Westwood Holdings Group, Inc. 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 nine months ended September 30, 2020, compared with the corresponding 2019 periods.
- AUM was $12.0 billion at September 30, 2020, down 20% from $15.0 billion a year earlier.
- The Board approved liquidation of Westwood International Advisors and closure of the Toronto office, effective September 30, 2020. The UCITS Fund was liquidated in June 2020.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $15.5 million | $19.9 million | $48.0 million | $65.5 million |
| Net operating income (loss) | $(4.0) million | $1.5 million | $(5.8) million | $5.6 million |
| Net income (loss) | $(10.3) million | $1.1 million | $(11.8) million | $3.4 million |
| Diluted EPS | $(1.31) | $0.13 | $(1.46) | $0.40 |
| Operating margin | (26.2)% | 7.7% | (12.0)% | 8.6% |
| Net margin | (66.6)% | 5.6% | (24.5)% | 5.1% |
- Q3 revenue declined 22%, while nine-month revenue declined 27%. Asset-based advisory fees fell 33% in Q3 and 34% year to date, primarily because of lower average AUM.
- Trust fees decreased 8% in Q3 and 10% year to date. Performance-based advisory fees increased to $0.7 million in Q3 and $1.4 million year to date.
- Expenses decreased 10% year to date, but expense reductions did not offset the revenue decline. Q3 expenses increased 6% because of a $3.4 million goodwill impairment charge.
- Economic Earnings, a non-GAAP measure, were $(1.7) million in Q3 and $2.7 million for the first nine months, compared with $3.9 million and $12.8 million, respectively, in the prior-year periods.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $15.6 million at September 30, 2020, compared with $49.8 million at December 31, 2019.
- Cash and short-term investments totaled $77.6 million at September 30, 2020, compared with $100.1 million at year-end 2019.
- Operating activities used $7.1 million during the first nine months of 2020, compared with $33.6 million provided in 2019. The 2020 use included $11.9 million of net purchases of current investments and a $3.8 million reduction in compensation liabilities.
- Investing activities used $0.1 million, primarily for property and equipment. Financing activities used $25.8 million, including $13.0 million of treasury stock repurchases, $11.0 million of dividends paid and $1.1 million of shares returned for tax withholding.
- The Company had no debt at September 30, 2020 or December 31, 2019. Working capital was $79.0 million, down from $95.6 million at year-end 2019.
- The Company suspended its dividend in the second quarter of 2020 to preserve capital and financial flexibility during the COVID-19 uncertainty.
- Management stated that current cash and short-term investments plus operating cash flow should be sufficient for ordinary operating and capital requirements for at least the next twelve months, although additional financing could be required.
Material Changes Versus the Prior Comparable Period
- AUM declined by $3.0 billion year over year, driven by net outflows and market depreciation. Nine-month net client outflows were $2.4 billion, while market depreciation was $0.9 billion.
- Institutional AUM declined 28% to $6.0 billion; mutual fund AUM declined 22% to $1.8 billion; wealth management AUM declined 5% to $4.1 billion.
- The Company recorded a $3.4 million impairment of Advisory segment goodwill following a sustained decline in market capitalization, a higher discount rate and revised long-term projections.
- The liquidation of Westwood International Advisors resulted in a $4.2 million cumulative foreign currency translation adjustment reclassified into net loss, $1.1 million of Canadian withholding taxes and approximately $0.9 million of severance, lease impairment and vendor-related costs, partially offset by $1.3 million of restricted stock forfeitures.
- The Company repurchased 679,756 shares for $13.0 million during the first nine months. No shares were repurchased during the third quarter. Approximately $10.0 million remained authorized under the repurchase program at September 30, 2020.
- Total assets declined to $144.4 million from $178.7 million at December 31, 2019, and stockholders’ equity declined to $126.5 million from $148.3 million.
Outlook, Commentary, Risks and Unusual Items
- No specific revenue, earnings or AUM guidance was provided.
- Management continued to monitor COVID-19 effects on global markets, client activity and operations. Employees were encouraged to work remotely, and management stated that cloud-based systems and business-continuity investments supported uninterrupted client service.
- Key risks include further AUM declines, client redemptions, fee pressure, market volatility, COVID-19 effects, revenue concentration, competition, personnel retention, cybersecurity, regulatory requirements and the ability to maintain dividends and fund future capital needs.
- The Company’s Texas state tax audit related to refund claims for 2014–2019 was not expected to have a material financial statement impact.
- Westwood Trust held approximately $11.3 million above its $4.0 million minimum restricted capital requirement at September 30, 2020.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No legal proceedings were reported.
Facts Investors Should Verify
- Whether AUM stabilizes after the closure of the Canadian advisory operation and the liquidation of the UCITS Fund.
- The sustainability of operating cash flow after the 2020 use of cash and the dividend suspension.
- Whether additional goodwill or other investment impairments arise from market conditions or continued AUM declines.
- The timing and terms of any resumption of dividends or additional share repurchases.
- The effect of COVID-19, client outflows, fee compression and concentration among key clients on future revenue.
- The valuation and sensitivity of the $3.2 million Level 3 private equity investment and the Company’s $11.4 million amount at risk in Private Equity.