Westwood Holdings Group, Inc. — 2020 Form 10-K Summary
Business Context and Reporting Period
Westwood is a holding company providing investment advisory, trust, custodial and investment management services through Westwood Management and Westwood Trust. Revenue is primarily based on assets under management (AUM). The filing covers the fiscal year ended December 31, 2020, compared primarily with 2019.
- Total AUM was $13.0 billion at year-end, down 14% from $15.2 billion.
- Average quarterly AUM declined 21% to $12.4 billion, driven mainly by institutional and mutual fund net outflows.
- Westwood liquidated Westwood International Advisors effective September 30, 2020, and liquidated the related UCITS Fund in June 2020.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $65.1 million | $84.1 million | Down 23% |
| Net operating income (loss) | $(3.4) million | $4.6 million | Declined |
| Income (loss) before taxes | $(7.6) million | $9.4 million | Declined |
| Net income (loss) | $(8.9) million | $5.9 million | Declined |
| Diluted EPS | $(1.12) | $0.70 | Declined |
| Economic Earnings | $7.3 million | $18.2 million | Down 60% |
| Economic EPS | $0.91 | $2.15 | Down 58% |
| Operating cash flow | $(9.8) million | $32.2 million | Declined |
- Asset-based advisory fees fell 33% to $38.0 million, while trust fees fell 8% to $23.6 million.
- Performance-based advisory fees increased to $2.8 million from $0.8 million. Trust performance-based fees were $0.4 million in 2020.
- Employee compensation and benefits declined 16% to $42.1 million, but increased to 64.7% of revenue from 59.6%.
- Income before taxes represented a negative 11.7% margin, compared with a positive 11.2% margin in 2019. The filing text does not provide a separate adjusted operating margin.
- Cash and short-term investments totaled $82.6 million at December 31, 2020, compared with $100.1 million in 2019.
- Cash and cash equivalents were $13.0 million, investments at fair value were $69.5 million, and stockholders’ equity was $130.7 million.
- The company had no debt at year-end. Working capital was $84.5 million.
- Westwood Trust held approximately $13.9 million above its $4.0 million minimum restricted-capital requirement.
Material Changes Versus the Prior Comparable Period
- AUM declined by $2.2 billion, reflecting $2.7 billion of net client outflows partially offset by $0.5 billion of market appreciation. Institutional AUM fell 25%, wealth management AUM fell 2%, and mutual fund AUM increased 4%.
- Revenue declined $19.0 million, primarily because of lower average AUM.
- The company recorded a $3.4 million goodwill impairment charge related to the Advisory segment following a sustained decline in market capitalization and revised valuation assumptions.
- Westwood recognized a $4.2 million non-cash reclassification of accumulated foreign currency translation adjustments into net loss following the liquidation of Westwood International Advisors. This did not affect stockholders’ equity.
- The company incurred $1.1 million of Canadian withholding taxes, net of the U.S. federal tax deduction, when repatriating more than $37 million from Canada.
- Closure-related costs included $0.5 million of severance, $0.3 million of lease impairment and $0.1 million of vendor contract costs, partially offset by $1.3 million of restricted-stock forfeitures.
- Operating cash flow shifted from $32.2 million provided in 2019 to $9.8 million used in 2020, largely because of net purchases of investments, unrealized investment losses and the net loss.
- The company repurchased 679,756 shares for approximately $13.0 million at an average price of $19.05 per share. Shares outstanding declined to approximately 8.3 million at year-end.
- Dividends were suspended after the $0.43-per-share dividend declared in February 2020. The company subsequently declared a $0.10-per-share dividend on February 10, 2021, payable April 1, 2021.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that available cash, short-term investments and expected operating cash flow should be sufficient for ordinary operating and capital requirements through at least the next twelve months, while noting that additional financing could become necessary.
- Management continues to pursue organic AUM growth, expanded intermediary distribution, digital capabilities, wealth-management growth, new investment strategies and potential strategic transactions. No quantitative revenue or earnings guidance was provided.
- COVID-19 reduced travel and affected client interactions, but technology and cloud-based systems allowed employees to work remotely and continue serving clients. The company continues to identify the pandemic’s potential effects as uncertain.
- Key business risks include market-driven AUM volatility, investment underperformance, net client outflows, fee pressure from passive products, client concentration, dependence on key personnel, regulatory compliance, litigation, cybersecurity, third-party vendors and operational failures.
- The ten largest clients represented approximately 24% of 2020 fee revenue, up from approximately 20% in each of 2019 and 2018. No individual client represented 10% or more of fee revenue.
- Contractual purchase obligations totaled $12.6 million, including $4.9 million due within one year. Operating lease liabilities totaled $7.8 million at year-end.
- The company reported no off-balance-sheet arrangements and stated that it is subject to ordinary-course legal claims and proceedings.
- In January 2021, the company remeasured its InvestCloud investment and recorded an approximately $5.6 million pre-tax gain. This subsequent event was not included in 2020 results.
- Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2020. The company was not required to obtain, and did not obtain, an external auditor’s opinion on internal control effectiveness.
Important Facts for Investors to Verify
- Whether AUM stabilizes or continues to decline, particularly in institutional and mutual fund channels.
- The sustainability of performance-based fees and the investment performance of key strategies relative to benchmarks.
- The timing and conditions for restoring regular dividends and the remaining authorization under the share-repurchase program.
- The effect of the Advisory goodwill impairment, foreign currency reclassification and Canadian tax costs on comparisons of reported and adjusted earnings.
- Whether operating cash flow returns to positive levels after the 2020 use of cash.
- The valuation and liquidity of private investments, including the approximately $5.6 million post-year-end InvestCloud gain.
- Client retention, fee rates, concentration and the impact of passive-management competition.
- Future regulatory, litigation, cybersecurity and COVID-19-related costs or disruptions.