Westwood Holdings Group, Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2019, compared with the corresponding 2018 periods. Westwood provides investment advisory, trust and custodial services; revenue is primarily based on assets under management (AUM).
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $21.7 million | $32.8 million | $45.6 million | $66.3 million |
| Net operating income | $2.6 million | $10.9 million | $4.1 million | $20.9 million |
| Net income | $1.9 million | $8.0 million | $2.3 million | $16.0 million |
| Diluted EPS | $0.22 | $0.94 | $0.27 | $1.87 |
| Operating margin | 11.9% | 33.4% | 8.9% | 31.5% |
| Net margin | 8.6% | 24.4% | 4.9% | 24.1% |
| Economic Earnings | $4.8 million | $12.2 million | $8.9 million | $24.9 million |
- Revenue mix: Q2 asset-based advisory fees were $14.7 million, performance-based fees were $0.1 million, trust fees were $6.4 million and other revenue was $0.5 million. Year-to-date amounts were $31.1 million, $0.3 million, $13.0 million and $1.2 million, respectively.
- Cash flow: Operating cash flow was $21.1 million for the first six months, versus $8.4 million in 2018. The 2019 amount included $18.8 million from liquidation of current investments and was partly offset by a $10.4 million reduction in compensation and benefits payables.
- Investing and financing: Investing activities used $0.7 million, while financing activities used $18.0 million, including $13.9 million of dividends, $2.4 million of restricted-stock tax withholding and $0.8 million of treasury-stock purchases.
- Liquidity and debt: Cash and cash equivalents were $56.3 million and investments totaled $53.3 million at June 30, 2019. The company reported no debt. Working capital was $105.1 million. Management stated that cash and short-term investments plus operating cash flow should fund ordinary operating and capital needs for at least the next twelve months.
- Capital and dividends: Stockholders’ equity was $154.0 million. The company declared a $0.72 per-share quarterly dividend in July 2019, payable October 1, 2019.
Material Changes Versus Prior Comparable Period
- Total revenue declined 34% in Q2 and 31% year to date, primarily because of lower average AUM. Asset-based advisory fees declined 37% in Q2 and 35% year to date.
- Q2 performance-based fees fell 93% to $0.1 million; year-to-date performance-based fees fell 90% to $0.3 million.
- AUM was $15.4 billion at June 30, 2019, down 29% from $21.6 billion at June 30, 2018. The decline reflected $3.3 billion of year-to-date net outflows, partly offset by $2.0 billion of market appreciation.
- Institutional AUM declined 33% to $8.4 billion, mutual fund AUM declined 38% to $2.6 billion and wealth management AUM declined 11% to $4.4 billion.
- Employee compensation and benefits decreased 22% in Q2 and 20% year to date, reflecting lower incentive compensation and the effect of the Omaha wealth-management divestiture.
- Foreign-currency losses were $0.7 million in Q2 and $1.5 million year to date, compared with foreign-currency gains in the 2018 periods, primarily due to declines in the Canadian dollar.
- The year-to-date effective tax rate increased to 45.7% from 25.5%, including a $0.6 million discrete tax expense related to the tax treatment of restricted stock compensation.
- The 2018 year-to-date results included a $0.5 million gain and $10.0 million of cash proceeds from the sale of the Omaha-based wealth-management operation; no comparable gain was recorded in 2019.
- Westwood adopted the lease accounting standard on January 1, 2019, recording operating lease right-of-use assets of $8.7 million and lease liabilities at December 31, 2018. The filing states that the adoption did not materially affect reported results.
Outlook, Risks and Unusual Items
The filing provides no formal revenue, earnings or AUM guidance. Management stated that future liquidity needs will depend on operating results, capital expenditures, strategic initiatives and dividend policy. Results remain highly sensitive to financial-market performance, client flows and the composition and value of AUM.
- Key risks include continued net outflows, fee pressure, competition, market volatility, customer concentration, foreign exposure, personnel retention, cybersecurity, operational and information-system failures, third-party vendor risks, litigation, conflicts of interest and regulatory changes.
- The company has approximately $31 million of undistributed income at Westwood International that would incur a 5% Canadian withholding tax if repatriated; management currently intends to keep those funds outside the United States.
- Westwood Trust is required to maintain $4.0 million of restricted capital and had approximately $19.8 million above that minimum at June 30, 2019.
- The company reported no legal proceedings and no significant changes in market-risk disclosures from its 2018 Form 10-K.
- Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether net client outflows, particularly in Institutional and Mutual Fund strategies, continue or stabilize.
- Reconcile future revenue performance to AUM levels, market appreciation and fee rates, including the limited contribution from performance-based fees.
- Assess the sustainability of operating cash flow, given the significant 2019 contribution from liquidating investments and changes in working capital.
- Monitor the elevated year-to-date effective tax rate and the impact of compensation-related permanent differences.
- Review dividend and share-repurchase capacity against cash balances, restricted capital requirements, lease obligations and strategic investment needs.