Westwood(WHG) - 2020 Q4 - Annual Report

Part I Business Westwood Holdings Group, Inc. is an investment management firm with $13.0 billion AUM as of December 31, 2020, providing services via Advisory and Trust segments - Westwood operates through its main subsidiaries: Westwood Management (registered investment adviser) and Westwood Trust (state-chartered trust company)[12] Total Assets Under Management (AUM) | Metric | Value | | :--- | :--- | | Total Assets Under Management (AUM) | ~$13.0 billion | | Date | December 31, 2020 | - In 2020, the company liquidated its wholly owned subsidiary, Westwood International Advisors, which previously provided investment advisory services[13] - The company's ten largest clients accounted for approximately 24% of fee revenues for the year ended December 31, 2020[26] Advisory Business The Advisory business, operated by Westwood Management, serves institutional and high net worth clients with U.S. Value Equity and Multi-Asset strategies - The advisory business is structured around two primary investment teams: U.S. Value Equity and Multi-Asset[17] - Key investment strategies include LargeCap Value, SMidCap, SmallCap Value, AllCap Value, Income Opportunity, Alternative Income, and Total Return[20][21][23] Fund Family AUM (as of Dec 31, 2020) | Fund Family | AUM (as of Dec 31, 2020) | | :--- | :--- | | Westwood Funds® | $2.1 billion | Trust Business Westwood Trust offers fiduciary and investment services to high net worth clients and institutions, featuring Enhanced Balanced® and Select Equity portfolios - Westwood Trust serves high net worth individuals and families, non-profits, and retirement plans, generally requiring at least $1 million in investable assets[29] - The Trust business offers specialized portfolios such as Enhanced Balanced® for asset diversification and Select Equity for tax-efficient equity exposure[35][36] Growth Strategy The company's growth strategy focuses on expanding client relationships, enhancing digital capabilities, attracting key talent, and pursuing strategic acquisitions - Key growth drivers include: - Growing the investment management platform through new and existing client relationships. - Attracting and retaining key employees. - Expanding assets in existing investment strategies. - Enhancing digital capabilities and client portals. - Fostering growth in the wealth management and intermediary channels. - Pursuing strategic corporate development opportunities, including acquisitions. - Expanding international sales efforts, with non-U.S. clients representing 12% of AUM at year-end 2020[42][43][49] Competition and Regulation Westwood faces intense competition from larger firms and passive strategies, operating under extensive federal and state regulations including SEC and Texas Department of Banking oversight - The company faces intense competition from larger firms and the increasing popularity of low-fee, passive investment strategies, which challenges its active management model[53][55] - The business is heavily regulated by the SEC under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. Westwood Trust is regulated by the Texas Department of Banking[57][58][61] - The company is also subject to ERISA regulations as a fiduciary for some client retirement plans[64] Risk Factors The company faces material risks from AUM fluctuations, intense competition, extensive regulations, litigation, operational challenges, and cybersecurity threats Industry and Business Risks Revenues are highly dependent on AUM and market performance, facing significant competition from lower-fee passive strategies and risks related to key employee retention - Revenues are primarily based on AUM, which is vulnerable to market performance and the firm's investment performance. Poor performance can lead to loss of client accounts[71] - The company faces significant competition from firms with lower-fee, passive investment strategies, which have been gaining market share from active managers[72][73] - The success of the business depends on attracting and retaining key professional employees; their departure could cause the loss of client accounts and revenue[84][85] Legal, Regulatory, and Technology Risks The business operates in a highly regulated environment, exposed to litigation risks and vulnerable to cybersecurity attacks and IT system failures - The business is subject to extensive regulation (e.g., Investment Advisers Act, Dodd-Frank Act), and non-compliance can result in significant penalties and reputational harm[75][76] - Cybersecurity is a major risk, as the business depends on IT systems. A breach could materially interrupt operations and lead to regulatory action and legal liability[91] - The company is exposed to litigation risk, which has increased in the asset management industry. Poor investment performance increases the likelihood of lawsuits from dissatisfied clients[79] Client and General Risks The company faces competitive fee pressures, client concentration risk, and general risks including the COVID-19 pandemic impact and dividend policy - The trend toward lower fees in the investment industry, largely driven by passive strategies, puts pressure on the company's fee structure and profit margins[98] - The company has significant client concentration, with the ten largest clients accounting for approximately 24% of fee revenue in 2020. The loss of these clients would have a material adverse effect[102] - The company suspended its dividend in the second quarter of 2020 to preserve capital amid uncertainties from the COVID-19 pandemic. Future dividends are not guaranteed[111] - The COVID-19 pandemic poses a significant risk, with potential impacts on business operations, clients, and financial results, the full extent of which is uncertain[103] Properties The company's principal operations are conducted from leased office spaces in Dallas, Houston, and Southborough, with a portion of its Dallas space recently subleased - The company's main office is a 45,000 sq. ft. leased space in Dallas, TX. It also leases space in Houston, TX and Southborough, MA[119] - In January 2021, the company subleased approximately 10,000 sq. ft. of its Dallas office space[120] Legal Proceedings The company is subject to claims and legal proceedings arising in the ordinary course of business - The company is subject to claims and legal proceedings from time to time in the ordinary course of business[121] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Westwood's common stock trades on the NYSE, with dividends suspended in Q2 2020 and an active share repurchase program, showing significant underperformance against market indices - The company suspended dividends in Q2 2020 to preserve capital amid COVID-19 uncertainties[126] Period Shares Repurchased Average Price Total Cost | Period | Shares Repurchased | Average Price | Total Cost | | :--- | :--- | :--- | :--- | | Year 2020 | 679,756 | $19.05 | $13.0 million | Cumulative Five-Year Total Return (2015-2020) | Index | Return | | :--- | :--- | | Westwood Holdings Group, Inc. | (64.24)% | | Russell 2000 Index | 86.36% | | SNL U.S. Asset Manager Index | 89.47% | Selected Financial Data The company's financial performance declined significantly from 2016 to 2020, reporting a net loss of $8.9 million in 2020, with AUM decreasing to $13.0 billion Selected Consolidated Financial Data (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenues | $65,111 | $84,079 | $122,300 | | Net income (loss) | $(8,947) | $5,911 | $26,751 | | Earnings (loss) per share – diluted | $(1.12) | $0.70 | $3.13 | | Cash dividends declared per common share | $0.43 | $2.88 | $2.76 | Assets Under Management (AUM) (in millions) | As of December 31, | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | AUM | $13,045 | $15,235 | $16,606 | - 2020 financial results were negatively impacted by a $4.2 million currency translation adjustment, $1.1 million in Canadian withholding taxes, and a $3.4 million goodwill impairment, totaling a negative impact of $1.09 per share[135] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, Westwood's financial performance was significantly impacted by lower average AUM, the closure of its Canadian subsidiary, and a goodwill impairment, resulting in a net loss - 2020 highlights include a 14% decrease in AUM to $13.0 billion, a 23% decrease in total revenue, a $3.4 million goodwill write-off, and a net loss for the year[153] - The company closed its Canadian subsidiary, Westwood International Advisors, incurring severance, lease impairment, and other costs, as well as a $4.2 million non-cash currency translation adjustment to net loss[146][153] - The company's financial position remains strong with $82.6 million in liquid cash and short-term investments and no debt as of December 31, 2020[153] Assets Under Management (AUM) AUM decreased 14% to $13.0 billion in 2020 due to net outflows of $2.7 billion, partially offset by market appreciation AUM by Channel (in millions) | Channel | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Institutional | $6,567 | $8,739 | (25)% | | Wealth Management | $4,335 | $4,438 | (2)% | | Mutual Funds | $2,143 | $2,058 | 4% | | Total AUM | $13,045 | $15,235 | (14)% | Roll-Forward of AUM for Year Ended Dec 31, 2020 (in millions) | Description | Amount | | :--- | :--- | | Beginning AUM | $15,235 | | Inflows | $2,239 | | Outflows | $(4,968) | | Net Client Flows | $(2,729) | | Market Appreciation | $539 | | End of Period AUM | $13,045 | Results of Operations For 2020, total revenues fell 23% to $65.1 million due to lower AUM, resulting in a net loss of $9.0 million and a negative effective tax rate Results of Operations Comparison (in thousands) | Line Item | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $65,111 | $84,079 | (23)% | | Total expenses | $68,558 | $79,435 | (14)% | | Income (loss) before income taxes | $(7,588) | $9,402 | (181)% | | Net income (loss) | $(8,947) | $5,911 | (251)% | - The decrease in 2020 revenue was primarily due to a $19.0 million decline in asset-based advisory fees resulting from lower average AUM[180] - A goodwill impairment charge of $3.4 million was recorded in 2020 related to the Advisory segment, following a sustained decline in the company's market capitalization[183] Liquidity and Capital Resources The company maintains a strong liquid position with $82.6 million in cash and short-term investments and no debt, despite negative operating cash flow in 2020 Key Liquidity Metrics (in thousands) | As of December 31, | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $13,016 | $49,766 | | Investments, at fair value | $69,542 | $50,324 | | Total Liquid Assets & Investments | $82,558 | $100,090 | Cash Flow Summary (in thousands) | Cash Flow | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Operating cash flows | $(9,770) | $32,172 | $31,484 | | Investing cash flows | $(4) | $(4,848) | $3,597 | | Financing cash flows | $(25,812) | $(31,870) | $(34,115) | - Westwood Trust is required to maintain minimum restricted capital of $4.0 million and had approximately $13.9 million in excess of this requirement at year-end 2020[198] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is AUM fluctuations, as revenues are based on a percentage of AUM, with a 10% decrease in AUM potentially reducing revenue by $6 million - A hypothetical 10% decrease in average AUM for the year ended December 31, 2020, would have resulted in an approximate $6 million reduction in consolidated total revenue[229] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, based on the COSO framework - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2020[234] - Management assessed internal control over financial reporting as effective as of December 31, 2020, using the COSO framework[240] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the 2021 Proxy Statement[245] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the 2021 Proxy Statement[246] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2020, 684,000 securities remained available for future issuance under equity compensation plans, with other information incorporated by reference Equity Compensation Plan Information as of December 31, 2020 | Plan Category | Securities to be issued upon exercise of outstanding options, etc. (a) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | — | 684,000 | Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and required exhibits, as detailed in their respective indexes Financial Statements and Notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements, identifying goodwill valuation for the Trust reporting unit as a critical audit matter - The auditor identified the valuation of the Trust reporting unit's goodwill as a critical audit matter due to significant management judgments in estimating fair value using the income approach, particularly regarding the discount rate and revenue projections[271] Notes to Consolidated Financial Statements The notes detail the closure of Westwood International Advisors, revenue recognition, segment reporting, goodwill impairment, and subsequent events like a dividend declaration and InvestCloud gain Note 1. Description of the Business This note describes Westwood's business and highlights the 2020 liquidation of Westwood International Advisors, including associated costs and Canadian withholding taxes - The liquidation of Westwood International Advisors in 2020 resulted in $0.5 million of severance expense, $0.3 million of lease impairment, and $0.1 million of vendor costs, offset by $1.3 million in restricted stock forfeitures[286] - The company repatriated income from Canada and incurred $1.1 million of withholding taxes (net of U.S. federal tax deduction)[287] Note 10. Goodwill and Other Intangible Assets The company recorded a $3.4 million goodwill impairment in 2020 for its Advisory segment, with the remaining $16.4 million goodwill allocated to the Trust segment Goodwill Balance (in thousands) | As of December 31, | 2020 | 2019 | | :--- | :--- | :--- | | Beginning balance | $19,804 | $19,804 | | Impairment expense | $(3,403) | — | | Ending balance | $16,401 | $19,804 | - The impairment was related to the Advisory segment and was caused by a sustained decline in market capitalization and revised long-term projections[398][399] Note 18. Subsequent Events Subsequent events include a $0.10 per share quarterly cash dividend declared in February 2021, issuance of restricted stock, and a $5.6 million pre-tax gain on InvestCloud investment - In January 2021, the company's investment in InvestCloud was remeasured, resulting in a pre-tax gain of approximately $5.6 million[427] - On February 10, 2021, the Board declared a quarterly cash dividend of $0.10 per share[425]