Westwood Holdings Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Westwood provides investment advisory, trust and custodial services; revenue is primarily tied to assets under management (AUM).
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $15.4 million | $17.9 million | $48.2 million | $53.7 million |
| Net operating income (loss) | $(1.1) million | $2.0 million | $(1.1) million | $3.6 million |
| Net income (loss) | $(1.2) million | $1.9 million | $(1.5) million | $7.0 million |
| Diluted EPS | $(0.15) | $0.24 | $(0.19) | $0.88 |
| Economic Earnings | $0.8 million | $3.7 million | $4.3 million | $12.8 million |
| Operating cash flow | Not separately provided | Not separately provided | $15.3 million | $21.1 million |
Margins: Q3 operating margin was approximately negative 7.0%, compared with 11.4% in Q3 2021. Q3 net margin was approximately negative 7.6%, compared with 10.5%. For the nine-month period, operating margin was approximately negative 2.2%, compared with 6.7%, and net margin was approximately negative 3.1%, compared with 13.0%.
AUM: AUM was $11.5 billion at September 30, 2022, down 17% from $13.8 billion a year earlier. The nine-month decline of $3.0 billion reflected $2.6 billion of market depreciation and $0.5 billion of net client outflows.
Liquidity and balance sheet: Cash and cash equivalents were $22.5 million, compared with $15.2 million at December 31, 2021. Cash and short-term investments totaled approximately $74.0 million, versus $80.2 million at year-end 2021. Working capital was $74.6 million. Total assets were $131.0 million and total liabilities were $17.5 million. The Company had no debt at either September 30, 2022 or December 31, 2021.
Cash flow and capital allocation: Nine-month operating cash flow was $15.3 million. Investing activities used $0.1 million, primarily for property and equipment. Financing activities used $7.9 million, including $4.5 million of dividends, $2.9 million of treasury stock purchases and $0.6 million of shares withheld for taxes. The Company repurchased 205,521 shares during the first nine months, including open-market purchases, and had $1.9 million remaining under its repurchase authorization at September 30.
Material changes versus the prior comparable period
- Q3 revenue declined 14% and nine-month revenue declined 10%, primarily because of lower average AUM.
- Asset-based advisory fees declined 13% in Q3 and 2% for the nine-month period; trust fees declined 13% and 11%, respectively.
- No performance-based advisory fees were recognized in the first nine months of 2022, compared with $2.0 million in the prior-year period.
- Expenses increased 4% in Q3 but decreased 2% for the nine-month period. Professional services expense increased substantially, including approximately $0.6 million in Q3 and $1.3 million year to date related to the pending Salient acquisition.
- The prior-year nine-month results included an $8.4 million realized gain from the InvestCloud recapitalization; no comparable gain was recorded in 2022.
- Net loss and negative operating income replaced prior-year profitability. Economic Earnings declined 78% in Q3 and 66% for the nine-month period.
- Cash increased from year-end despite lower profitability, primarily reflecting operating cash generation and investment liquidations.
Outlook, unusual items and risks
Pending acquisition: Westwood expects to acquire Salient Partners’ asset management business in the fourth quarter of 2022, subject to customary closing conditions, including fund shareholder and client approvals. Consideration includes $35.0 million payable at closing and deferred payments of up to $25.0 million over several years, subject to revenue retention and growth targets. Management expects to fund the transaction through cash on hand, operating cash flow and equity.
Management stated that existing cash and short-term investments, together with operating cash flow, should be sufficient for ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could become necessary.
The Company declared a quarterly dividend of $0.15 per share on October 26, 2022, payable January 3, 2023. Management cautions that future distributions may include a return of capital.
Key business risks include market-driven changes in AUM, client redemptions and concentration, fee pressure, investment performance, competition, personnel retention, cybersecurity and information systems, regulation, litigation, execution of strategic initiatives, acquisition-related risks, and the Company’s ability to maintain dividends and fund capital requirements. No material changes were reported to previously disclosed risk factors, no legal proceedings were reported, and management concluded that disclosure controls were effective.
Unusual valuation items included a $0.5 million net unrealized loss on private investments for the first nine months and a $0.6 million unrealized loss related to the Charis investment. No goodwill or intangible-asset impairment was recorded.
Investor verification points
- Confirm the closing status, funding sources and final economics of the Salient acquisition, including any deferred consideration obligations.
- Monitor AUM trends, market performance and net client flows, particularly in LargeCap Value and Income Opportunity strategies.
- Assess whether recurring fee revenue and expense controls can restore operating profitability after the 2022 decline.
- Review the sustainability of dividends and share repurchases given negative GAAP earnings and the planned acquisition cash requirement.
- Evaluate the valuation sensitivity of private investments, especially the Level 3 Charis investment.
- Distinguish recurring operating performance from prior-period gains, performance fees and non-GAAP Economic Earnings adjustments.