Westwood Holdings Group, Inc. — FY2012 Form 10-K
Business context and reporting period
Westwood is an asset-management and trust-services holding company. Its subsidiaries provide investment advisory, subadvisory, trust and custodial services, with revenue primarily based on assets under management (AUM). The filing covers the fiscal year ended December 31, 2012, including unaudited fourth-quarter results. Westwood managed approximately $14.2 billion of AUM at year-end, up 8% from 2011.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $77.5 million | $68.9 million | 12% increase |
| Income before taxes | $20.0 million | $23.1 million | 13% decrease |
| Net income | $12.1 million | $14.7 million | 18% decrease |
| Diluted EPS | $1.65 | $2.04 | 19% decrease |
| Operating cash flow | $13.8 million | $18.5 million | 26% decrease |
| Cash and investments | $63.7 million | $60.1 million | 6% increase |
| Long-term debt | None | None | No change |
| Stockholders’ equity | $76.6 million | $70.8 million | 8% increase |
- Revenue mix included $57.9 million of asset-based advisory fees, $1.3 million of performance-based fees, $15.0 million of trust fees and $3.3 million of other revenue.
- Net margin was approximately 15.6% in 2012 versus 21.3% in 2011; pretax margin was approximately 25.8% versus 33.5%.
- Economic Earnings, a non-GAAP measure, declined 8% to $23.2 million. Economic Expenses increased 32% to $46.5 million.
- Year-end AUM was $14.167 billion, comprising $9.225 billion institutional, $3.339 billion private wealth and $1.603 billion mutual-fund assets.
- 2012 AUM growth reflected $2.1 billion of inflows and $1.7 billion of market appreciation, partly offset by $2.7 billion of outflows, producing net client outflows of approximately $650 million.
- Fourth-quarter 2012 revenue was $20.6 million, pretax income was $5.9 million, net income was $3.6 million and diluted EPS was $0.49, compared with fourth-quarter 2011 revenue of $17.0 million, pretax income of $6.3 million, net income of $4.1 million and diluted EPS of $0.57.
Material changes versus the prior comparable period
- Revenue grew because of higher average AUM, increased trust fees, $1.3 million of performance fees and substantially higher investment gains included in other revenue.
- Profitability declined as expenses increased 25%, principally from employee compensation, Westwood International start-up costs, recruiting and legal costs, technology investments and higher facilities costs.
- Westwood International, established in the second quarter of 2012, generated less than $2 million of revenue but incurred $10.3 million of operating costs. It ended the year with $888 million of AUM and 11 employees.
- Employee compensation and benefits increased 25% to $43.7 million. Professional-services expense increased 48% to $4.4 million, partly because of one-time recruiting and legal costs related to the Canadian expansion.
- Other revenue increased to $3.3 million from $0.2 million, including a $1.9 million gain on the sale of Teton Advisors shares. This gain was an unusual, non-recurring contributor to 2012 results.
- The effective tax rate increased to 39.6% from 36.4%, primarily reflecting Westwood International losses and tax-return adjustments.
- The Board increased the quarterly dividend to $0.40 per share beginning in the fourth quarter. Total dividends declared were $1.51 per share in 2012 versus $1.42 in 2011.
- Westwood repurchased 97,724 shares for $3.8 million and had $10.0 million remaining under its repurchase authorization at year-end.
Guidance, outlook, commentary and risks
Management did not provide quantitative earnings or revenue guidance. Management expects growth opportunities from existing and new client relationships, mutual-fund distribution, Westwood Trust, international strategies, new products and possible acquisitions. Management stated that current cash, short-term investments and operating cash flow should fund ordinary operating and capital requirements for at least the next twelve months.
- Primary business risks include investment underperformance, market declines, client outflows, fee pressure, intense competition and the short-term termination rights in advisory and trust agreements.
- LargeCap Value represented approximately 37% of AUM and underperformed its benchmark in 2012, although it ranked above the median of its peer group. Management attributed some recent client outflows partly to this underperformance.
- The four largest clients represented approximately 12.6% of 2012 fee revenue. Loss of a major client could materially affect results.
- Westwood International has Canadian net operating loss carryforwards and a related deferred tax asset without a valuation allowance. If projected taxable income is not achieved, future earnings could be reduced by a valuation allowance.
- Westwood faces litigation in Ontario brought by AGF relating to the hiring of members of its global and emerging-markets team. AGF seeks unspecified damages and punitive damages, including stated claims of $10 million and $5 million Canadian in separate actions. The ultimate financial impact is not estimable; management did not currently expect a material impact but acknowledged that an adverse resolution could be material.
- Operating lease commitments totaled $9.3 million, including $1.3 million due within one year.
- Westwood Trust exceeded its $1.0 million minimum regulatory capital requirement by approximately $11.4 million. Westwood International exceeded its Canadian working-capital requirement by approximately $1.0 million.
- The company reported no material weaknesses in internal control; management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2012.
Most important facts for investors to verify
- Whether AUM growth converts into sustainable net inflows, rather than primarily market appreciation, and whether institutional outflows continue.
- The ongoing revenue contribution and expense trajectory of Westwood International.
- The effect of LargeCap Value performance and other investment results on client retention and fee revenue.
- The sustainability of the $0.40 quarterly dividend and share-repurchase activity given operating cash flow and subsidiary dividend restrictions.
- The ultimate resolution and potential cost of the AGF litigation.
- Whether the Canadian deferred tax assets and net operating loss carryforwards are realized without a valuation allowance.
- The extent to which 2012 earnings benefited from the $1.9 million Teton Advisors gain and other investment-related gains.