Westwood Holdings Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Westwood manages investment assets and provides investment advisory, trust, and custodial services through its subsidiaries. Revenue is primarily based on assets under management (AUM). This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
AUM was $14.4 billion at June 30, 2021, up 21% from $11.9 billion a year earlier. The increase reflected market appreciation, partly offset by net client outflows. The company closed Westwood International Advisors in September 2020 and exited its stand-alone Global Convertibles business; two related mandates totaling approximately $1.6 billion returned to Aviva Investors on April 1, 2021.
Financial Highlights
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $17.5 million | $15.9 million | $35.8 million | $32.5 million |
| Net operating income (loss) | $0.8 million | $(2.1) million | $1.5 million | $(1.7) million |
| Net income (loss) | $1.0 million | $(2.6) million | $5.1 million | $(1.5) million |
| Diluted EPS | $0.12 | $(0.33) | $0.64 | $(0.18) |
| Operating margin | 4.5% | (13.4%) | 4.3% | (5.3%) |
| Net margin | 5.5% | (16.2%) | 14.2% | (4.5%) |
Asset-based advisory fees increased 22% in the quarter and 7% year to date, while trust fees increased 10% and 6%, respectively. Six-month results included $1.96 million of performance-based advisory fees versus $0.70 million in the prior-year period. Quarterly performance-based fees were zero versus $0.70 million in Q2 2020.
Total expenses were $16.7 million in Q2 2021, down 7% year over year, and $34.3 million for the six-month period, essentially unchanged from 2020. Employee compensation declined due primarily to lower headcount and stock-based compensation, while professional services expense increased due primarily to legal costs.
Cash flow from operating activities was an outflow of $1.2 million for the first six months of 2021, compared with an inflow of $21.8 million in 2020. The change primarily reflected net purchases of current investments and working-capital timing. Investing activities provided $9.7 million, principally from investment sales. Financing activities used $4.2 million for dividends, share repurchases, and restricted stock tax withholding.
Cash and cash equivalents were $17.2 million at June 30, 2021, compared with $13.0 million at December 31, 2020. Cash and short-term investments totaled $92.3 million, and working capital was $92.8 million. The company had no debt. Westwood Trust held approximately $17.6 million above its $4.0 million minimum restricted-capital requirement.
Material Changes Versus the Prior Comparable Period
- Revenue increased 10% in both the quarter and six-month period, supported by higher AUM and asset-based fees.
- The company returned to operating and net profitability, compared with losses in the 2020 periods.
- Six-month net income included an approximately $8.3 million realized gain from the redemption of the company’s original InvestCloud investment. Westwood reinvested approximately $4.4 million in newly issued InvestCloud shares.
- Six-month net income also reflected a $2.1 million net decrease in unrealized appreciation on private investments, compared with a $0.8 million decrease in 2020.
- AUM rose 21% year over year, but Q2 2021 experienced $0.7 billion of net outflows, largely from the Global Convertibles mandate exits, partially offset by $0.6 billion of market appreciation.
- The company repurchased 111,357 shares for $1.7 million during the first six months, compared with 679,756 shares for $13.0 million in the prior-year period.
- Quarterly and year-to-date dividends of $0.10 and $0.20 per share, respectively, were declared in 2021 after the dividend had been suspended in Q2 2020.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that current 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. No formal earnings or revenue guidance was provided.
SmallCap Value approached capacity in 2021 and was closed to new institutional separate accounts and platforms, while remaining open to existing-client additions. Management continues to monitor COVID-19 effects, financial markets, and remote-work operations.
Key risks include AUM and market-value fluctuations, client redemptions and concentration, competitive fee pressure, regulatory changes, cybersecurity and information-system risks, dependence on key personnel and subsidiaries, litigation, operational and vendor risks, and the ability to maintain dividends and fund future capital needs. The company also adopted a stockholder rights agreement in May 2021 and disclosed risks related to activist stockholders and potential takeover deterrence.
On July 27, 2021, the board declared a regular quarterly dividend of $0.10 per share payable October 1, 2021, and a special dividend of $2.50 per share payable August 20, 2021. Management reported no legal proceedings and no material changes to internal controls; disclosure controls were effective as of June 30, 2021.
Important Facts for Investors to Verify
- Whether AUM growth can continue despite recent institutional net outflows and the loss of the Global Convertibles mandates.
- The sustainability of profitability excluding the approximately $8.3 million InvestCloud realized gain and other investment-related valuation changes.
- The effect of the $2.50 per-share special dividend on liquidity, capital allocation, and future dividend capacity.
- Current authorization and remaining capacity under the share repurchase program; the filing reports approximately $8.3 million remaining after Q2 purchases.
- The valuation and concentration risks associated with private investments, including InvestCloud and Charis.
- The impact of regulatory developments, including the proposed Department of Labor fiduciary-rule rewrite.