Statements in this report and the Annual Report to Stockholders that are not purely historical facts, including, without limitation, statements about our expected future financial position, results of operations or cash flows, as well as other statements including, without limitation, words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should," "could," "goal," "potentially," "may," "designed" and other similar expressions, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, the risks described under "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2021and those risks set forth below:
•the composition and market value of our assets under management;
• our ability to maintain our pricing structure in light of competitive pricing pressures;
•the risks associated with the actions of activist shareholders;
•distributions to our common stockholders have included and may in the future include a return of capital;
•the inclusion of investments by foreign companies in our AUMs;
•regulations adversely affecting the financial services sector;
•our ability to maintain effective cybersecurity;
•risks of litigation;
•our ability to successfully develop and market new investment strategies;
•our reputation and relationships with current and potential customers;
•our ability to attract and retain qualified personnel;
•our ability to perform operational tasks;
• our ability to select and supervise third-party suppliers;
•our dependence on the operations and funds of our subsidiaries;
•our ability to maintain effective information systems;
•our ability to prevent misuse of assets and information in the possession of our employees and third-party vendors, which could damage our reputation and result in costly litigation and liability for our clients and us;
•our stock is lightly traded and may be subject to volatility;
•our organizational documents contain provisions that may prevent or deter another group from paying a premium over the market price to our stockholders to acquire our stock;
•competition in the investment management industry;
• our ability to avoid termination of customer agreements and related investment redemptions;
•the strong concentration of our revenues on a small number of customers;
•our relationships with investment advisory firms;
•the lingering effects of the COVID-19 pandemic;
•our ability to identify and execute our strategic initiatives;
•our ability to declare and pay dividends;
•our ability to finance future capital requirements on favorable terms;
•our ability to properly deal with conflicts of interest;
•our ability to maintain adequate insurance coverage; and
•our ability to maintain an effective system of internal controls.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We are not obligated and do not undertake an obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events or otherwise.
We manage investment assets and provide services for our clients through our subsidiaries,
Westwood Management Corp.and Westwood Advisors, L.L.C.(each of which is an SEC-registered investment advisor and referred to hereinafter together as "Westwood Management") and Westwood Trust. Westwood Managementprovides investment advisory services to institutional investors, a family of mutual funds called the Westwood Funds®, other mutual funds, individuals and clients of Westwood Trust. Westwood Trustprovides trust and custodial services and participation in common trust funds to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of AUM. Pending Acquisition
Salient is a real asset and alternative investment firm that offers a suite of strategies focused on energy and infrastructure, real estate and tactical alternative investments. The acquisition would add complementary, highly differentiated investment capabilities to us, and expand and enhance our multi-asset program, and we also foresee many opportunities to collaborate on new strategies. Revenues We derive our revenues from investment advisory fees, trust fees and other revenues. Our advisory fees are generated by
Westwood Managementwhich manages client accounts under investment advisory and subadvisory agreements. Advisory fees are typically calculated based on a percentage of AUM and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on AUM on the last day of the preceding quarter, quarterly in arrears based on AUM on the last day of the quarter just ended or are based on a daily or monthly analysis of AUM for the stated period. We recognize advisory fee revenues as services are rendered. Certain of our clients have a contractual performance-based fee component in their contracts, which generates additional revenues if we outperform a specified index over a specific period of time. We record revenue for performance-based fees at the end of the measurement period. Since our advance paying clients' billing periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter, and our Condensed Consolidated Financial Statements contain no deferred advisory fee revenues. Our trust fees are generated by Westwood Trustpursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of AUM. Westwood Trustalso provides trust services to a small number of clients on a fixed fee basis. Trust fees are primarily calculated quarterly in arrears based on a daily average of AUM for the quarter. Since billing periods for most of Westwood Trust'sclients coincide with the calendar quarter, revenue is fully recognized within the quarter, and our Condensed Consolidated Financial Statements contain no deferred advisory fee revenues.
Our other income consists primarily of investment gains and losses from our seed fund investments in new investment strategies.
Employee compensation and benefits
Employee compensation and benefit expenses generally include salaries, incentive compensation, stock-based compensation and employee benefits.
Sales and Marketing
Sales and marketing expenses relate to our marketing efforts, including travel and entertainment, direct marketing and advertising expenses.
Westwood Mutual Funds
Westwood mutual fund expenses relate to our marketing, distribution and administration of Westwood Funds®.
Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs.
Professional services fees generally include costs associated with sub-advisory fees, audit, tax, legal and other professional services.
general and administrative
General and administrative expenses generally consist of costs associated with the lease of office space, amortization, depreciation, insurance, custody expense, Board of Directors' fees, investor relations, licenses and fees, office supplies and other miscellaneous expenses.
Capital gains realized on private investments
Realized gains on private placements include amounts by which the net proceeds from the sale or redemption of our private placements exceed costs.
Net change in unrealized appreciation (depreciation) on private placements
The net change in unrealized appreciation (depreciation) of private placements includes changes in the value of our private equity investments.
Net investment income
Net investment income primarily includes interest and dividend income on fixed income securities and money market funds.
Other income mainly includes income from the subletting of part of our offices.
Assets Under Management AUM decreased
$2.3 billionto $11.5 billionat September 30, 2022compared with $13.8 billionat September 30, 2021. The average of beginning and ending AUM for the third quarter of 2022 was $11.8 billioncompared to $14.1 billionfor the third quarter of 2021. The following table displays AUM as of September 30, 2022and 2021 (in millions): As of September 30, 2022 2021 Change Institutional(1) $ 5,510 $ 6,701(18) % Wealth Management(2) 3,528 4,236 (17) Mutual Funds(3) 2,428 2,863 (15) Total AUM(4) $ 11,466 $ 13,800(17) % (1)Institutional includes (i) separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft-Hartley plans, endowments, foundations and individuals; (ii) subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including collective investment trusts; and (iv) managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers. (2)Wealth Management includes assets for which Westwood Trustprovides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals pursuant to trust or agency agreements and assets for which Westwood Advisors, L.L.C.provides advisory services to high net worth individuals. Investment subadvisory services are provided for the common trust funds by Westwood Managementand external unaffiliated subadvisors. For certain assets in this category Westwood Trustcurrently provides limited custodial services for a minimal or no fee, viewing these assets as potentially converting to fee-generating managed assets in the future. (3)Mutual Funds include the Westwood Funds®, a family of mutual funds for which Westwood Managementserves as advisor. These funds are available to individual investors, institutional investors and wealth management accounts. (4)AUM excludes $298 millionand $283 millionof assets under advisement ("AUA") as of September 30, 2022and 2021, respectively, related to our model portfolios for which we provided consulting advice but for which we did not have direct discretionary investment authority.
Roll-forward of assets under management
17 -------------------------------------------------------------------------------- Three Months Ended September Nine Months Ended September 30, 30, (in millions) 2022 2021 2022 2021 Institutional Beginning of period assets
$ 5,889 $ 7,123 $ 7,037 $ 6,567Inflows 60 64 175 1,797 Outflows (216) (401) (476) (779) Net client flows (156) (337) (301) 1,018 Global Convertibles transition - - - (1,593) Market appreciation (depreciation) (223) (85) (1,226) 709 Net change (379) (422) (1,527) 134 End of period assets $ 5,510 $ 6,701 $ 5,510 $ 6,701Wealth Management Beginning of period assets $ 3,676 $ 4,427 $ 4,420 $ 4,335Inflows 145 98 341 241 Outflows (177) (238) (466) (655) Net client flows (32) (140) (125) (414) Market appreciation (depreciation) (116) (51) (767) 315 Net change (148) (191) (892) (99) End of period assets $ 3,528 $ 4,236 $ 3,528 $ 4,236Mutual Funds Beginning of period assets $ 2,570 $ 2,857 $ 3,046 $ 2,143Inflows 182 248 592 1,004 Outflows (219) (194) (637) (565) Net client flows (37) 54 (45) 439 Market appreciation (depreciation) (105) (48) (573) 281 Net change (142) 6 (618) 720 End of period assets $ 2,428 $ 2,863 $ 2,428 $ 2,863Total AUM Beginning of period assets $ 12,135 $ 14,407 $ 14,503 $ 13,045Inflows 387 410 1,108 3,042 Outflows (612) (833) (1,579) (1,999) Net client flows (225) (423) (471) 1,043 Global Convertibles transition - - - (1,593) Market appreciation (depreciation) (444) (184) (2,566) 1,305 Net change (669) (607) (3,037) 755 End of period assets $ 11,466 $ 13,800 $ 11,466 $ 13,800
Three months completed
$0.7 billiondecrease in AUM for the three months ended September 30, 2022was due to market depreciation of $0.4 billionand net outflows of $0.2 billion. Net outflows were primarily related to our LargeCap Value strategy. The $0.6 billiondecrease in AUM for the three months ended September 30, 2021was due to net outflows of $0.4 billionand market depreciation of $0.2 billion. Net outflows were primarily related to our LargeCap Value and SmallCap Value strategies.
End of nine months
$3.0 billiondecrease in AUM for the nine months ended September 30, 2022was due to market depreciation of $2.6 billionand net outflows of $0.5 billion. Net outflows were primarily related to our LargeCap Value and Income Opportunity strategies. 18 -------------------------------------------------------------------------------- The $0.8 billionincrease in AUM for the nine months ended September 30, 2021was due to market appreciation of $1.3 billionoffset by net outflows of $0.6 billion. Net outflows were primarily related to the outflow of $1.6 billionfrom the closure of two Global Convertibles accounts. In the fourth quarter of 2020 we made the decision to exit the stand-alone convertibles business and our Global Convertibles team reverted to Aviva Investors, the firm from which they had previously joined Westwood. As a result, $1.6 billionin two sub-advised Global Convertibles mandates returned to Aviva as of April 1, 2021. These outflows were partially offset by net inflows to our SmallCap Value strategy.
The following table (in thousands of dollars) and discussion of our results of operations are based on data derived from the condensed consolidated statements of comprehensive income contained in our condensed consolidated financial statements and should be read in conjunction with those statements included elsewhere in this report.
Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 Change 2022 2021 Change Revenues: Advisory fees: asset-based
$ 10,474 $ 12,011(13) % $ 33,244 $ 33,846(2) % Advisory fees: performance-based - - NM - 1,959 (100) Trust fees: asset-based 5,177 5,952 (13) 16,257 18,233 (11) Other, net (245) (103) 138 (1,276) (375) 240 Total revenues 15,406 17,860 (14) 48,225 53,663 (10) Expenses: Employee compensation and benefits 9,526 10,268 (7) 28,993 32,053 (10) Sales and marketing 335 292 15 1,326 892 49 Westwood mutual funds 615 814 (24) 1,812 1,573 15 Information technology 2,170 1,937 12 5,934 6,190 (4) Professional services 1,660 726 129 4,655 3,471 34 General and administrative 2,182 1,779 23 6,570 5,893 11 Total expenses 16,488 15,816 4 49,290 50,072 (2) Net operating income (loss) (1,082) 2,044 (1,065) 3,591 Realized gains on private investments - - NM - 8,371 (100) Net change in unrealized appreciation (depreciation) on private investments (249) (13) 1,815 (511) (2,124) (76) Net investment income 104 131 (21) 93 562 (83) Other income 206 198 4 598 390 53 Income (loss) before income taxes (1,021) 2,360 (885) 10,790 Income tax provision 154 481 (68) 618 3,840 (84) Net income (loss) $ (1,175) $ 1,879(163) % $ (1,503) $ 6,950(122) % _________________________ NM Not meaningful
Three months completed
Total revenues. Total revenues decreased
$2.5 million, or 14%, to $15.4 millionfor the three months ended September 30, 2022compared with $17.9 millionfor the three months ended September 30, 2021. Asset-based advisory fees decreased $1.5 million, or 13%, and Trust fees decreased $0.8 million, or 13%, both primarily related to lower average AUM. Employee compensation and benefits. Employee compensation and benefits decreased $0.8 millionto $9.5 millioncompared with $10.3 millionfor 2021 due to lower commissions and incentive compensation. Professional services. Professional services increased $1.0 million, or 129%, to $1.7 millioncompared with $0.7 millionfor 2021 primarily due to approximately $0.6 millionin expenses related to our pending acquisition of Salient. 19 -------------------------------------------------------------------------------- Income tax provision. Our effective tax rate differed from the 21% statutory rate for the third quarter of 2022 primarily due to permanent differences between book and tax restricted stock expense based on a decrease in our stock price between the restricted stock grant and vesting dates.
End of nine months
Total revenues. Total revenues decreased
$5.5 million, or 10%, to $48.2 millionfor the nine months ended September 30, 2022compared with $53.7 millionfor the nine months ended September 30, 2021. Asset-based advisory fees decreased $0.6 million, or 2% and Trust fees decreased $1.9 million, or 11%, both primarily related to lower average AUM. Performance-based advisory fees decreased $2.0 milliondue to reflecting lower performance fees in the nine months ended September 30, 2022. Employee compensation and benefits. Employee compensation and benefits decreased $3.1 millionto $29.0 millioncompared with $32.1 millionfor 2021 due to lower incentive compensation and commissions.
Sales and Marketing. Sales and marketing expenses increased
Professional services. Professional services increased
$1.2 million, or 34%, to $4.7 millioncompared with $3.5 millionfor 2021 primarily due to approximately $1.3 millionin expenses related to our pending acquisition of Salient.
Gains made on private investments. We recorded a realized gain of approximately
Net change in unrealized appreciation (depreciation) on private investments. We recorded a
$2.8 millionnet change in unrealized depreciation to reflect the recognition of previously recorded unrealized gains in connection with InvestCloud'srecapitalization in the first quarter of 2021, partially offset by $0.7 millionof fair value increases related to our investment in Charis. Income tax provision. The effective tax rate for the nine months ended September 30, 2022differed from the 21% statutory rate for 2022 primarily due to permanent differences between book and tax restricted stock expense based on a decrease in our stock price between the restricted stock grant and vesting dates.
Additional financial information
As supplemental information, we are providing non-GAAP performance measures that we refer to as Economic Earnings and Economic EPS. We provide these measures in addition to, not as a substitute for, net income (loss) and earnings (loss) per share, which are reported on a GAAP basis. Our management and Board of Directors review Economic Earnings and Economic EPS to evaluate our ongoing performance, allocate resources, and review our dividend policy. We believe that these non-GAAP performance measures, while not substitutes for GAAP net income (loss) or earnings (loss) per share, are useful for management and investors when evaluating our underlying operating and financial performance and our available resources. We do not advocate that investors consider these non-GAAP measures without also considering financial information prepared in accordance with GAAP. We define Economic Earnings as net income (loss) plus non-cash equity-based compensation expense, amortization of intangible assets and deferred taxes related to goodwill. Although depreciation on fixed assets is a non-cash expense, we do not add it back when calculating Economic Earnings because depreciation charges represent an allocation of the decline in the value of the related assets that will ultimately require replacement. In addition, we do not adjust Economic Earnings for tax deductions related to restricted stock expense or amortization of intangible assets. Economic EPS represents Economic Earnings divided by diluted weighted average shares outstanding. 20 -------------------------------------------------------------------------------- The following tables provide a reconciliation of net income (loss) to Economic Earnings and Economic Earnings by segment (in thousands, except share and per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change 2022 2021 Change Net income (loss)
$ (1,175) $ 1,879(163) % $ (1,503) $ 6,950(122) % Stock-based compensation expense 1,509 1,362 11 4,410 4,459 (1) Intangible amortization 407 406 - 1,218 1,218 - Tax benefit from goodwill amortization 59 59 - 177 177 - Economic Earnings $ 800 $ 3,706(78) % $ 4,302 $ 12,804(66) % Earnings (loss) per share $ (0.15) $ 0.24(163) % $ (0.19) $ 0.88(122) % Stock-based compensation expense 0.19 0.17 12 0.57 0.56 2 Intangible amortization 0.05 0.05 - 0.15 0.15 - Tax benefit from goodwill amortization 0.01 0.01 - 0.02 0.02 - Economic Earnings per share $ 0.10 $ 0.47(79) % $ 0.55 $ 1.61(66) % Diluted weighted average shares outstanding 7,794,060 7,956,081 7,867,555 7,933,860 Economic Earnings by Segment: Advisory $ 3,590 $ 4,416(19) % $ 11,428 $ 14,885(23) % Trust 769 2,015 (62) 2,396 6,507 (63) Westwood Holdings (3,559) (2,725) 31 (9,522) (8,588) 11 Consolidated $ 800 $ 3,706(78) % $ 4,302 $ 12,804(66) %
Cash and capital resources
We fund our operations and cash requirements with cash generated from operating activities. We may also use cash from operations to pay dividends to our stockholders. We reinstated a dividend in the first quarter of 2021, following a suspension in the second quarter of 2020 as we preserved capital and enhanced our financial flexibility amid the uncertainties created by the COVID-19 pandemic. Our announced acquisition of Salient's asset management business will require an upfront cash payment of
$35.0 millionupon closing, and subsequent deferred payments of up to $25.0 millionover several years, upon satisfaction of certain revenue retention and growth targets. Those payments are expected to be made from a combination of cash on hand, cash flows from operations and equity. As of September 30, 2022and December 31, 2021, we had no debt. The changes in net cash provided by operating activities generally reflect changes in earnings plus the effects of non-cash items and changes in working capital, including liquidation of investments used to cover current liabilities. Changes in working capital, especially accounts receivable and accounts payable, are generally the result of timing differences between collection of fees billed and payment of operating expenses. During the nine months ended September 30, 2022, cash flow provided by operating activities was $15.3 million, which included net sales of $12.1 millionof current investments and a $1.9 millionchange in accounts receivable, partially offset by a reduction in compensation and benefits payable of $3.6 million. During the nine months ended September 30, 2021, cash flow provided by operating activities was $21.1 million, which included net sales of $11.2 millionof current investments, a $2.2 millionchange in income taxes payable, and a $1.1 millionchange in accounts payable and accrued liabilities, partially offset by decreases of $1.2 millionin other liabilities and $0.4 millionin compensation and benefits payable.
Cash flows used in investing activities during the nine months ended
was related to
gains realized on private placements and the sale of property and equipment following the subletting of part of our
Cash flows used in financing activities of
$7.9 millionfor the nine months ended September 30, 2022reflected the payment of dividends, treasury stock repurchases and restricted stock returned for the payment of taxes. Cash flows used in financing activities of $25.2 millionfor the nine months ended September 30, 2021reflected the payment of dividends, including those treated as a return of capital for accounting purposes, treasury stock repurchases and restricted stock returned for the payment of taxes We had cash and short-term investments of $74.0 millionas of September 30, 2022and $80.2 millionas of December 31, 2021. At September 30, 2022and December 31, 2021, working capital aggregated $74.6 millionand $78.0 million, respectively. Westwood Trustis required to maintain cash and investments in an amount equal to the minimum restricted capital of $4.0 million, as required by the TexasFinance Code. Restricted capital is included in Investments in the accompanying Condensed Consolidated Balance Sheets. At September 30, 2022, Westwood Trusthad approximately $15.6 millionin excess of its minimum capital requirement. Our future liquidity and capital requirements will depend upon numerous factors, including our results of operations, the timing and magnitude of capital expenditures or strategic initiatives, our dividend policy and other business and risk factors described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021. We believe that current cash and short-term investment balances plus cash generated from operations will be sufficient to meet both the operating and capital requirements of our ordinary business operations through at least the next twelve months, however there can be no assurance that we will not require additional financing within this time frame. Failure to raise needed capital on attractive terms, if at all, could have a material adverse effect on our business, financial condition and results of operations. Contractual Obligations As of September 30, 2022, there have been no material changes outside of the ordinary course of business to our contractual obligations since December 31, 2021. For information regarding our contractual obligations, refer to "Contractual Obligations" in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Critical and significant accounting policies and estimates
There have been no significant changes in our critical or significant accounting policies and estimates since
December 31, 2021. Information with respect to our critical accounting policies and estimates that we believe could have the most significant effect on our reported consolidated results and require difficult, subjective or complex judgment by management is described under "Critical Accounting Policies and Estimates" in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Refer to Note 2 "Summary of Significant Accounting Policies" in our Condensed Consolidated Financial Statements included in Part I, Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q for a description of recently issued accounting guidance.
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