Westwood(WHG) - 2023 Q4 - Annual Report

PART I Item 1. Business Westwood Holdings Group, Inc. provides investment advisory, trust, and custodial services, with revenue from AUM and AUA - Westwood Holdings Group, Inc. manages investment assets and provides services through its subsidiaries, Westwood Management Corp., Westwood Advisors, L.L.C., Salient Advisors, L.P., and Westwood Trust[15] - Revenues are generally derived from fees based on a percentage of assets under management (AUM) and assets under advisement (AUA)[15] Assets Under Management (AUM) and Assets Under Advisement (AUA) | Metric | Value at Dec 31, 2023 (in billions) | Value at Dec 31, 2022 (in billions) | | :----- | :-------------------- | :-------------------- | | AUM | ~$15.5 billion | ~$14.8 billion | | AUA | ~$1.1 billion | ~$1.3 billion | - In January 2023, Westwood acquired an additional 32% interest in Broadmark Asset Management LLC for $1.2 million, increasing its ownership to approximately 80% and gaining a controlling interest[19] - The company offers five distinct investment capabilities: U.S. Value Equity, Multi-Asset, Energy and Real Assets, Tactical Absolute Return, and Income Alternatives, with four strategies exceeding $1 billion in AUM[25][27] - Westwood Trust provides fiduciary and investment services to high net worth individuals, families, non-profit endowments, foundations, and retirement plans, with fees typically based on AUM[49] - The growth strategy focuses on expanding client relationships, attracting and retaining key employees, growing existing investment strategies, enhancing digital capabilities, fostering wealth management and intermediary distribution, pursuing strategic corporate development, strengthening brand name, and developing/acquiring new investment strategies[64][65][72] - The company operates in a highly competitive and regulated environment, facing competition from larger firms, passive investment strategies, and evolving consumer demands for digital interaction[74][76][78] - As of December 31, 2023, approximately 43% of the workforce was female and 34% represented minorities, reflecting a culture of diversity and inclusion[88][104] - Westwood's ESG focus is guided by six pillars: Environmental impact, Diversity, equity and inclusion, Community, Responsible investing, Privacy and data protection, and Governance[91][97] Item 1A. Risk Factors The company faces significant risks from AUM/AUA fluctuations, competition, regulations, and operations - Revenues are highly dependent on the market value and composition of AUM and AUA, which can fluctuate due to market performance and investment performance[108] - The investment management industry is highly competitive, with many larger competitors offering lower-fee, passive investment strategies, which could adversely affect Westwood's business[108][109][110] - The business is subject to extensive and frequently changing federal, state, and non-U.S. regulations, leading to significant compliance costs and potential sanctions for violations[112][113][114] - Operational risks include the substantial cost and time required to introduce new investment strategies, potential damage to reputation, dependence on key employees, and vulnerability to systems failures and cybersecurity threats[118][121][122][129][131] - A small number of clients account for a substantial portion of fee revenues (approximately 21% in 2023), making the business vulnerable to the loss or reduction of these relationships[142] - Future distributions to common stockholders may include a return of capital, which reduces the asset base and could necessitate future debt or capital infusions[136] Item 1B. Unresolved Staff Comments No unresolved staff comments to report - No unresolved staff comments[157] Item 1C. Cybersecurity Westwood invested significantly in cybersecurity governance, with Board oversight and an Incident Response Team - Westwood has made significant investments in cybersecurity governance, including enhanced control access, firewalls, security systems, employee training, and intrusion monitoring[158] - Periodic vulnerability assessments are conducted based on technology use, vendor relationships, cybercrime methodologies, and in response to incidents[159] - The Board of Directors oversees the cybersecurity programs, and management, including the CEO, CFO, President/COO, Information Security Officer, and Chief Compliance Officer, possesses cybersecurity expertise[164][166] - An Incident Response Team (IRT) is responsible for detecting, analyzing, containing, eradicating, and restoring operations in the event of a cybersecurity breach, with timely notification to the Board and affected parties[167][168][169] Item 2. Properties Westwood operates primarily from leased offices in Dallas and Houston, with limited additional spaces elsewhere - Principal operations are conducted from leased office spaces in Dallas, Texas (38,000 sq ft, lease expires March 2026) and Houston, Texas (11,000 sq ft, lease expires September 2029)[170] - Additional limited office space is leased in San Francisco, California, and Chicago, Illinois[170] Item 3. Legal Proceedings Westwood is subject to various claims and legal proceedings in the ordinary course of business - The company is subject to claims and legal proceedings in the ordinary course of business[172] Item 4. Mine Safety Disclosures This item is not applicable to Westwood Holdings Group, Inc - Not applicable[173] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Westwood's common stock trades on the NYSE, with 190 record holders, and an authorized share repurchase program - Westwood's common stock trades on the New York Stock Exchange under the symbol 'WHG'[176] - As of December 31, 2023, there were approximately 190 record holders of common stock[176] - The Board of Directors has discretion over cash dividends, subject to Delaware General Corporation Law and Texas law for Westwood Trust[177][178] - A share repurchase program authorized up to $35.0 million, with $1.8 million remaining as of December 31, 2023. No shares were repurchased in 2023[179][180] Cumulative Five-Year Total Return (Period ended December 31, 2023) | Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | Cumulative Five Year Total Return (%) | | :---------------------------------------- | :------- | :------- | :------- | :------- | :------- | :------- | :-------------------------------- | | Westwood Holdings Group, Inc. | $100.00 | $95.59 | $47.65 | $62.90 | $43.14 | $51.33 | (48.67)% | | Russell 2000 Index | $100.00 | $125.53 | $150.58 | $172.90 | $137.56 | $160.85 | 60.85 % | | S&P U.S. BMI Asset Management & Custody Banks Index | $100.00 | $125.80 | $145.77 | $215.18 | $161.21 | $211.89 | 111.89 % | Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Westwood's financial condition and operations, covering revenue, expenses, AUM/AUA, and accounting estimates - Westwood's business model involves managing investment assets and providing services through its subsidiaries, with revenues primarily derived from AUM and AUA[190][192] - The company's investment approach is value-oriented, focusing on companies with high free cash flow, improving returns on equity, and strengthening balance sheets[193] - 2023 highlights include the integration of Salient's asset management business, the addition of the Managed Investment Solutions team, acquisition of a controlling interest in Broadmark (80%), and strong performance in several investment strategies[195] 2023 Key Financial Highlights | Metric | 2023 Performance | | :----------------------------------- | :--------------- | | AUM (as of Dec 31, 2023) | $15.5 billion | | Quarterly average AUM (YoY increase) | $15.0 billion (15% increase) | | Total Revenue (YoY increase) | 31% | | Dividends Paid | $5.5 million | | Liquid Cash & Short-Term Investments | $53.1 million | | Debt | None | Forward-Looking Statements This section outlines forward-looking statements, noting actual results may differ due to AUM/AUA, competition, and regulatory risks - Statements in the report that are not purely historical facts are forward-looking and subject to inherent uncertainties, risks, and changes in circumstances[187] - Important factors that could cause actual results to differ include AUM/AUA market value, competitive fee pressures, regulatory changes, cybersecurity, litigation, and the ability to attract and retain qualified personnel[188] Overview Westwood Holdings Group, Inc. is an investment asset manager and service provider, with fee-based revenues from AUM and AUA - Westwood manages investment assets and provides services through Westwood Management (investment advisory) and Westwood Trust (trust and custodial services)[190][191] AUM and AUA at December 31, 2023 | Metric | Value (approx.) (in billions) | | :----- | :-------------- | | AUM | $15.5 billion | | AUA | $1.1 billion | - The company utilizes a 'value' investment style, focusing on companies with high free cash flow, improving returns on equity, and strengthening balance sheets[193] 2023 Highlights In 2023, Westwood integrated Salient, increased Broadmark ownership, saw AUM growth, and maintained a strong financial position - Integrated Salient's asset management business and added the Managed Investment Solutions team[195] - Acquired an additional 32% interest in Broadmark, increasing ownership to approximately 80%[195] 2023 Financial and Operational Highlights | Metric | Value / Change (YoY) | | :----------------------------------- | :------------------- | | AUM (as of Dec 31, 2023) | $15.5 billion (5% increase) | | Quarterly average AUM | $15.0 billion (15% increase) | | Total Revenue | 31% increase | | Dividends Paid | $5.5 million | | Liquid Cash & Short-Term Investments | $53.1 million | | Debt | None | - SMidCap Value, SmallCap Value, MidCap Value, High Alpha, Enhanced Balanced, High Income, Alternative Income, Global Real Estate, and Select Income strategies beat their primary benchmarks[195] Revenue and Expense Components Westwood's revenues are primarily from investment advisory and trust fees, with key expenses including compensation and marketing - Revenues are primarily from investment advisory fees (asset-based and performance-based) and trust fees, with other revenues from seed money investments[195][196][197][198] - Advisory fees are typically calculated as a percentage of AUM/AUA, paid quarterly in advance or arrears, and recognized as services are rendered[196] - Trust fees are negotiated per client, generally based on AUM, calculated quarterly in arrears, and recognized within the quarter[197] - Major expense categories include employee compensation and benefits, sales and marketing, Westwood mutual funds, information technology, professional services, and general and administrative expenses[199][200][201][202][203][204] Firm-wide Assets Under Management (AUM) and Assets Under Advisement (AUA) Westwood's AUM and AUA totaled $16.6 billion at year-end 2023, with AUM increasing due to market appreciation Firm-wide Assets Under Management (AUM) and Assets Under Advisement (AUA) | Metric | Dec 31, 2023 (in billions) | Dec 31, 2022 (in billions) | Dec 31, 2021 (in billions) | | :----- | :------------------------- | :------------------------- | :------------------------- | | AUM | $15.5 | $14.8 | $14.5 | | AUA | $1.1 | $1.3 | $0.3 | | Total | $16.6 | $16.1 | $14.8 | AUM Changes (Year Ended December 31, 2023) | Category | Change (in millions) | | :---------------- | :------------------- | | Beginning AUM | $14,779 | | Inflows | $1,620 | | Outflows | $(2,898) | | Net Client Flows | $(1,278) | | Market Appreciation | $1,958 | | End of Period AUM | $15,459 | AUM Changes (Year Ended December 31, 2022) | Category | Change (in millions) | | :---------------- | :------------------- | | Beginning AUM | $14,503 | | Inflows | $1,543 | | Outflows | $(2,441) | | Net Client Flows | $(898) | | Salient Acquisition | $2,661 | | Market Depreciation | $(1,487) | | End of Period AUM | $14,779 | AUA Changes (Year Ended December 31, 2023) | Category | Change (in millions) | | :------------------------ | :------------------- | | Beginning AUA | $1,255 | | Inflows | $160 | | Outflows | $(400) | | Net Client Flows | $(240) | | Market Appreciation (Depreciation) | $64 | | End of Period AUA | $1,079 | Results of Operations Analysis Westwood's total revenues increased by 31% in 2023, leading to a net income of $10.6 million, a significant improvement Consolidated Statements of Comprehensive Income (Loss) Summary | Metric (in thousands) | 2023 | 2022 | 2021 | | :-------------------- | :---------- | :---------- | :---------- | | Total Revenues | $89,781 | $68,681 | $73,054 | | Total Expenses | $83,776 | $73,554 | $67,095 | | Net Operating Income (Loss) | $6,005 | $(4,873) | $5,959 | | Income (Loss) before Income Taxes | $13,443 | $(5,195) | $14,003 | | Net Income (Loss) | $10,571 | $(4,628) | $9,763 | | Diluted EPS | $1.17 | $(0.59) | $1.23 | - Total revenues increased by $21.1 million (31%) in 2023, primarily due to higher average AUM from the Salient Acquisition, partially offset by a $1.4 million decrease in Trust fees[226] - Total expenses increased by 14% in 2023, driven by higher employee compensation (due to increased headcount from Salient Acquisition), sales and marketing, Westwood mutual funds expenses, information technology costs, and general and administrative expenses (due to intangible asset amortization)[227][228] - A $2.8 million gain was recorded from the remeasurement of contingent consideration related to the Salient Acquisition, and $5.0 million in life insurance proceeds contributed to other income in 2023[229][230] Supplemental Financial Information (Economic Earnings and Economic EPS) Westwood uses non-GAAP Economic Earnings and EPS to evaluate performance, with Economic Earnings increasing by 589% in 2023 - Economic Earnings and Economic EPS are non-GAAP measures used by management and the Board to evaluate performance, allocate resources, and review dividend policy[237] - Economic Earnings are defined as Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. plus non-cash equity-based compensation expense, impairment expense, amortization of intangible assets, currency translation adjustment reclassification, and deferred taxes related to goodwill[238] Economic Earnings and Economic EPS | Metric (in thousands, except per share) | 2023 | 2022 | 2021 | | :-------------------------------------- | :---------- | :---------- | :---------- | | Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | $9,520 | $(4,628) | $9,763 | | Economic Earnings | $18,342 | $2,663 | $15,149 | | Economic Earnings per Share | $2.26 | $0.45 | $2.20 | - For 2023, Economic Earnings increased by 589% to $18.3 million, driven by higher revenues and life insurance proceeds, partially offset by increased expenses from the Salient Acquisition[240] Liquidity and Capital Resources Westwood funds operations through cash flow, with $53.1 million in liquid assets and no debt - Operations are funded by cash generated from operating activities, with no debt as of December 31, 2023 and 2022[243] Liquidity and Capital Resources (in thousands) | Metric | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------------ | :----------- | :----------- | | Cash and cash equivalents | $20,422 | $23,859 | | Accounts receivable | $14,394 | $13,900 | | Total liquid assets | $34,816 | $37,759 | | Investments, at fair value| $32,674 | $15,342 | | Cash and short-term investments | $53,100 | $39,200 | | Working capital | $53,600 | $40,600 | Cash Flow Data (in thousands) | Cash Flow Type | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :---------------------- | :---------- | :---------- | :---------- | | Operating cash flows | $(1,185) | $51,490 | $19,385 | | Investing cash flows | $4,112 | $(33,739) | $9,566 | | Financing cash flows | $(6,364) | $(9,103) | $(26,806) | - The decrease in operating cash flow in 2023 was primarily due to net purchases of investments, contrasting with net sales in 2022 to fund the Salient Acquisition[248] Cash Dividends The Board declared quarterly cash dividends of $0.15 per share in 2023 and 2022, totaling $0.60 per share annually Cash Dividends Declared Per Share | Year | Dividend Per Share | | :--- | :----------------- | | 2023 | $0.60 | | 2022 | $0.60 | - The dividend declared on October 26, 2022, was treated as a return of capital for accounting purposes[252] Contractual Obligations Westwood's purchase commitments total $14.6 million for IT services, software, and research tools - Purchase commitments primarily consist of outsourced information technology services, software licenses, and financial research tools[254] Purchase Commitments (in thousands) as of December 31, 2023 | Period | Amount (in thousands) | | :--------------- | :----------- | | Less than 1 year | $6,519 | | 1-3 years | $5,674 | | 4-5 years | $2,444 | | Thereafter | $0 | | Total | $14,637 | - No material off-balance sheet arrangements exist as of December 31, 2023[254] Critical Accounting Estimates Financial statements require significant estimates for business combinations, contingent consideration, goodwill, and income taxes - Critical accounting estimates include business combinations (allocating purchase price, valuing tangible and intangible assets), contingent consideration (fair value estimation using Monte Carlo simulations), and consolidation assessments[256][258][259] - Goodwill is tested at least annually for impairment at the reporting unit level (Advisory and Trust segments) using qualitative or quantitative assessments[264][265][266] - Accounting for income taxes involves significant judgment in determining the provision, assessing valuation allowances for deferred tax assets, and recognizing uncertain tax positions based on a 'more likely than not' standard[269][270][271][272] Accounting Developments Recent ASUs on Segment Reporting and Income Taxes will impact disclosures but not financial results - ASU 2023-07 (Segment Reporting) requires disclosure of significant segment expenses and other segment items on an annual and interim basis, effective for fiscal years beginning after December 15, 2023[383][385] - ASU 2023-09 (Income Taxes) mandates enhanced income tax rate reconciliation and disaggregated disclosures of income taxes paid, effective for annual periods beginning after December 15, 2024[386] - Both ASUs are expected to impact disclosures but not the company's results of operations, cash flows, or financial condition[385][386] Item 7A. Quantitative and Qualitative Disclosures about Market Risk Westwood's revenues are highly exposed to market risks from AUM/AUA fluctuations, but the company does not use hedging - Revenues are primarily generated from fees based on AUM and AUA, making them subject to market risks from fluctuations in securities markets and interest rates[275][276] - A hypothetical 10% decrease in average AUM and AUA for 2023 would have reduced total revenue by approximately $9 million[276] - The company invests corporate capital in financial instruments, exposing it to interest rate risk, but does not use hedging activities or derivative financial instruments[275][277] Item 8. Financial Statements and Supplementary Data The independent auditor's report and consolidated financial statements are included in Item 15 - The independent registered public accounting firm's report and Consolidated Financial Statements are located in Item 15 of this Report[278] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure to report - No changes in or disagreements with accountants on accounting and financial disclosure[279] Item 9A. Controls and Procedures Disclosure controls were effective as of December 31, 2023, excluding Broadmark, with no material changes - Disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of December 31, 2023, excluding the Broadmark acquisition[280] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2023[282] - Management assessed internal control over financial reporting as effective as of December 31, 2023, based on the COSO 2013 framework, excluding Broadmark Asset Management, LLC[285][286] - Broadmark represented approximately 5% of total revenues and 7% of total assets of the consolidated financial statements as of December 31, 2023[286] Item 9B. Other Information No other information to report under this item - No other information to report[288] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Westwood Holdings Group, Inc - Not applicable[289] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement[291] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2024 Proxy Statement - Information on executive compensation is incorporated by reference from the 2024 Proxy Statement[292] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity compensation plan and security ownership information is incorporated by reference from the 2024 Proxy Statement - Information on security ownership and related stockholder matters is incorporated by reference from the 2024 Proxy Statement[294] Equity Compensation Plan Information (as of December 31, 2023) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :------------------------------------------------ | :-------------------------------------------------------------------------------- | :------------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by security holders | — | $— | 646,000 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[295] Item 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement[296] PART IV Item 15. Exhibits, Financial Statement Schedules Financial statements and exhibits are listed in their respective indices within this report - Financial statements and schedules are listed in the Index to Financial Statements[298] - Exhibits required by Item 15 are listed in the Index to Exhibits[299] SIGNATURES The report is signed by the CEO, CFO, and Board members, affirming their authorization and responsibility - The report is signed by the Chief Executive Officer, Chief Financial Officer and Treasurer, and members of the Board of Directors, duly authorized[302][303][305][306] INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (BDO USA, P.C.) BDO USA, P.C. issued an unqualified opinion on 2023 and 2022 financial statements, identifying contingent consideration valuation as a critical audit matter - BDO USA, P.C. issued an unqualified opinion on the consolidated financial statements for 2023 and 2022[309] - The valuation of contingent consideration liabilities was identified as a critical audit matter due to the complexity of the Monte Carlo simulation model and subjective estimates (revenue growth, volatility, discount rates)[314][315] Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP) Deloitte & Touche LLP issued an unqualified opinion on 2021 financial statements and served as the predecessor auditor - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for the two years ended December 31, 2021[319] - Deloitte & Touche LLP served as the company's auditor from 2015 and became the predecessor auditor in 2022[323] Consolidated Balance Sheets Westwood's total assets increased to $155.2 million in 2023, liabilities decreased, and total equity rose to $122.4 million Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :---------------------------- | :----------- | :----------- | | ASSETS | | | | Cash and cash equivalents | $20,422 | $23,859 | | Investments, at fair value | $32,674 | $15,342 | | Goodwill | $39,501 | $35,732 | | Total assets | $155,167 | $146,427 | | LIABILITIES | | | | Contingent consideration | $10,133 | $12,901 | | Total liabilities | $32,721 | $35,779 | | STOCKHOLDERS' EQUITY | | | | Total Westwood Holdings Group, Inc. stockholders' equity | $120,401 | $110,648 | | Noncontrolling interest | $2,045 | $— | | Total equity | $122,446 | $110,648 | - Total assets increased by $8.7 million (5.9%) from 2022 to 2023, primarily due to an increase in investments at fair value and goodwill[326] - Total liabilities decreased by $3.1 million (8.5%) from 2022 to 2023, mainly driven by a reduction in contingent consideration[326] - Total equity increased by $11.8 million (10.7%) from 2022 to 2023, reflecting higher retained earnings and the inclusion of noncontrolling interest[326] Consolidated Statements of Comprehensive Income (Loss) Total revenues increased by 31% in 2023, leading to a net income of $10.6 million, a significant improvement Consolidated Statements of Comprehensive Income (Loss) Summary (in thousands, except per share data) | Metric | 2023 (in thousands, except per share data) | 2022 (in thousands, except per share data) | 2021 (in thousands, except per share data) | | :---------------------------- | :---------- | :---------- | :---------- | | Total revenues | $89,781 | $68,681 | $73,054 | | Total expenses | $83,776 | $73,554 | $67,095 | | Net operating income (loss) | $6,005 | $(4,873) | $5,959 | | Income (loss) before income taxes | $13,443 | $(5,195) | $14,003 | | Net income (loss) | $10,571 | $(4,628) | $9,763 | | Diluted EPS | $1.17 | $(0.59) | $1.23 | - Total revenues increased by 31% in 2023, while total expenses increased by 14%[328] - Net income in 2023 was $10.6 million, a significant turnaround from a net loss of $4.6 million in 2022[328] Consolidated Statements of Stockholders' Equity Total equity increased to $122.4 million in 2023, driven by net income and stock-based compensation Consolidated Statements of Stockholders' Equity Summary (in thousands) | Account | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :---------------------------------------- | :----------- | :----------- | :----------- | | Total Westwood Holdings Group, Inc. stockholders' equity | $120,401 | $110,648 | $117,906 | | Noncontrolling interest in consolidated subsidiary | $2,045 | $— | $— | | Total equity | $122,446 | $110,648 | $117,906 | - Total equity increased by $11.8 million in 2023, driven by net income and stock-based compensation expense, partially offset by dividends and tax-related stock returns[330] - The acquisition of a noncontrolling interest added $994 thousand to equity in 2023[330] Consolidated Statements of Cash Flows Operating cash flow shifted to a $1.2 million use in 2023, with investing providing $4.1 million and financing using $6.4 million Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Type | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------ | :---------- | :---------- | :---------- | | Net cash provided by (used in) operating activities | $(1,185) | $51,490 | $19,385 | | Net cash provided by (used in) investing activities | $4,112 | $(33,739) | $9,566 | | Net cash used in financing activities | $(6,364) | $(9,103) | $(26,806) | | Net increase (decrease) in cash and cash equivalents | $(3,437) | $8,653 | $2,190 | | Cash and cash equivalents, end of year | $20,422 | $23,859 | $15,206 | - Operating cash flows shifted from a $51.5 million provision in 2022 to a $1.2 million use in 2023, mainly due to net purchases of investments[248][333] - Investing cash flows provided $4.1 million in 2023, primarily from life insurance proceeds, while financing activities used $6.4 million, largely for cash dividends[249][250][333] Notes to Consolidated Financial Statements The Notes provide detailed disclosures supporting the financial statements, covering business, policies, combinations, and more Note 1. DESCRIPTION OF THE BUSINESS Westwood manages investment assets and provides services, with revenue dependent on AUM, and completed Broadmark and Salient acquisitions - Westwood Holdings Group, Inc. manages investment assets and provides services through Westwood Management and Westwood Trust[335] - Revenue is largely dependent on the total value and composition of assets under management (AUM)[336] - In January 2023, Westwood acquired an additional 32% interest in Broadmark Asset Management LLC for $1.2 million, increasing its ownership to approximately 80% and gaining a controlling interest[338] - On November 18, 2022, Westwood completed the acquisition of Salient Partners' asset management business, expanding into energy infrastructure, tactical absolute return, real estate, and private investments[339][340] Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines Westwood's significant accounting policies, including consolidation, investments, revenue, and recent ASUs - Consolidated financial statements include Westwood and its subsidiaries, with intercompany accounts eliminated[342] - The company assesses each legal entity for consolidation as a Variable Interest Entity (VIE) or Voting Ownership Entity (VOE) based on controlling financial interest[343][347] - Investments are classified as trading securities at fair market value, or at cost minus impairment for those without readily determinable fair value[354][357] - Goodwill is tested at least annually for impairment at the reporting unit level (Advisory and Trust segments)[360][361] - Revenue is recognized when performance obligations (investment management/advisory or trust services) are satisfied, typically over the calendar quarter[367] - Stock-based compensation expense is recognized over the service period for restricted stock awards, measured at grant date fair value[370] - Income taxes are accounted for under ASC 740, requiring recognition of current and deferred tax assets/liabilities, with significant judgment in assessing valuation allowances and uncertain tax positions[371][372][373] - Business combinations involve allocating purchase price to acquired assets and liabilities at fair value, with contingent consideration estimated using Monte Carlo simulation models[378][380] - Recent accounting pronouncements, ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), are expected to impact disclosures but not financial results[383][386] Note 3. BUSINESS COMBINATIONS This note details the Broadmark and Salient acquisitions, including purchase price allocation, goodwill, and intangible assets - In January 2023, Westwood acquired an additional 32% interest in Broadmark for $1.2 million (net of cash acquired), increasing ownership to 80% and requiring consolidation[387] Broadmark Acquisition Purchase Price Allocation (in thousands) | Category | Amount (in thousands) | | :-------------------------------------------- | :---------- | | Total consideration, net of cash acquired | $1,168 | | Fair value of Westwood's investment in Broadmark before business combination | $2,417 | | Fair value of noncontrolling interest in Broadmark | $994 | | Total Identifiable Net Assets | $382 | | Goodwill | $4,197 | - Broadmark contributed $4.4 million in revenue and $4.1 million in net income to Westwood's consolidated statements for 2023[392] - The Salient Acquisition, completed November 18, 2022, involved $33.4 million in cash and $12.9 million in estimated contingent consideration, totaling $46.3 million[395] Salient Acquisition Purchase Price Allocation (in thousands) | Category | Amount (in thousands) | | :-------------------------------------------- | :---------- | | Total consideration, net of cash acquired | $46,320 | | Total Identifiable Net Assets | $26,989 | | Goodwill | $19,331 | - Salient Acquisition resulted in $18.9 million in identifiable intangible assets (client relationships, trade names, non-compete agreements) with weighted average amortization periods[400] Note 4. REVENUE Westwood recognizes revenue from investment advisory and trust services, disaggregated by account type and geographical location - Revenue is recognized when the performance obligation for investment management, advisory, or trust services is satisfied[367][408] - Advisory fees are typically calculated as a percentage of AUM/AUA, with performance-based fees recognized at the end of the measurement period[408][411][412] - Trust fees are generally based on a percentage of AUM, calculated quarterly in arrears[413] Revenue Disaggregated by Account Type (in thousands) | Account Type | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :---------------- | :---------- | :---------- | :---------- | | Institutional | $37,738 | $26,653 | $31,069 | | Mutual Funds | $29,745 | $20,245 | $17,507 | | Wealth Management | $1,172 | $805 | $686 | | Trust Fees | $20,592 | $21,686 | $24,131 | | Other | $534 | $(708) | $(339) | | Total revenues| $89,781 | $68,681 | $73,054 | Revenue Disaggregated by Geographical Location (in thousands) | Region | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :----- | :---------- | :---------- | :---------- | | U.S. | $88,676 | $67,510 | $70,991 | | Canada | $1,105 | $1,171 | $1,163 | | Europe | $— | $— | $900 | | Total | $89,781 | $68,681 | $73,054 | Note 5. SEGMENT REPORTING Westwood operates two segments, Advisory and Trust, with performance evaluated by the CEO primarily on fee revenues - Westwood operates two reportable segments: Advisory and Trust, managed based on product/service types and client bases[417] - The Chief Executive Officer evaluates segment performance primarily on fee revenues[417] - The Advisory segment includes Westwood Management and Salient, providing investment advisory services[419] - The Trust segment comprises Westwood Trust, offering trust and custodial services[420][422] Segment Financial Information (in thousands) | Metric (2023) | Advisory (in thousands) | Trust (in thousands) | Westwood Holdings (in thousands) | Eliminations (in thousands) | Consolidated (in thousands) | | :------------------------ | :---------- | :---------- | :---------------- | :----------- | :----------- | | Total revenues | $75,460 | $20,870 | $— | $(6,549) | $89,781 | | Net income (loss) | $14,636 | $1,776 | $(5,841) | $— | $10,571 | | Segment assets | $285,179 | $46,754 | $14,256 | $(191,022) | $155,167 | | Segment goodwill | $23,100 | $16,401 | $— | $— | $39,501 | - All property and equipment were located in the United States as of December 31, 2023 and 2022[424] Note 6. INVESTMENTS Westwood's investments include strategic stakes, equity method investments, and trading securities at fair value - Strategic investments include InvestCloud ($4.4 million) and Vista ($2.8 million), measured at cost minus impairment[426][428][429] - The investment in Charis was exchanged for Vista shares on April 3, 2023[430] - Investments in Zarvona Energy Fund GP, L.P. and Zarvona Energy Fund II-A, L.P. are accounted for under the equity method[432] - Broadmark Asset Management LLC, previously an equity method investment, became a consolidated subsidiary in January 2023[433] Investments Carried at Fair Value (in thousands) as of December 31, 2023 | Investment Type | Cost (in thousands) | Gross Unrealized Gains (in thousands) | Gross Unrealized Losses (in thousands) | Estimated Fair Value (in thousands) | | :------------------------ | :---------- | :--------------------- | :---------------------- | :------------------- | | U.S. Government securities| $22,522 | $14 | $(75) | $22,461 | | Money market funds | $5,367 | $111 | $— | $5,478 | | Equity funds | $4,295 | $195 | $(260) | $4,230 | | Equities | $381 | $— | $(24) | $357 | | Exchange-traded bond funds| $152 | $— | $(4) | $148 | | Total trading securities | $32,717 | $320 | $(363) | $32,674 | | Private investment fund | $265 | $7 | $(31) | $241 | | Total investments carried at fair value | $32,982 | $327 | $(394) | $32,915 | Equity Method Investments (in thousands) as of December 31, 2023 | Investment Type | Carrying value (in thousands) | Ownership | | :---------------------------- | :------------- | :-------- | | Zarvona Energy Fund GP, L.P. | $3,565 | 50.0 % | | Zarvona Energy Fund II-A, L.P.| $700 | 0.5 % | | Salient MLP Total Return Fund, L.P. | $11 | — % | | Salient MLP Total Return TE Fund, L.P. | $8 | 0.2 % | | Total | $4,284 | | Note 7. FAIR VALUE MEASUREMENTS This note details fair value measurements, including Level 3 contingent consideration valued using Monte Carlo simulations - Fair value measurements are categorized into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[437] - Investments in InvestCloud and Vista are measured at cost minus impairment, not included in recurring fair value tables[437] Assets and Liabilities Measured at Fair Value (in thousands) as of December 31, 2023 | Category | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | NAV (in thousands) | Total (in thousands) | | :-------------------------------------- | :---------- | :------ | :------ | :---- | :---------- | | Investments in trading securities | $32,674 | $— | $— | $— | $32,674 | | Private investment fund | $— | $— | $— | $241 | $241 | | Total assets measured at fair value | $32,674 | $— | $— | $241 | $32,915 | | Salient Acquisition contingent consideration | $— | $— | $10,133 | $— | $10,133 | | Total liabilities measured at fair value | $— | $— | $10,133 | $— | $10,133 | - Contingent consideration liabilities (Level 3) were valued at $10.1 million as of December 31, 2023, using Monte Carlo simulation models based on updated revenue growth projections and financial inputs[440] Range of Unobservable Inputs for Level 3 Contingent Consideration (December 31, 2023) | Earn-out | Unobservable Input | Low (%) | High (%) | Weighted Average Rate (%) | | :------------------------ | :----------------- | :---- | :---- | :-------------------- | | Revenue Retention earn-out| Discount rate | 11.5% | 12.0% | 11.75% | | | Volatility | 8.3% | 16.3% | 11.30% | | Growth earn-out | Discount rate | 12.8% | 13.3% | 13.00% | | | Volatility | 14.9% | 24.9% | 19.90% | Note 8. EMPLOYEE BENEFITS Westwood's employee benefits include restricted stock awards, mutual fund incentives, and a defined contribution plan - Westwood grants restricted stock to employees and non-employee directors under the Ninth Amended and Restated Stock Incentive Plan, with shares vesting based on service or performance conditions[444] Stock-Based Compensation Expense (in thousands) | Expense Type | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :-------------------------------- | :----- | :----- | :----- | | Service condition restricted stock expense | $6,479 | $5,729 | $5,253 | | Performance-based restricted stock expense | $39 | $272 | $581 | | Total stock-based compensation expense | $6,518 | $6,001 | $5,834 | - As of December 31, 2023, there was approximately $9.4 million of unrecognized compensation cost for restricted stock, expected to be recognized over a weighted-average period of 2.4 years[447] - Mutual fund incentive awards are annual bonus awards based on mutual fund performance, vesting after approximately two years of service[454][457] - The company offers a defined contribution and profit-sharing plan, including a 401(k) match of up to 6% of eligible compensation[458] Note 9. INCOME TAXES Westwood's 2023 income tax provision was $2.9 million, with an effective rate of 23.2%, and net deferred tax assets of $0.7 million Income (Loss) Before Income Taxes by Jurisdiction (in thousands) | Jurisdiction | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :----------- | :---------- | :---------- | :---------- | | U.S. | $12,419 | $(5,112) | $13,989 | | Canada | $(27) | $(83) | $14 | | Total | $12,392 | $(5,195) | $14,003 | Effective Income Tax Rate Reconciliation (in thousands) | Item | 2023 Amount (in thousands) | 2023 Rate (%) | 2022 Amount (in thousands) | 2022 Rate (%) | 2021 Amount (in thousands) | 2021 Rate (%) | | :---------------------------------------- | :---------- | :-------- | :---------- | :-------- | :---------- | :-------- | | Income tax provision computed at US federal statutory rate | $2,603 | 21.0 % | $(1,091) | 21.0 % | $2,935 | 21.0 % | | State and local income taxes, net of federal income taxes | $349 | 2.8 | $128 | (2.5) | $372 | 2.7 | | Stock-based compensation | $452 | 3.6 | $319 | (6.1) | $859 | 6.1 | | Other, net | $(532) | (4.2) | $(10) | 0.2 | $(106) | (0.8) | | Total income tax expense | $2,872 | 23.2 % | $(567) | 10.9 % | $4,240 | 30.3 % | | Effective income tax rate | | 23.2 % | | 10.9 % | | 30.3 % | Net Deferred Tax Assets (in thousands) | Category | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------------ | :----------- | :----------- | | Total deferred tax assets | $5,004 | $5,096 | | Total deferred tax liabilities | $(4,278) | $(3,334) | | Net deferred tax assets | $726 | $1,762 | - The company's 2020, 2021, and 2022 tax years are open for examination by the IRS, and the gross liability for uncertain tax positions was de minimis at December 31, 2023[467][468] Note 10. EARNINGS (LOSS) PER SHARE This note details basic and diluted EPS computation, with diluted EPS at $1.17 in 2023, reflecting profitability - Basic EPS is computed by dividing comprehensive income (loss) attributable to Westwood Holdings Group, Inc. by the weighted average number of shares outstanding[469] - Diluted EPS includes the effect of dilutive restricted stock using the treasury stock method[469] Earnings (Loss) Per Share (in thousands, except per share and share amounts) | Metric | 2023 (in thousands, except per share and share amounts) | 2022 (in thousands, except per share and share amounts) | 2021 (in thousands, except per share and share amounts) | | :------------------------------------------ | :---------- | :---------- | :---------- | | Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | $9,520 | $(4,628) | $9,763 | | Weighted average shares outstanding – basic | 7,964,423 | 7,844,363 | 7,875,395 | | Dilutive potential shares from unvested restricted shares | 147,716 | — | 52,577 | | Weighted average shares outstanding – diluted | 8,112,139 | 7,844,363 | 7,927,972 | | Earnings (loss) per share: Basic | $1.20 | $(0.59) | $1.24 | | Earnings (loss) per share: Diluted | $1.17 | $(0.59) | $1.23 | Note 11. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill increased to $39.5 million in 2023 due to the Broadmark Acquisition, with no impairment losses - Goodwill represents the excess of acquired asset cost over the fair value of assumed liabilities[472] Goodwill by Segment (in thousands) | Segment | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------ | :----------- | :----------- | :----------- | | Trust Segment | $16,401 | $16,401 | $16,401 | | Advisory Segment | $23,100 | $19,331 | $— | | Total | $39,501 | $35,732 | $16,401 | - Goodwill is tested at least annually for impairment; no impairment losses were recorded in 2021, 2022, or 2023[472] Other Intangible Assets, Net (in thousands) as of December 31, 2023 | Intangible Asset | Weighted Average Amortization Period (years) | Gross Carrying Amount (in thousands) | Accumulated Amortization (in thousands) | Net Carrying Amount (in thousands) | | :-------------------------- | :------------------------------------------- | :-------------------- | :----------------------- | :------------------ | | Client relationships | 15.0 | $34,397 | $(12,906) | $21,491 | | Internally developed software | 5.8 | $1,439 | $(1,258) | $181 | | Trade name | 3.0 | $3,800 | $(1,372) | $2,428 | | Non-compete agreements | 3.0 | $1,100 | $(397) | $703 | | Total | | $40,736 | $(15,933) | $24,803 | - Amortization expense for intangible assets was $4.1 million in 2023, $1.9 million in 2022, and $1.6 million in 2021[474] Note 12. LEASES Westwood holds operating leases for offices and equipment, with total lease liabilities of $4.6 million at year-end 2023 - Westwood has operating leases for corporate offices (terms 1-6 years) and office equipment[476] - The Houston office lease was extended through September 2029 in 2022, and new office space was leased in Chicago in 2023[477] Lease Costs and Sublease Income (in thousands) | Item | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :-------------- | :----- | :----- | :----- | | Operating lease costs | $1,512 | $1,682 | $1,655 | | Sublease income | $862 | $771 | $602 | Operating Lease Information (in thousands, except years and rates) as of December 31, 2023 | Metric | Amount (in thousands) | | :-------------------------------------- | :---------- | | Operating lease right-of-use assets | $3,673 | | Operating lease liabilities | $1,286 | | Non-current lease liabilities | $3,266 | | Total lease liabilities | $4,552 | | Weighted-average remaining lease term (in years) | 3.3 | | Weighted-average discount rate | 5.7 % | Note 13. BALANCE SHEET COMPONENTS Net property and equipment totaled $1.4 million at December 31, 2023, including leasehold improvements and computer hardware Property and Equipment, Net (in thousands) | Category | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------------------ | :----------- | :----------- | | Leasehold improvements | $5,173 | $4,921 | | Furniture and fixtures | $2,792 | $2,786 | | Computer hardware and office equipment | $3,557 | $3,317 | | Accumulated depreciation | $(10,078) | $(9,196) | | Property and equipment, net | $1,444 | $1,828 | Note 14. COMMITMENTS AND CONTINGENCIES Westwood's purchase commitments total $14.6 million for IT services, software, and research tools - Purchase commitments primarily consist of outsourced information technology services, software licenses, and financial research tools[482] Purchase Commitments (in thousands) as of December 31, 2023 | Period | Amount (in thousands) | | :--------------- | :----------- | | Total | $14,637 | | Less than 1 year | $6,519 | | 1-3 years | $5,674 | | 4-5 years | $2,444 | | Thereafter | $— | - No material off-balance sheet arrangements exist as of December 31, 2023[482] Note 15. REGULATORY CAPITAL REQUIREMENTS Westwood Trust exceeded its $4.0 million minimum restricted capital, and SCLP exceeded its net capital requirement - Westwood Trust must maintain a minimum restricted capital of $4.0 million, exceeding it by approximately $11.1 million at December 31, 2023[483] - Westwood Trust's dividend payments are limited by Texas law to undivided profits[484] - SCLP, a b