Westwood Holdings Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Westwood provides investment management, trust, custodial and related services to institutional investors, private wealth clients and financial intermediaries through its Advisory and Trust segments. Revenue is primarily based on assets under management (AUM), making results sensitive to market performance, client flows and AUM composition. This report covers the quarter and six months ended June 30, 2017; the financial statements are unaudited.
AUM was $22.6 billion at June 30, 2017, up 8% from $21.0 billion at June 30, 2016. The increase reflected market appreciation, partly offset by net outflows.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2017 | 2016 | 2017 | 2016 | |
| Total revenue | $33.8 million | $31.0 million | $66.4 million | $60.2 million |
| Income before taxes | $10.6 million | $8.5 million | $18.4 million | $14.2 million |
| Net income | $6.9 million | $5.7 million | $13.0 million | $9.2 million |
| Diluted EPS | $0.83 | $0.69 | $1.56 | $1.13 |
| Economic Earnings | $11.7 million | $10.4 million | $22.3 million | $18.5 million |
| Economic Earnings per diluted share | $1.41 | $1.27 | $2.68 | $2.27 |
| Cash dividends declared per share | $0.62 | $0.57 | $1.24 | $1.14 |
Net income margins were approximately 20.4% in the second quarter and 19.5% for the first six months, compared with approximately 18.2% and 15.3%, respectively, in the comparable 2016 periods. Income before tax margins were approximately 31.4% and 27.6% in 2017, versus 27.4% and 23.5% in 2016.
- Asset-based advisory fees increased 8% in the quarter and 9% year to date, primarily due to higher average AUM.
- Performance-based advisory fees increased to $1.0 million in the quarter and $1.4 million year to date, compared with $0.4 million in each comparable 2016 period.
- Trust fees increased 4% in both periods.
- Total expenses increased 3% in the quarter and 4% year to date. Employee compensation increased 3% and 5%, respectively, reflecting higher incentive compensation, performance-based restricted stock expense and merit increases.
- The six-month effective tax rate declined to 29.4% from 35.1%, primarily because adoption of ASU 2016-09 resulted in approximately $1.0 million of excess tax benefits being recognized in income tax expense. The second-quarter tax rate increased to 34.8% from 33.5%.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $43.1 million at June 30, 2017, compared with $33.7 million at December 31, 2016.
- Investments at fair value were $45.7 million, resulting in cash and investments of approximately $88.8 million.
- Operating cash flow was $26.8 million for the first six months, compared with $30.6 million in 2016.
- Investing cash flow was negative $0.2 million, principally for property and equipment. Financing cash flow was negative $18.2 million, primarily due to dividends and stock-related transactions.
- Working capital was $92.6 million at June 30, 2017, compared with $86.3 million at year-end 2016.
- The company reported no debt. Management believes cash, short-term investments and operating cash flow will be sufficient for ordinary operating and capital requirements for at least the next twelve months.
- Westwood Trust had approximately $18.8 million in excess of its $4.0 million minimum restricted capital requirement.
Material Changes, Outlook, Risks and Unusual Items
- AUM increased $1.6 billion year over year to $22.6 billion. Second-quarter net outflows were $89 million and six-month net outflows were $384 million, partially offset by market appreciation of $566 million and $1.7 billion, respectively.
- Management identified net outflows primarily in SMidCap and LargeCap Value strategies, with offsets from SmallCap Value, Market Neutral Income and Emerging Markets strategies.
- The company adopted ASU 2016-09 effective January 1, 2017. Adoption also produced a $711,000 reduction to beginning retained earnings related to accounting for forfeitures.
- Performance-based restricted stock compensation became probable of vesting during the second quarter. Fiscal 2017 performance goals are tied to pre-tax income, including a $24.0 million goal for certain awards and a $34.0 million target for specified executive awards.
- The company declared a $0.62 quarterly dividend in July 2017, payable October 2, 2017.
- No specific financial guidance was provided in the filing. Management’s outlook is subject to AUM composition and market value, client flows, competition and fee pressure, personnel retention, cybersecurity and information systems, regulation, litigation, acquisitions and customer concentration.
- An unresolved Canadian lawsuit brought by AGF seeks unspecified damages and punitive damages, including $10 million Canadian in one action and additional damages in a related action. The company cannot estimate the ultimate financial impact; management does not currently believe the proceedings will be material, but an adverse resolution could materially affect results.
- The company reported no goodwill or intangible-asset impairment during the periods presented. It also stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether market appreciation continues to offset net outflows, particularly in SMidCap and LargeCap Value strategies.
- The sustainability and composition of AUM growth, including the distinction between AUM and approximately $1.0 billion of assets under advisement excluded from AUM.
- The effect of performance-based compensation and restricted stock expense on future margins and cash requirements.
- The recurring versus one-time impact of the $1.0 million tax benefit from ASU 2016-09 adoption.
- The status and potential financial exposure of the AGF litigation and the extent of insurance coverage for defense costs.
- The company’s ability to maintain dividends and repurchases while funding operations, restricted capital and strategic initiatives.