million. The measure adds back restricted-stock expense, intangible amortization and deferred taxes on goodwill; it is not a substitute for GAAP net income.
- The company completed its annual goodwill impairment assessment during the third quarter and recorded no impairment.
- The Ireland-based UCITS Fund began operations in August 2013. Westwood concluded it was not the primary beneficiary, so the fund was not consolidated. A temporary €300,000 capital contribution was refunded in full.
Outlook, Risks and Contingencies
- The filing does not provide formal revenue or earnings guidance. Results remain sensitive to market levels, AUM flows, investment performance, client concentration, fee pressures and competition.
- Management identified risks involving retention of qualified personnel, development of new strategies, relationships with consultants and clients, regulatory and legislative changes, interest rates, tax rates and internal controls.
- Westwood and related parties are defendants in two Canadian lawsuits brought by AGF concerning former employees and alleged breaches, inducement and defamation. AGF seeks unspecified damages and punitive damages; the company’s counterclaim also seeks damages.
- The litigation was in discovery, with completion anticipated in the first quarter of 2014. The company could not estimate the ultimate financial impact, did not accrue a litigation loss, and stated that an adverse resolution could materially affect results. Insurance was expected to cover 50% of defense costs for the AGF claims, excluding Westwood’s counterclaim; a $356,000 insurance receivable was recorded.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability and composition of the $17.1 billion AUM, including the contribution from market appreciation versus net client flows.
- Assess client and strategy concentration, particularly institutional accounts and LargeCap Value outflows.
- Review compensation and stock-based awards, including the $25.0 million of remaining unrecognized restricted-stock expense.
- Monitor the profitability and AUM trajectory of Westwood International and the newer mutual funds.
- Track the AGF litigation, insurance recoveries and any potential financial or personnel impact.
- Reconcile dividends, treasury-stock purchases and the company’s stated liquidity outlook with future capital-allocation decisions.