Westwood Holdings Group, Inc. — FY2014 Form 10-K Summary
Business context and reporting period
Westwood is an investment-management holding company operating through Westwood Management, Westwood Trust and Westwood International. It provides investment advisory, subadvisory, trust and custodial services, with revenue primarily tied to assets under management (AUM). The filing covers the fiscal year ended December 31, 2014, with comparative results for 2013 and 2012.
- Total AUM was $20.3 billion at year-end, up 7% from $18.9 billion; average AUM was $19.8 billion, up 21%.
- Westwood Funds AUM increased 34% to $3.7 billion.
- Westwood International AUM increased to $3.3 billion from $2.5 billion, with more than 85% invested in emerging-markets strategies.
- The company had 130 full-time employees at year-end, compared with 106 in 2013.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $113.2 million | $91.8 million | +23% |
| Asset-based advisory fees | $88.5 million | $70.0 million | +26% |
| Performance-based advisory fees | $3.8 million | $2.6 million | +49% |
| Trust fees | $20.5 million | $18.4 million | +12% |
| Total expenses | $71.2 million | $63.6 million | +12% |
| Income before taxes | $42.0 million | $28.2 million | +49% |
| Net income | $27.2 million | $17.8 million | +53% |
| Diluted EPS | $3.45 | $2.32 | +49% |
| Economic Earnings | $41.4 million | $30.0 million | +38% |
- Income before tax margin was 37.1%, compared with 30.7% in 2013. Net income margin was approximately 24.1%, compared with approximately 19.4%.
- Employee compensation and benefits were $52.8 million, or 46.7% of revenue, versus 52.1% in 2013.
- The effective tax rate declined to 35.2% from 36.7%, principally because Westwood International generated operating income in 2014.
- Cash flow from operations was $26.5 million, compared with $21.7 million in 2013.
- Investing cash flow was negative $0.5 million, primarily for property and equipment. Financing cash flow was negative $18.0 million, primarily reflecting dividends, treasury-stock purchases and shares withheld for employee taxes.
- Cash and investments totaled $97.8 million at year-end, including $18.1 million of cash and cash equivalents and $79.6 million of investments. Working capital was $91.6 million.
- The company had no debt or liabilities for borrowed money at December 31, 2014.
- Total assets were $139.9 million and stockholders’ equity was $110.0 million.
- Quarterly fourth-quarter 2014 revenue was $28.3 million, income before taxes was $9.5 million, net income was $6.0 million, and diluted EPS was $0.77.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher average AUM and market appreciation of approximately $1.3 billion. Net client flows were approximately neutral: $3.459 billion of inflows and $3.438 billion of outflows.
- Mutual fund AUM increased substantially, while institutional AUM grew 3% and private-wealth AUM grew 1%.
- Income Opportunity AUM reached $4.1 billion after net inflows exceeding $650 million.
- Compensation expense increased 10%, reflecting additional hiring, higher incentive compensation and increased performance-based restricted-stock expense.
- Other revenues declined to $0.4 million from $0.9 million, largely because of lower dividend income. The 2013 comparison also benefited from a $1.9 million investment gain in 2012 that did not recur.
- The company corrected an immaterial historical error involving the measurement dates for certain performance-based restricted-stock awards. The cumulative correction reduced previously reported net income by approximately $3.3 million but had no effect on total stockholders’ equity; comparative periods were adjusted.
- Quarterly dividends increased from $0.40 in the first three quarters of 2013 and $0.44 in the fourth quarter to $0.44 in the first three quarters of 2014 and $0.50 in the fourth quarter. Total 2014 dividends declared were $1.82 per share.
Guidance, outlook, risks, contingencies and unusual items
- The filing provides no specific earnings, revenue or AUM guidance. Management’s stated growth priorities include expanding existing strategies, growing Westwood Trust and mutual funds, developing international distribution, recruiting and retaining personnel, and pursuing strategic acquisitions.
- In October 2014, Westwood added a Global Convertible Securities team with approximately $500 million of assets under advisement, not included in reported AUM because Westwood lacked direct discretionary authority.
- On January 15, 2015, Westwood agreed to acquire Woodway Financial Advisors, a Houston-based private-wealth and trust company with approximately $1.6 billion of AUM. Consideration includes $32 million, subject to adjustments, plus a capped earn-out of $15 million; approximately 73% is expected to be paid in cash and 27% in Westwood shares. Closing requires Texas Department of Banking approval and other customary conditions.
- Management expects existing cash, short-term investments and operating cash flow to fund ordinary operations and the Woodway acquisition for at least the next twelve months, but states that additional financing could become necessary.
- Key risks include market-driven AUM and revenue volatility, investment underperformance, client concentration, fee pressure, intense competition, reliance on key employees, regulatory and compliance requirements, international and foreign-currency exposure, cybersecurity and systems failures, litigation, acquisition integration and dependence on subsidiary dividends.
- The ten largest clients generated more than 20% of 2014 fee revenue. No individual customer generated 10% or more.
- An AGF-related lawsuit in Ontario remains in discovery. AGF seeks unspecified damages and punitive damages in the disclosed amounts; Westwood has asserted counterclaims. The company cannot estimate the ultimate financial impact, does not currently expect a material impact, and receives insurance coverage for 50% of defense costs on the AGF claims, excluding its counterclaim.
- Westwood Trust exceeded its $1.25 million regulatory minimum capital requirement by approximately $12 million. Westwood International exceeded its Canadian working-capital requirement by approximately $12.9 million.
- Goodwill and intangible-asset impairment testing resulted in no impairment charges for 2014.
- Management and Grant Thornton concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014.
Most important facts for investors to verify
- Whether AUM growth is sustained through net inflows rather than primarily market appreciation, particularly in institutional and private-wealth accounts.
- The closing status, financing, cash cost, stock dilution, earn-out exposure and integration progress of the Woodway acquisition.
- Client retention and performance of the LargeCap Value, Income Opportunity, emerging-markets and mutual-fund strategies.
- The effect of performance-based fees, compensation and restricted-stock expense on recurring profitability and cash generation.
- Future dividend capacity, including legal and regulatory limits on distributions from Westwood Trust and the company’s dependence on subsidiary cash transfers.
- Developments in the AGF litigation, related defense costs and insurance recoveries.
- Exposure to market declines, foreign currency movements, regulatory changes, cybersecurity incidents and loss of key personnel.