Westwood Holdings Group, Inc. — Fiscal 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual Form 10-K, not a quarterly filing; fourth-quarter results are included below where disclosed. Westwood is an investment-management and trust-services holding company with Advisory and Trust segments. Revenue is primarily based on assets under management.
Business Context
- Managed assets under management were $20.8 billion at year-end, up 3% from 2014; average AUM increased 9% to $21.5 billion.
- The company completed its acquisition of Woodway Financial Advisors on April 1, 2015. Woodway added approximately $1.6 billion of AUM and expanded private-wealth and trust operations.
- Westwood launched three mutual funds during 2015, bringing the Westwood Funds family to 15 funds.
- At year-end, the company had 168 full-time employees, compared with 130 at December 31, 2014.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $130.9 million | $113.2 million | +16% |
| Income before taxes | $42.2 million | $42.0 million | Flat |
| Net income | $27.1 million | $27.2 million | -1% |
| Diluted EPS | $3.33 | $3.45 | -3% |
| Economic Earnings | $46.5 million | $41.4 million | +12% |
| Cash dividends declared per share | $2.07 | $1.82 | +14% |
Margins: Pretax margin was 32.2%, compared with 37.1% in 2014. Net margin was approximately 20.7%, compared with approximately 24.1% in 2014. The decline primarily reflected expense growth, including compensation, technology, amortization and acquisition-related costs.
- Asset-based advisory fees increased 12% to $99.3 million.
- Trust fees increased 40% to $28.8 million; Woodway contributed $7.7 million of 2015 revenue.
- Performance-based fees declined to $2.7 million from $3.8 million.
- Employee compensation and benefits increased 20% to $63.6 million, including a $1.0 million non-cash acceleration charge for stock compensation.
- Income-tax expense was $15.1 million, producing a 35.8% effective tax rate versus 35.2% in 2014.
Cash Flow, Liquidity and Capital
- Operating cash flow was $55.2 million, up from $26.5 million in 2014.
- Investing cash flow was negative $25.1 million, primarily reflecting the Woodway acquisition.
- Financing cash flow was negative $22.1 million, primarily due to dividends, tax-related share withholding and treasury-stock purchases.
- Cash and investments totaled $95.1 million at December 31, 2015, including $22.7 million of cash and cash equivalents and $72.3 million of investments.
- Working capital was $72.8 million, compared with $91.6 million in 2014.
- The company had no debt at year-end. Westwood Trust held approximately $8.9 million above its $4.0 million regulatory minimum capital requirement.
Material Changes Versus the Prior Comparable Period
- Woodway increased private-wealth AUM by approximately $1.6 billion and added $7.7 million of revenue, but also increased compensation, amortization, technology, marketing and professional-services costs.
- Total year-end AUM increased by $594 million, consisting primarily of $1.6 billion from the acquisition and $174 million of net inflows, offset by $1.2 billion of market depreciation.
- Institutional AUM declined 6% to $11.8 billion, private-wealth AUM rose 36% to $5.4 billion, and mutual-fund AUM declined 3% to $3.6 billion.
- Fourth-quarter 2015 revenue was $31.6 million, compared with $28.3 million in the fourth quarter of 2014. Fourth-quarter net income was $4.7 million versus $6.0 million.
- Accumulated other comprehensive loss increased to $4.7 million from $1.2 million, primarily because of foreign-currency translation losses.
- The company changed its independent auditor from Grant Thornton LLP to Deloitte & Touche LLP effective October 7, 2015; management reported no disagreements with either auditor.
Outlook, Commentary, Risks and Unusual Items
- Management emphasized growth opportunities in existing strategies, private wealth, mutual funds, international distribution, new investment strategies and potential acquisitions. The filing does not provide specific earnings or revenue guidance.
- Management stated that cash, short-term investments and operating cash flow should be sufficient for ordinary operations, capital needs and Woodway contingent consideration for at least the next twelve months.
- Woodway contingent consideration was estimated at $9.0 million at year-end, with an earn-out capped at $15 million. The liability was classified as a Level 3 fair-value measurement and is payable after the earn-out period.
- 2015 included a $1.0 million non-cash stock-compensation acceleration charge and $807,000 of tax expense related to uncertain tax positions. The company recorded approximately $1.6 million of gross unrecognized tax benefits at year-end.
- Management identified major risks from market declines, investment underperformance, client withdrawals, fee pressure, competition from passive products, dependence on key employees and large clients, regulatory requirements, international and foreign-currency exposure, cybersecurity and systems failures, litigation, and acquisition integration.
- The ten largest clients generated more than 20% of fee revenue in each of 2015, 2014 and 2013.
- AGF litigation in Canada remained in the discovery phase. Claimed damages include unspecified amounts and punitive damages; the company stated that the ultimate financial impact could not be estimated, although it did not currently expect a material impact.
- Management and Deloitte concluded that disclosure controls and internal control over financial reporting were effective at year-end. Woodway, representing $37.6 million of assets and $7.7 million of 2015 revenue, was excluded from the internal-control assessment under applicable SEC guidance for recently acquired businesses.
Most Important Facts for Investors to Verify
- Whether Woodway retains clients and achieves the anticipated revenue, earnings and integration benefits after the earn-out period.
- The sustainability of AUM, especially given 2015 market depreciation, institutional outflows and mutual-fund outflows.
- The effect of elevated compensation, stock-based compensation, technology spending and acquired-intangible amortization on future margins.
- The final Woodway earn-out payment and any related equity dilution; the filing estimates the liability at $9.0 million.
- The status and potential exposure from the AGF litigation and unresolved tax positions.
- The company’s ability to maintain dividends while relying on distributions from regulated subsidiaries, particularly Westwood Trust.
- Exposure to Canadian-dollar movements, global and emerging-market performance, and regulatory requirements affecting international operations.