Business Context and Reporting Period
Westwood Holdings Group, Inc. is an asset-management and trust-services holding company operating through Westwood Management, Westwood International Advisors and Westwood Trust. Revenue is primarily based on fees tied to assets under management (AUM). This Form 10-K covers the fiscal year ended December 31, 2019; quarterly data shows fourth-quarter 2019 results but the filing is an annual report.
- Total AUM was $15.2 billion at year-end, including $8.7 billion institutional, $4.4 billion wealth management and $2.1 billion mutual-fund assets.
- The company had 165 full-time employees and operated Advisory and Trust reporting segments.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $84.1 million | $122.3 million | Down 31% |
| Asset-based advisory fees | $57.0 million | $89.4 million | Down 36% |
| Performance-based fees | $0.8 million | $3.0 million | Down 74% |
| Trust fees | $25.5 million | $29.0 million | Down 12% |
| Net operating income | $4.6 million | $35.9 million | Down 87% |
| Income before taxes | $9.4 million | $36.5 million | Down 74% |
| Net income | $5.9 million | $26.8 million | Down 78% |
| Diluted EPS | $0.70 | $3.13 | Down 78% |
| Economic Earnings | $18.2 million | $43.9 million | Down 59% |
| Operating cash flow | $32.2 million | $31.5 million | Up 2% |
Income before taxes represented an 11.2% margin, compared with 29.8% in 2018. Net income represented approximately a 7.0% margin, compared with approximately 21.9% in 2018. Employee compensation and benefits declined 16% to $50.2 million, but increased to 59.6% of revenue from 49.0% in 2018.
- Cash and short-term investments were $100.1 million at December 31, 2019, compared with $118.2 million in 2018.
- Cash and cash equivalents were $49.8 million; total stockholders’ equity was $148.3 million.
- The company had no debt. Working capital was $95.6 million.
- Cash flow from investing activities was negative $4.8 million, primarily due to the investment in Charis. Financing cash outflows were $31.9 million, including $26.1 million of dividends paid.
- Dividends declared increased to $2.88 per share from $2.76 per share. The February 2020 quarterly dividend was declared at $0.43 per share.
Material Changes Versus Prior Comparable Period
- Year-end AUM declined 8% to $15.2 billion, while quarterly average AUM declined 26% to $15.8 billion. Net client outflows of $4.4 billion were partly offset by $3.0 billion of market appreciation.
- Mutual-fund AUM declined 36% to $2.1 billion, institutional AUM declined 6% to $8.7 billion, and wealth-management AUM increased 10% to $4.4 billion.
- Revenue fell substantially faster than expenses. Employee compensation declined $9.8 million, but total expenses declined only 8%, resulting in significant operating-margin compression.
- 2019 included a $3.3 million unrealized gain on private investments, principally valuation increases in InvestCloud and Charis, and a $1.9 million foreign-currency transaction loss. These items affected reported earnings and were unusual relative to 2018.
- The effective tax rate increased to 37.1% from 26.6%, partly due to a $0.6 million discrete tax expense related to stock-based compensation and limitations under the Tax Cuts and Jobs Act.
- The company repurchased 85,559 shares for $2.4 million during 2019. In February 2020, the board added $10 million to the repurchase authorization, bringing availability to approximately $13 million.
- The company adopted the new lease accounting standard in 2019, recognizing operating lease right-of-use assets and lease liabilities; management stated the adoption did not materially affect earnings.
Guidance, Outlook, Commentary and Risks
The filing does not provide quantitative revenue or earnings guidance. Management expects growth efforts to focus on expanding existing strategies, intermediary distribution, wealth management, digital capabilities, international relationships and potential acquisitions or strategic alliances. The company added experienced intermediary-sales personnel and continued investments in technology and digital client portals.
- Management stated that current cash, short-term investments and operating cash generation should be sufficient for ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could become necessary.
- Westwood Trust exceeded its $4.0 million regulatory capital minimum by approximately $7.9 million. Dividend transfers from Westwood Trust are subject to regulatory restrictions; no dividends were paid by Westwood Trust to the parent in 2019, 2018 or 2017.
- Approximately $31 million of undistributed earnings at the Canadian subsidiary were intended to remain permanently reinvested outside the United States. Repatriation could require approximately $1.6 million of foreign withholding tax.
- Key risks include market-driven AUM volatility, continued net outflows, investment underperformance, fee pressure from passive products, client concentration, employee retention, regulatory and international compliance, foreign-currency exposure, cybersecurity, operational failures, litigation and reliance on subsidiary cash distributions.
- The ten largest clients represented approximately 20% of fee revenue in 2019, 2018 and 2017. Advisory and trust agreements generally can be terminated on short notice.
- Contractual purchase obligations totaled $11.0 million, and operating lease liabilities totaled $9.3 million at year-end. The filing reports no off-balance-sheet arrangements.
- Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019. The financial statement and internal-control audits received unqualified opinions.
Investor Verification Priorities
- Verify whether AUM net outflows, particularly in institutional, Income Opportunity, Emerging Markets and LargeCap Value strategies, continued after year-end.
- Assess the sustainability of the $0.43 quarterly dividend and planned share repurchases given the sharp decline in GAAP earnings and retained earnings.
- Separate recurring operating performance from the $3.3 million private-investment gain, $1.9 million foreign-currency loss and other non-recurring or non-cash items.
- Monitor fee rates, performance relative to benchmarks and the effect of passive-management competition on future revenue margins.
- Review the valuation and liquidity of the InvestCloud, Charis and other private investments, including exposure to Level 3 valuation assumptions.
- Evaluate regulatory capital, Canadian cash repatriation constraints, tax audits, client concentration and contractual obligations.
- Confirm subsequent events, including the February 2020 dividend, expanded repurchase authorization and expected $6.7 million restricted-stock issuance.