Business Context and Reporting Period
Westwood Holdings Group, Inc. is an investment-management and trust-services company operating through Advisory and Trust segments. Revenue is primarily based on assets under management (AUM). This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, filed October 27, 2021.
AUM was $13.8 billion at September 30, 2021, up 15% from $12.0 billion at September 30, 2020. The company had 8,305,035 common shares outstanding as of October 20, 2021.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $17.9 million | $15.5 million | $53.7 million | $48.0 million |
| Net operating income (loss) | $2.0 million | $(4.0) million | $3.6 million | $(5.8) million |
| Net income (loss) | $1.9 million | $(10.3) million | $7.0 million | $(11.8) million |
| Diluted EPS | $0.24 | $(1.31) | $0.88 | $(1.46) |
| Operating margin | 11.4% | (26.2)% | 6.7% | (12.0)% |
| Net margin | 10.5% | (66.6)% | 12.9% | (24.5)% |
Asset-based advisory fees increased 36% to $12.0 million in the third quarter and 16% to $33.8 million for the nine-month period. Trust fees increased 3% to $6.0 million in the quarter and 5% to $18.2 million year to date. Performance-based advisory fees were zero in the third quarter and $2.0 million year to date.
Nine-month cash flow from operating activities was $21.1 million, compared with cash used of $7.1 million in the prior-year period. Investing activities provided $9.6 million, while financing activities used $25.2 million, primarily for dividends and share repurchases. Cash and cash equivalents were $18.5 million at September 30, 2021, and cash plus short-term investments totaled $76.6 million. Working capital was $75.6 million.
The company had no debt at September 30, 2021 or December 31, 2020. Total assets were $135.3 million and stockholders’ equity was $115.7 million at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16% in the third quarter and 12% for the first nine months, primarily from higher average AUM and asset-based fees.
- The company returned to operating and net profitability, compared with losses in the prior-year periods.
- Prior-year results included a $3.4 million goodwill impairment charge and a $4.2 million foreign-currency translation adjustment related to liquidation of Westwood International Advisors. No goodwill impairment was recorded in 2021.
- Nine-month 2021 results included an $8.4 million realized gain from the recapitalization and redemption of the company’s InvestCloud investment. Westwood reinvested $4.4 million in newly issued InvestCloud shares.
- AUM increased year over year, but third-quarter AUM declined $0.6 billion from the beginning of the quarter because of $0.4 billion of net outflows and $0.2 billion of market depreciation.
- Nine-month net client flows were negative $0.6 billion, including a $1.6 billion outflow when two Global Convertibles mandates returned to Aviva Investors. Mutual fund net flows were positive $0.4 billion.
- Employee compensation declined 3% year to date, general and administrative expense declined 14%, and impairment expense was eliminated. Third-quarter mutual-fund expense increased 93% due primarily to one-time mutual-fund administration costs.
- The company paid a $2.50-per-share return-of-capital distribution, totaling $20.8 million, in August 2021. It also paid regular dividends and repurchased 136,859 shares for $2.2 million during the first nine months.
Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantified financial guidance. Management stated that existing cash and short-term investments, together with cash generated from operations, are expected to fund ordinary operating and capital requirements for at least the next twelve months, although additional financing could become necessary.
- Results remain sensitive to financial-market conditions, AUM levels and composition, client redemptions, investment performance, fee pressure and customer concentration.
- The company faces competition, regulatory and fiduciary-rule uncertainty, cybersecurity and operational risks, litigation exposure, personnel-retention risk and risks associated with third-party vendors.
- COVID-19 continues to be monitored. Management reported that cloud-based systems and business-continuity investments supported remote operations without hindering internal controls.
- Future distributions may include returns of capital, which reduce the company’s asset base and may reduce an investor’s tax basis.
- A stockholder rights agreement adopted in May 2021, together with other corporate-governance provisions, may deter or delay a change in control or an acquisition offering a premium.
- Westwood Trust must maintain at least $4.0 million of restricted capital; management reported approximately $18.3 million of excess over that requirement at September 30, 2021.
- No legal proceedings were reported, and management concluded that disclosure controls were effective with no material changes to internal control over financial reporting.
- On October 27, 2021, the board declared a quarterly dividend of $0.15 per share payable January 3, 2022.
Investor Verification Checklist
- Verify the sustainability of revenue growth and whether future AUM changes are driven by client flows or market performance.
- Separate recurring operating profitability from the $8.4 million nonrecurring InvestCloud gain and other investment valuation changes.
- Assess the effect of the Global Convertibles exit, strategy-level outflows and fee compression on future revenue.
- Review liquidity after the $20.8 million return-of-capital distribution, regular dividends and share repurchases.
- Review the valuation and sensitivity of the $4.1 million Level 3 private-equity investment and the remaining InvestCloud holding.
- Evaluate the tax and balance-sheet implications of future return-of-capital distributions and the company’s dividend policy.