SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
20132015
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission file number 1-31234
WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
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| Delaware | | 75-2969997 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
200 Crescent Court, Suite 1200
Dallas, Texas 75201 | | 75201 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (214) 756-6900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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| Title of each class: | | Name of each exchange on which registered: |
Common Stock, par value $0.01 per share | | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xý Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No xý Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xý No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xý No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | ¨ | | Accelerated filer | | x
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Non-accelerated filer | | ¨ | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xý The aggregate market value on June 30,
20132015 of the voting and non-voting common equity held by non-affiliates of the registrant was
$308,961,000.$380,863,476. For purposes of this calculation, the registrant has assumed that stockholders that are not officers or directors of the registrant are not affiliates of the registrant.
The number of shares of registrant’s Common Stock, par value $0.01 per share, outstanding as of February
25, 2014: 8,262,430.18, 2016: 8,628,067.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant’s definitive Proxy Statement for the
20142016 Annual Meeting of Stockholders,
which will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates, are incorporated by reference into Part III hereof.
WESTWOOD HOLDINGS GROUP, INC.
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Unless the context otherwise requires, the term “we,” “us,” “our,” “Westwood,” or “Westwood Holdings Group” when used in this Form 10-K (“Report”) and in the Annual Report to the Stockholders refers to Westwood Holdings Group, Inc., a Delaware corporation, and its consolidated subsidiaries
and predecessors taken as a whole. This Report contains some forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of some events could differ materially from those
projectedprojected in or contemplated by the forward-looking statements due to a number of factors, including without limitation those set forth under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A. Risk Factors”.We manage investment assets and provide services for our clients through our subsidiaries, Westwood Management Corp.
(“and Westwood
Advisors, LLC (together, “Westwood Management”),
Westwood Trust, and Westwood International Advisors Inc. (“Westwood International”)
. and Westwood Trust. Westwood Management, founded in 1983, provides investment advisory services to
corporate and public retirement plans, endowments and foundations,institutional investors, a family of mutual funds called the Westwood
Funds ™,Funds®, other mutual funds,
individualsan Ireland-domiciled fund organized pursuant to the European Union’s Undertakings for Collective Investment in Transferable Securities (“UCITS”), individual investors and clients of Westwood Trust.
WestwoodWestwood International was established in 2012 and provides investment advisory services to institutional clients, the Westwood Funds®, other mutual funds, UCITS funds and clients of Westwood Trust. Westwood Trust, founded as a state-chartered trust company in 1974, provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth individuals. Westwood International, based in Toronto, was established in 2012 and provides global and emerging markets investment advisory services to institutional clients, the Westwood Funds ™, other mutual funds, an Ireland-domiciled fund organized pursuant to the European Union’s Undertakings for Collective Investment in Transferable Securities (“UCITS”), and clients of Westwood Trust. Our revenues are generally derived from fees based on a percentage of assets under management. Westwood Management, Westwood TrustInternational and Westwood InternationalTrust collectively managed assets valued at approximately $18.9$20.8 billion at December 31, 2013.2015. We were incorporated under the laws of the State of Delaware on December 12, 2001. We are an independent public company and ourOur common stock is listed on the New York Stock Exchange under the ticker symbol “WHG.” We are a holding company whose principal assets consist of the capital stock of Westwood Management, Westwood Trust and Westwood International.
The success of our business is very dependent on client relationships. We believe that, in addition to investment performance, client service is paramount in the asset management business. Accordingly, a major
focus of our business
strategyfocus is to build strong relationships with clients to enhance our ability to anticipate their needs and
satisfysatisfy their investment objectives. Our team approach is designed to deliver efficient, responsive service to our clients. Our success is dependent to a significant degree on investment performance and our ability to provide attentive client service.We have focused on building theour foundation of a firm in terms of personnel and infrastructure to support a much larger business. We have also developed investment strategies that we expect to be desirable within our target institutional, private wealth and mutual fundfund markets. The costs of developingDeveloping new investment strategies and building the organization can result in incurring expenses before significant offsetting revenues are realized. We continue to evaluate new strategies and resources in terms of meeting actual and potential investor needs.
Acquisition of Woodway Financial Advisors
On January 15, 2015, we entered into an agreement (the "Merger Agreement") to acquire Woodway Financial Advisors (“Woodway”), a Houston-based private wealth and trust company that managed assets of approximately $1.6 billion at December 31, 2014. We completed the acquisition on April 1, 2015. Pursuant to the Merger Agreement, on April 1, 2015 Woodway merged with Westwood Trust, a wholly-owned subsidiary of Westwood, with Westwood Trust being the surviving entity (the “Merger”). The total Merger consideration consisted of (i) $30.6 million in cash and stock, as described below, and (ii) contingent consideration equal to the annualized revenue from the post-closing business of Woodway for the twelve-month period ending March 31, 2016 (the “Earn-Out Period”), adjusted for certain clients or accounts that have terminated, and capped at $15 million (the “Earn-Out Amount”).
The Merger consideration of $39.7 million consisted of (i) closing date consideration of $25.3 million paid in cash and the issuance of 109,712 shares of Westwood common stock, valued at $5.3 million (discounted from $6.7 million due to certain required holding periods), and (ii) contingent consideration of $9.1 million, based on estimates and assumptions as of the closing date of the acquisition, to be paid no later than 75 calendar days after the last day of the Earn-Out Period. The acquired assets were deemed to constitute a business in a transaction using the purchase method of accounting for business combinations. Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date.
We maintain a website at www.westwoodgroup.com. Information contained on, or connected to, our website is not incorporated by reference into this Report and should not be considered part of this Report or any other filing that we make with the Securities and Exchange Commission (“SEC”). All of our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to SectionsSections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are available free of charge on our website. Additionally, ourOur Code of Business Conduct, our Corporate Governance Guidelines and our Audit Committee, Compensation Committee and Governance/Nominating Committee Charters are available without charge on our website. Stockholders also may obtain print copies of these documents free of charge by submitting a written request to Mark A. Wallace,Tiffany B. Kice, our Chief Financial Officer, at the address set forth in the front of this Report. The public can also obtain any document we file with the SEC at www.sec.gov.1
Advisory
Advisory
Our advisory business is comprised of Westwood Management and Westwood
International.International and encompasses three distinct investment teams – the U.S. Value Team, the Global Convertible Securities Team, and the Global and Emerging Markets Equity Team.
Westwood Management provides investment advisory services to large institutions, including corporate retirement plans, public retirement plans, endowments and foundations. Institutional separate account minimums
depend on thevary by investment strategy
offered butand generally range from
$10$5 million to $25 million. Westwood Management also provides advisory services to individuals,
and the Westwood
Funds ™Funds® and UCITS funds, as well as subadvisory services to other mutual funds and pooled investment vehicles.
Westwood Management’s investment strategies are managed by the U.S. Value Team, based in Dallas, Texas, and by the Global Convertible Securities Team, based in Boston, Massachusetts. Our
overall investment
philosophy was developed by our Founder and Chairman, Susan M. Byrne, and is implemented by a teamprofessionals average fifteen years of investment professionals under the leadership of our Chief Investment Officer, Mark Freeman. With respect to the bulk of assets under management we utilize a “value” investment style focused on achieving superior long-term, risk-adjusted returns by investing in companies with high levels of free cash flow, improving returns on equity and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the marketplace. This investment approach is designed to preserve capital during unfavorable periods and provide superior real returns over the long term. Our investment team members average investment experience of fifteen years and one third of our team has worked together at Westwood for more than five years.experience. We believe team continuity and years of experience are among the critical elements required for successfully managing investments.Westwood International,
based in Toronto, Canada, provides investment advisory services to large institutions,
and pooled investment vehicles and UCITS funds, as well as subadvisory services to the National Bank Westwood Funds, which are mutual funds offered by National Bank of Canada. Institutional separate account minimums vary by investment strategy and generally range from $10 million to $25 million. Westwood International also providesInternational's investment advisory services to an Ireland-domiciled UCITS fund.strategies are managed by the Global and Emerging Markets Equity Team. Westwood International has entered into a Memorandum of Understanding (“MOU”) with Westwood Management pursuant to which Westwood International is considered a “participating affiliate” of Westwood Management as that term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisers to use portfolio management or research resources of advisory affiliates subject to the supervision of a registered adviser. Pursuant to the MOU, Westwood International professionals provide advisory and subadvisory services to certain Westwood Funds,Funds®, pooled investment vehicles and large U.S. institutions under the supervision of Westwood Management.We offer a broad range of investment strategies, allowingwhich allows us to serve variousa variety of client types and investmentwith different investment objectives. Approximately 49% ofWe currently manage five investment strategies each with over $1 billion in assets under management, including our consolidated revenues are invested in ourIncome Opportunity, LargeCap Value, and SMidCap Value, Emerging Markets and Emerging Markets Plus strategies.
U.S. Value Team
The U.S. Value team employs a value-oriented approach. The common thread that permeates the team's strategies is a disciplined approach to controlling risk and preserving client assets whenever possible. The team seeks to invest in companies with high levels of free cash flow, improving returns on equity and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the marketplace. Through investments in companies that exhibit these characteristics, we seek to generate consistently superior performance relative to our industry peers and relevant benchmark indices. This investment approach is intended to preserve capital during unfavorable periods and provide superior real returns over the long term. We believe that we have established a track record of delivering competitive risk-adjusted returns for our clients. The principal investment strategies currently managed by
Westwood Managementthe U.S. Value Team are as follows:
LargeCap Value: Investments in equity securities of approximately 40-60 well-seasonedseasoned companies with market capitalizations at purchase generally over $7.5 billion. This portfolio is invested in companies where we expect that futurefuture profitability, driven by operational improvements, will exceed expectations reflected in current share prices. Dividend Growth:Concentrated LargeCap Value: InvestmentsInvestment in equity securities of approximately 30-50 high quality15-30 companies with market capitalizations at purchase generally over $1$5 billion. This portfolio is invested in companies of which at least 80% are paying dividends and whose prospects for dividend growth are strong. This strategy combines quantitative and fundamental research to create a diversified portfolio of companieswhere we expect that we believe can create value for shareholders.future profitability, driven by operational improvements, will exceed expectations reflected in current share prices.SMidCap Plus+:Investments in equity securities of approximately 45-65 companies with market capitalizations at purchase of between $2 billion and $15 billion. Similar to our other value-oriented investment strategies, we seek to discover operational improvements driving earnings growth within small to mid-sized companies that can be purchased at reasonable prices. SMidCap Value: Investments in equity securities of approximately 50-6550-70 companies with market capitalizationscapitalizations at purchase of between $500 million and $8 billion. Similar to our other value-oriented investment strategies, we seek to discover operational improvements driving earnings growth within small to mid-size companies that can be purchased at reasonable prices. This strategy reached its asset capacity in 2010 and is now closed to new investors. SmallCap Value: Investments in equity securities of approximately 50-70 companies with market capitalizations at purchase of between $100 million and $2 billion. Similar to our other value-oriented investment strategies, we seek to invest in high quality companies whose earnings growth is driven by operational improvements not yet fully recognized by the market. AllCap Value: Investments in equity securitiessecurities of approximately 50-80 well-seasonedseasoned companies. The portfolio generally comprises our investment professionals’ best ideas amongfor companies with market capitalizations at purchase above $100 million. Similar to our other value-oriented investment strategies, we seek to invest in companies across a broad range of market capitalizations where we expect that future profitability, driven by operational improvements, will be higher than expectations currently reflected in share prices.2
BalancedConcentrated AllCap Value: : Investments in a combinationequity securities of equity and fixed income securities, designedapproximately 15-30 companies with market capitalization at purchase generally over $100 million. We seek to provide both growth opportunities and income, while also emphasizing asset preservationinvest in “down” markets. Westwood Management applies its expertisecompanies where we expect that future profitability, driven by operational improvements, will be higher than expectations currently reflected in dynamic asset allocation and security selection decisions in carrying out this balanced strategy approach.share prices.
Income Opportunity: Investments in dividend-paying common stocks, preferred stocks, convertible securities, master limited partnerships, royalty trusts, REITs and selected debt instruments. This portfolio’s strategy focuses on companies with strong and improving cash flows sufficientable to support sustainable or rising income streams for investors.streams. This strategy is targeted towards investors seeking current income, a competitive total return and low volatility throughvia dividend-paying or interest-bearing securities. Worldwide Income Opportunity: Investments in a diversified group of global income-producing companies that may include market capitalizations of any size, global preferred equity, global convertible preferred, global fixed income, global REITs, Royalty Trusts, MLPs and cash. This portfolio's strategy focuses on companies with strong and improving cash flow sufficient to support sustainable or rising income streams.
Master Limited Partnership Infrastructure Renewal (“MLPs”): InvestmentsInvestments include MLPs (including limited partnerships and general partnerships) and other securities. Within these types of securities, the portfolio focusesfocusing on partnerships that exhibit higher distribution yields, stable and predictable cash flows, low correlations to other asset classes, and growth potential.
Global Convertible Securities Team
The Global Convertible Securities Team manages both long-only and liquid alternative global convertible securities strategies employing a disciplined investment process and rigorous risk management. The team's investment philosophy is based on the following beliefs:
the asymmetric return profile of balanced convertible bonds can provide superior risk-adjusted returns over medium- to long-term time horizons;
convertible securities markets are inefficient and opportunities exist to benefit from pricing anomalies;
a global focus provides more robust opportunities and a clearer picture of the broad convertibles universe; and
proprietary fundamental research is the best way to identify solid companies with attractive risk-adjusted return profiles.
The team draws on the proprietary fundamental research of all three of Westwood's investment teams in order to identify securities with an attractive risk-adjusted return profile. The principal investment strategies currently managed by the Global Convertible Securities Team are as follows:
Investment Grade FixedStrategic Global Convertibles:This strategy seeks to provide equity-like returns with lower volatility by investing in a balanced portfolio of 60-90 worldwide convertible securities.
Market Neutral Income: InvestmentsThis liquid alternative strategy seeks to produce positive absolute returns over a full market cycle with low volatility by combining a yield-focused portfolio that invests in high-grade, intermediate term corporatehigh quality, short duration convertible securities with a hedged portfolio utilizing convertible arbitrage and government bonds. We seekother hedging strategies.
Global and Emerging Markets Equity Team
The Global and Emerging Markets Equity Team emphasizes Economic Value Added (EVA) in its investment process and seeks to
add value to client portfolios through yield curve positioning and investing in debt instruments with improving credit quality potential.Each investment strategy consists of a portfolio of equity and/or fixed income securities selected by Westwood’s portfolio teams and chosen to optimize long-term returns consistent with Westwood’s investment philosophy. Our portfolio teams make decisions for Westwood Management investment strategies in accordance with the investment objectives and policies of those strategies, including determining when and which securities to purchase and sell.
We employ a value-oriented approach for our domestic equity investment strategies.identify mispriced businesses that can generate sustainable earnings growth. The common thread that permeates these strategies is our disciplined approach to controlling risk and preserving client assets whenever possible. Our investment teams seek to invest in companies with high levels of free cash flow, improving returns on equity, and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the marketplace. Through investments in companies that exhibit these characteristics, we seek to demonstrate consistently superior performance relative to our industry peers and relevant benchmark indices.
We believe that we have established a track record of delivering competitive risk-adjusted returns for our clients. Approximately 90 percent of our investment strategies have delivered above-benchmark performance and more than 90 percent have experienced below-benchmark volatility over the past ten years.
Westwood Internationalteam offers global and emerging markets equity investment strategies. Over 85% of Westwood International’s $2.5 billion of assets under management at December 31, 2013 is invested in our Emerging Markets strategies. The principal investment strategies currently managed by Westwood Internationalthe Global and Emerging Markets Equity Team are as follows:
Emerging Markets:This strategy invests in the common stocks of 70-90 companies that are located or have primary operations in emerging markets and havewith market capitalizations above $500 million. The portfolio is invested in companies that we believe arerepresents sound businesses that are mispriced and can generate sustainable earnings growth. Emerging Markets Plus:This strategy invests in the common stocks of 50-70 companies that are located or have primary operations in emerging markets and have market capitalizations above $1.5 billion. The portfolio is invested in companies that we believe arerepresent sound businesses that are mispriced and that can generate sustainable earnings growth. Emerging Markets SMid: This strategy invests in the common stocks of 70-90 small- and mid-cap companies that are located or have primary operations in emerging markets and have market capitalizations between $150 million and $9 billion. The portfolio is invested in companies that we believe are sound businesses that are mispriced and that can generate sustainable earnings growth. Global Equity:This strategy invests in the common stocks of 65-85 companies located throughout the world, with market capitalizations above $1 billion. Similar to our Emerging Markets strategy, the portfolio invests in companies that we believe are sound businesses that are mispriced and can generate sustainable earnings growth. Global Dividend:This strategy invests in the common stocksstocks of 65-90 well-established companies around the world, with an emphasis on sustainability and growth of dividends. It seeks to invest in strong franchises that we believe are mispriced, with good liquidity, the ability to generate sustainable economic profits and potentially pay dividends.3
Our ability to grow assets under management is primarily dependent on our ability to generate competitive investment performance, our success in building strong relationships with investment consulting firms and other financial intermediaries, as well as our ability to develop new
client relationships while nurturing existing relationships. We continually seek to expand assets under management by growing our existing investment strategies, as well as identifying and developing new ones. We intend to grow our investment strategies internally but may also consider acquiring new investment strategies from third parties, as discussed under “Growth Strategy” below. Our growth strategy provides clients with more investment opportunities and diversifies our assets under management, thereby reducing risk in any one area of investment and increasing our competitive ability to attract new clients. Our fourten largest clients accounted for approximately 13.7%over 20% of our fee revenues for the year ended December 31, 2013.2015. The loss of some or all of these large clients could have a material adverse effect on our business and our results of operations.Advisory and Subadvisory Agreements
Westwood Management and Westwood International manage client accounts under investment advisory and subadvisory agreements. Typical
infor the asset management industry,
suchthese agreements are usually terminable upon short notice and provide for compensation based on the market value of client assets under management. Westwood’s advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding
quarter,quarter, quarterly in arrears based on assets under management on the last day of the previous quarter, or are based on a daily or monthly analysis of assets under management for the stated period. A few clients have contractual performance-based fee arrangements, which generate additional revenues if we outperform a specified index over a specific period of time. Revenue for performance-based fees is recorded at the end of the measurement period. Revenue from advance payments is deferred and recognized over the period that services are performed. Pursuant to these agreements, Westwood provides overall investment management services, including directing investments in conformity with client-established investment objectives and restrictions. Unless otherwise directed in writing by clients, Westwood has the authority to vote all proxies with respect to securities in client portfolios.Westwood Management and Westwood International are parties to subadvisory agreements with other investment advisors under which they perform similar services
as they do under advisory agreements. Our subadvisory fees are generally computed based upon the average daily assets under management and are payable on a monthly basis.
As with our advisory agreements, these agreements are terminable upon short notice.Westwood Management provides investment advisory services to the Westwood Funds ™Funds® family of mutual funds, which includes the Westwood Income Opportunity Fund, the Westwood SMidCap Fund, the Westwood LargeCap Value Fund, the Westwood SmallCap Value Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus+ Fund, the Westwood Short Duration High Yield Fund, the Westwood Emerging Markets Fund, the Westwood Global Equity Fund and the Westwood Global Dividend Fund. The Westwood Short Duration High Yield Fund is subadvised by SKY Harbor Capital Management, LLC, a registered investment adviser based in Greenwich, Connecticut. funds:
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Ÿ Westwood Income Opportunity | | Ÿ Westwood MLP & Strategic Energy |
Ÿ Westwood SMidCap | | Ÿ Westwood Worldwide Income Opportunity |
Ÿ Westwood LargeCap Value | | Ÿ Westwood Emerging Markets |
Ÿ Westwood SmallCap Value | | Ÿ Westwood Global Equity |
Ÿ Westwood Dividend Growth | | Ÿ Westwood Global Dividend |
Ÿ Westwood SMidCap Plus+ | | Ÿ Westwood Short Duration High Yield* |
Ÿ Westwood Strategic Global Convertibles | | Ÿ Westwood Opportunistic High Yield* |
Ÿ Westwood Market Neutral Income | | |
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| *Subadvised by SKY Harbor Capital Management, LLC, a registered investment adviser based in Greenwich, Connecticut |
As of December 31,
2013,2015, the Westwood
Funds ™Funds® had assets under management of
$2.8$3.6 billion.
Through the combined efforts of the Dallas, Omaha and Houston offices of Westwood Trust, we provide trustfiduciary and investment services and participation in Westwood Trust sponsored common trust funds to institutions and high net worth individuals and families, non-profit endowments and foundations, public and private retirement plans and individual retirement accounts ("IRAs"). Westwood Trust is chartered and regulated by the Texas Department of Banking. Fees charged by Westwood Trust are separately negotiated with each client and are typically based on assets under management. Clients generally havinghave at least $2$1 million in investable assets.
Fiduciary Services
Westwood Trust’s fiduciary services include but are not limited to: financial planning, wealth transfer planning, customizable trust services, trust administration and estate settlement. Westwood Trust also provides custodial services, tax reporting, accounting of trust income and principal, beneficiary and retiree distributions and safekeeping of assets.
Investment Services
Westwood Trust utilizes a consultative approach in developing a client’s portfolio asset allocation. Our approach involves examining the client’s financial situation, including their current portfolio of investments, and advising the client on ways to reduce risk, enhance investment returns and strengthen their financial position based on each client’s unique objectives and constraints. Westwood Trust seeks to define and improve risk/return profiles of client investment portfolios by offering a comprehensive investment solution or
complementing or enhancing
clients’ existing investment strategies. Westwood Trust
provides back office services to clients, including tax reporting, distributionmanages separate portfolios of equity and fixed income to beneficiaries, preparation of account statementssecurities for certain agency and attending totrust clients. Equity portfolios are generally patterned after the special needs of particular trusts, and also serves as trustee for tax and estate-planning purposes and for special needs trusts.institutional strategies offered by Westwood Trust is chartered and regulatedManagement or developed by the Texas Departmentinternal investment team in our Houston Woodway office. Fixed income portfolios consist of Banking.Westwood Trusttargeted laddered portfolios of primarily provides services for employee benefit trusts and personal trusts. Employee benefit trusts include retirement plans of businesses to benefit their employees, including defined contribution plans, pensions and profit sharing plans. Westwood Trust may also be appointed as a trustee and may provide administrative support for these plans, as well as investment advisory and custodial services. Personal trusts are developed to achieve a number of different objectives and Westwood Trust acts as trustee to such trusts and assists them in developing tax-efficient trust portfolios. Fees charged by Westwood Trust are separately negotiated with each client and are typically based on assets under management.
4
high quality municipal securities.
Services
Westwood Trust undertakes a fiduciary responsibility with regard to the management of each client’s assets and utilizes a consultative asset allocation approach. This approach involves our examining the client’s financial situation, including the client’s current portfolio of investments, and advising the client on ways to enhance investment returns and strengthen its financial position. Westwood Trust also provides custodial services, safekeeping and accounting services.
Common Trust Funds
Westwood Trust sponsors a number ofseveral common trust funds in which client assets are commingled to achieve economies of scale. Westwood Trust’s common trust funds fall within two basic categories: personal trusts and employee benefit trusts. Westwood Trust sponsors common trust funds for most of the investment strategies managed by Westwood Management.Management and Westwood International. Westwood Trust has also engages third-party subadvisors for some common trust funds, such asengaged SKY Harbor Capital Management, LLC, William Blair & Company, LLC and Brandywine Global Investment Management, LLC, all registered investment advisors, to subadvise our High Yield Bond, Domestic Growth Equity High Yield Bond and International Fixed Income common trust funds.
funds, respectively.
Westwood Trust also develops asset allocation models for certain clients utilizing mutual funds managed by Westwood Management and Westwood International, as well as from certain other mutual fund families.
Enhanced
BalancedBalanced® Portfolios
Westwood Trust is a strong proponent of asset class diversification and offers its clients the ability to diversify among many different asset classes. Westwood Trust Enhanced
Balanced™Balanced® portfolios combine these asset classes into a customizable portfolio for clients seeking to maximize return for a given level of risk. Periodic adjustments are made to asset class weightings in Enhanced
Balanced ™Balanced® portfolios based on historical returns, risk and correlation data and our current capital markets
outlook.We market our services through several distribution channels to
expandoptimize the reach of our investment advisory
and trust services. These channels enable us to leverage
the distribution infrastructures and capabilities of other financial services firms and intermediaries while focusing on our core competency of developing and managing investment strategies.
Institutional
In our institutional channel, we market our investment strategies through institutional investment consultants, financial intermediaries, managed accounts programs and directly to institutional investors. Institutional
Investment ConsultantsInvestment consulting firmsinvestment consultants serve as gatekeepers to the majority of corporate retirement plans, public retirement plans, endowments and foundations, which represent Westwood’s primary institutional target markets. Consultants provide guidance to their clients in setting asset allocation strategy,strategies, as well as creating investment policies. Consultants also make recommendations for investment firms they believe can best meet their client’s investment objectives. We have established strong relationships with many global, national and regional investment consulting firms, which collectively have contributed to our being considered and hired by their clients. Continuing to enhance existing consulting firm relationships, as well as forging new relationships, serves to increaseincreases the awareness of our services in both the consultant community and within their institutional client base.
Subadvisory Relationships
Our
Marketing our investment strategies to financial intermediaries, via subadvisory relationships,
allowallows us to extend the reach of our investment advisory services to clients of other investment companies with broad, established distribution capabilities. In subadvisory arrangements, our client is generally the investment company through which our services are offered to investors, typically via mutual fund offerings. The investment company that sponsors the mutual fund is responsible for
relevantappropriate marketing, distribution
and operational and
accountingaccounting activities.Managed Accounts
Managed accounts are similar in some respects to subadvisory relationships in that a third-party financial institution, such as a brokerage firm or turnkey asset management program provider, handles distribution to the end client. The end client in a managed account is typically a high net worth individual or small institution. In these arrangements, the third-party financial institution is responsible to the end client for client service, operations and accounting.
We also market our investment strategies directly to pension funds, endowments, foundations and other institutional investors.
Mutual Funds
In our mutual funds channel, we market our registered mutual funds, the Westwood Funds®, to institutional investment consultants, financial intermediaries, registered investment advisors, select broker-dealers and fund supermarkets. By leveraging our existing relationships with institutional investment consulting firms we are able to participate when their defined contribution and other retirement plan clients require a mutual fund vehicle. We also seek relationships with financial intermediaries that manage discretionary fund models in order to have our funds placed in such models. Our wholesaling group markets our funds directly to registered investment advisors, select broker-dealers and mutual fund supermarkets.
Private Wealth
In our private wealth channel, we generate awareness of our trust fiduciary and investment services through investment consultants, centers of influence, community involvement and targeted direct marketing to high net worth individuals, families and small to medium-sized institutions. A significant portion of our new asset growth has been generated by referrals from existing clients.
We believe that we have established a strong platform to support future growth, deriving our strength in large part from the experience and capabilities of our management team and skilled investment professionals. We believe that this focused, stable team has contributed significantly to our solid investment performance, superior client service and a growing array of investment strategies. We believe that opportunities for future growth may come from our ability to:
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| generate growth from new and existing clients and consultant relationships
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·
| attract and retain key employees
|
5
·
| grow assets in our existing investment strategies
|
generate growth from new and existing clients and consultant relationships;·
| foster continued growth of the Westwood Trust platform
|
attract and retain key employees;·
| foster expanded distribution via mutual funds
|
grow assets in our existing investment strategies;·
| pursue strategic corporate development opportunities
|
foster continued growth of the Westwood Trust platform;·
| pursue opportunities internationally through targeted sales and relationships with international distributors and institutional investors
|
expand distribution via mutual funds;·
| continue to strengthen our brand name
|
seek strategic corporate development opportunities;·
| develop or acquire new investment strategies
|
pursue opportunities internationally through targeted sales and relationships with international distributors and institutional investors;·
| expand our distribution focus to target U.S. plan sponsors more directly
|
continue to strengthen our brand name; anddevelop or acquire new investment strategies.
Generate growth from new and existing clients and consultant relationships. As our primary business objective, we intend to maintain and enhance existing relationships with clientsclients and investment consultants by continuing to provideproviding solid investment performance and attentive client service. We also intend to pursue growth throughvia targeted sales and marketing efforts that emphasize our investment philosophy, and performance and superior client service. New institutional client accounts are generally derived throughsourced from either investment consultants and we have developed productive long-term relationshipsor from our direct sales efforts with many national and regional investment consultants.institutional investors. We believe that the in-depth knowledge of our firm, our people and our processes embedded in our consultant relationships, as well as in existing and prospective client relationships, is a key factor when being considered for new client investment mandates. Attract and retain key employees. In order toTo achieve our investment performance andand client relationship objectives, we must be able to retainattract and attractretain talented professionals. We believe that we have created a workplace environment in which motivated, performance-driven, and client-oriented individuals can thrive. As a public company, we are able to offer our employees a compensation program that includes strong equity incentives such thatto closely align their success will be closely aligned with the successthat of our clients and stockholders. We believe that these factors are critical ingredients into maintaining a stable, client-focused environment that can support significant future growth. Grow assets in our existing investment strategies. Most of our existing, seasoned investment strategiesWe have significant capacity for additional assets.assets across our existing range of investment strategies, which we have continued to expand. We have developed a range of approximately 20 institutional investment strategies by building on the core competencies of our U.S. Value team, which has now been in place for over 30 years, as well as via the addition of new investment teams. In order to expand2012, we initiated our offerings for currentGlobal and prospective clients, we launched Westwood International in 2012, enabling us to offerEmerging Markets Equity Team, thereby adding five new equity strategies that focus on emerging and global markets: Emerging Markets, Emerging Markets Plus, Emerging Markets SMid, Global Equity and Global Dividend. TheseOur emerging markets strategies are experiencinghave experienced strong investor demand, from investors and we believe they represent significantprovide additional growth opportunities for us. Assetsopportunities. In 2014, we established the Westwood Global Convertible Securities Team, which manages two strategies - a long-only strategy, Global Convertibles Securities, and a market neutral strategy, Market Neutral Income. Our U.S. Value Team has launched four new strategies since 2014 - Concentrated LargeCap Value, Concentrated AllCap Value, MLP Opportunities and MLP & Strategic Energy - and in 2015 we launched our second Multi-Asset strategy, Worldwide Income Opportunity, strategy grew substantiallya global version of our very successful Income Opportunity strategy. These recently launched offerings, in 2012 and 2013, exceeding $2.8 billion at the endcombination with our range of 2013, as the strategy continuedseasoned investment strategies, provide significant capacity to receive strong interest from our private wealth and mutual fund channels as well as from additional institutional mandates.grow assets under management. We have the team in place to support these investment strategies in our target institutional, private wealth and, mutual fund markets. If we continue to deliverwith continuing strong investment performance, we believe that demand for these strategies can provide meaningful growth infor our assets under management. Foster continued growth of the Westwood Trust platform.Westwood Trust has experienced solid growth in serving small to medium-sized institutions as well as high net worth individuals and families. We anticipate continued interest from clients and prospects in our diversified, highly attentive service model. A significant percentage of new asset growth at Westwood Trust stems from referrals, andas well as gathering additional assets from existing clients. We believe that our Enhanced Balanced ™® strategy, which offers diversified exposure to multiple asset classes in a tax-efficient, comprehensive solution for clients, providesmanner, along with our separately managed portfolios, provide good opportunities for growth.
Foster expanded distribution via mutual funds. We have tenfifteen funds in the Westwood Funds™Funds® family: Westwood SMidCap (WHGMX), Westwood IncomeIncome Opportunity (WHGIX), Westwood LargeCap Value (WHGLX), Westwood SmallCap Value (WHGSX), Westwood Dividend Growth (WHGDX), Westwood SMidCap Plus+ (WHGPX),Westwood Short Duration High Yield (WHGHX)Strategic Global Convertibles (WSGCX), Westwood Market Neutral Income (WMNIX), Westwood Worldwide Income Opportunity (WWIOX), Westwood MLP & Strategic Energy (WMLPX), Westwood Emerging Markets (WWEMX), Westwood Global Equity (WWGEX) and, Westwood Global Dividend (WWGDX), Westwood Short Duration High Yield (WHGHX) and Westwood Opportunistic High Yield (WWHYX). We believe that providing investors access to our investment strategies via mutual funds is a key component to achieving asset growth in the defined contribution and retirement marketplaces as well as in thewith registered investment advisor distribution channel.advisors. With the exception of Westwood Short Duration High Yield and Westwood Opportunistic High Yield, both of which isare subadvised by SKY Harbor Capital Management, LLC, the Westwood Funds ™Funds® generally mirror our institutional strategies. TheAll funds offer capped expense ratios and are available in an institutional share class for all funds.class. We also offer Class A shares for Westwood LargeCap Value (WWLAX), Westwood Income Opportunity (WWIAX), Westwood Emerging Markets (WWEAX) and Westwood Short Duration High Yield (WSDAX) in order to target No Transaction Fee (“NTF”)(NTF) mutual fund supermarket platforms and the broker/dealer marketplace. Westwood Market Neutral Income (WMNUX) and Westwood Opportunistic High Yield (WHYUX) offer an Ultra share class generally only available to institutional investors who purchase the fund directly and for which no shareholder servicing fees are paid.6
Pursue strategic corporate development opportunities.We evaluate strategic corporate development opportunities carefully in order to augment organic growth. We may pursue various transactions, including acquisitionacquisitions of asset management firms, mutual funds or private wealth firms, as well as hiring investment professionals or teams. We consider opportunities to enhance our existing operations, expand our range of investment strategies and services or further develop our distribution capabilities. By acquiring investment firms or by hiring investment professionals or teams that successfully manage investment strategies beyond our current expertise, we can both attract new clients and provide existing clients with an even more diversified range of investment strategies. We may also consider forging alliances with other financial services firms to leverage our core competency of developing superior investment strategies in combination with alliance partners who couldthat can provide enhanced distribution capabilities or additional service offerings. In October 2014, we hired our Global Convertible Securities Team to manage a new, convertible securities strategy, and in April 2015, we acquired Woodway to grow our private-wealth business.
Pursue opportunities internationally through targeted sales and relationships with international distributors and institutional investors.In recent years we have increased our sales efforts outside of the U.S. As of December 31, 2015, non-U.S. clients represented 18% of our assets under management compared with 5% as of December 31, 2011. The growth in our non-U.S. client base has primarily been a function of the broadening of our range of investment strategies to include Emerging Markets equity and Global Convertible Securities. In addition, we established a UCITS platform in 2012 and now offer three sub-funds under the UCITS umbrella for non-U.S. investors. We intend to continue our sales efforts outside of the U.S. We may consider forging alliances with international financial services firms or partners that could provideto obtain enhanced distribution capabilities and greater access to global customers. We may also target institutional investors in specific non-U.S. markets including Canada, the U.K.,United Kingdom, Australia, Switzerland, Scandinavia and the Netherlands. Continue to strengthen our brand name.We believe that the strength of our brandbrand name has been a key component to our long-term success in the investment industry and will be instrumental to our future success. We have developed our strong brand name largely through excellent performance coupled with high profile coverage in investment publications and electronic media. Several of our investment professionals including Mark Freeman, David Spika, Ragen Stienke, Patricia Perez-Coutts and Thomas Pinto Basto have been visible in print and electronic media, and we will continue to look for creative ways to strengthen our brand name and reputation in our target markets. Develop or acquire new investment strategies.We continue to look for opportunities to expand the range of investment strategies that we offer to existing and prospective clients. We may consider internally-developed strategies that extend our existing investment process to new markets and may also consider externally acquired investment strategies. An expanded range of investment strategies offers us additional ways to serve our client base, generating more diversified revenue streams, as well as asset and revenue growth opportunities.Expand our distribution focus to target U.S. plan sponsors more directly.As we look to expand our footprint within the U.S. institutional market, we will be taking a more active approach in meeting directly with pension funds, endowments, foundations and other institutional investors. We believe this will complement our existing efforts with investment consultants while also increasing the universe of prospects with whom we have the ability to discuss our firm and our strategies.
We are subject to substantial and growing competition in all aspects of our business. Barriers to entry
toin the asset management business are relatively low, and we expect to face a growing number of competitors. Although no one company dominates the asset management industry, many companies are larger, better known and have greater resources than us.
Further, we compete with other asset management firms on the basis of investment strategies offered,
thetheir investment performance
of those strategies both in absolute terms and relative to peer groups, quality of service, fees charged, the level and type of compensation offered to key employees, and the manner in
which investment strategies are marketed. Many of our competitors offer more investment strategies and services and have substantially greater assets under management.We compete against numerous investment dealers, banks, insurance companies, mutual fund companies, exchange-traded funds, brokerage and investment firms, and others that sell equity funds, taxable income funds, tax-free investments and other investment products. In addition, the allocation of assets by many investors from active equity
investmentinvestment to index funds, fixed income or similar asset classes has enhanced the ability of firms offering non-equity asset classes and passive equity management to compete effectively with us effectively.us. In summary, our competitive landscape is intense and dynamic, and we may not be able to compete effectivelysuccessfully in the future as an independent company.Additionally, most prospective clients perform a thorough review of an investment manager’s background, investment policies and performance before committing assets to that manager. In many cases, prospective clients invite a number of competing firms to make presentations. The process of obtaining a new client typically takes twelve to eighteen months from the time of the initial contact. While we have achieved success in
competing successfullycompeting for new clients, it is a process to which we dedicate significant resources over an extended period, with no certainty of success.7
winning.
RegulationRegulation
Virtually all aspects of our business are subject to federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients. Under such laws and regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit,
restrictrestrict or prohibit advisers from carrying on their business in the event thatif they fail to comply with such laws and regulations. Possible sanctions include suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures and fines. We believe that we are in substantial compliance with all material laws and regulations.Our business is subject to regulation at both federal and state levels by the SEC and other regulatory bodies. Westwood Management isCorp. and Westwood Advisors, LLC are registered with the SEC under the Investment Advisers Act of 1940 (the “Investment Advisers Act”) and under the laws of various states. As a registered investment adviser,advisers, Westwood Management isManagement Corp. and Westwood Advisors, LLC are regulated and subject to examination by the SEC. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, record keeping requirements, operational requirements,and marketing requirements and disclosure obligations. Westwood Management Corp. also acts as adviser to the Westwood Funds ™,Funds®, a family of mutual funds registered with the SEC under the Investment Company Act of 1940.1940 (the "Investment Company Act"). As an adviser to a registered investment company, Westwood Management Corp. must comply with the Investment Company Act and related regulations. The Investment Company Act imposes numerous obligations on registered investment companies, including requirements relating to operations, fees charged, sales, accounting, record keeping, disclosure, governance and restrictions on transactions with affiliates. Under theSEC rules and regulations of the SEC promulgated pursuant to the federal securities laws, we are subject to periodic SEC examinations. The SEC can institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from censure to termination of an investment adviser’s registration. The failure of Westwood Management Corp. and Westwood Advisors, LLC to comply with SEC requirements could have a material adverse effect on Westwood. We must also comply with anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001, as subsequently amended and reauthorized. We believe that we are in substantial compliance with the requirements of the regulations under the Investment Advisers Act, the Investment Company Act and the USA PATRIOT Act of 2001.
As an investment adviser, we have a fiduciary duty to our clients. The SEC has interpreted that duty to impose standards, requirements and limitations on, among other things: trading of client accounts, allocations of investment opportunities among clients, use of soft dollars, execution of transactions and recommendations to clients. We manage accounts for our clients with the authority to buy and sell securities, select broker-dealers to execute trades and negotiate brokerage commission rates. We receive soft dollar credits from certain broker-dealers that reduce certain operating expenses and cash payments to these broker-dealers. Our soft dollar arrangements are intended to be within the safe harbor provided by Section 28(e) of the Exchange Act.
If our ability to use soft dollars were reduced or eliminated as a result of the implementation of statutory amendments or new regulations, our operating expenses would increase.
Westwood Trust operates in a highly regulated environment and is subject to extensive supervision and examination. As a Texas chartered trust company, Westwood Trust is subject to the Texas Finance Code (the “Finance Code”), the rules and regulations promulgated under the Finance Code and supervision by the Texas Department of Banking. These laws are intended primarily for the protection of Westwood Trust’s clients and creditors rather than for the benefit of investors. The Finance Code provides for and
regulatesregulates a variety of matters, such as:·
| minimum capital maintenance requirements
|
·
| restrictions on dividends
|
minimum capital maintenance requirements;·
| restrictions on investments of restricted capital
|
restrictions on dividends;·
| lending and borrowing limitations
|
restrictions on investments of restricted capital;·
| prohibitions against engaging in certain activities
|
lending and borrowing limitations;·
| periodic fiduciary and information technology examinations by the office of the Texas Department of Banking Commissioner
|
prohibitions against engaging in certain activities;·
| furnishing periodic financial statements to the Texas Department of Banking Commissioner
|
periodic fiduciary and information technology examinations by the Texas Department of Banking Commissioner;·
| fiduciary record keeping requirements
|
furnishing periodic financial statements to the Texas Department of Banking Commissioner;·
| prior regulatory approval for certain corporate events (such as mergers, sale/purchase of all or substantially all of the assetsfiduciary record keeping requirements; and transactions transferring control of a trust company)
|
prior regulatory approval for certain corporate events (such as mergers, the sale or purchase of all or substantially all trust company assets and transactions transferring control of a trust company).
The Finance Code also gives the Banking Commissioner broad regulatory powers (including penalties and civil and administrative actions) if the trust company violates certain provisions of the Finance Code, including
implementing conservatorship or closure if Westwood Trust is determined to be in a “hazardous condition” (as defined by
applicable law). Westwood
Trust’s failure to comply with the Finance Code could have a material adverse effect on Westwood.8
Westwood Trust is limited by the Finance Code in the payment of dividends to undivided profits, which is described as that part of equity capital equal to the balance of net profits, income, gains, and losses since formation minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate board resolutions. At the discretion of its boardBoard of directors, WestwoodDirectors, Westwood Trust has made quarterly and special dividend payments to Westwood Holdings Group, Inc. out of undivided profits.
Westwood International is registered with both the Ontario Securities Commission (“OSC”) and the Autorité des marchés financiers (“AMF”) in Québec.
The OSC is an independent Crown corporation responsible for regulating the capital markets in Ontario. Its statutory mandate is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets. The OSC has rule making and enforcement powers to help safeguard investors, deter misconduct and regulate participants involved in capital markets in Ontario. It regulates firms and individuals that sell securities and
provide advice in Ontario, and also regulates public companies, investment funds and marketplaces, such as the Toronto Stock Exchange. The OSC’s powers are granted under the Securities Act (Ontario) the Commodity Futures Act (Ontario) and certain provisions of the Business Corporations Act. It operates independently from the government and is funded by fees charged to market participants. The OSC is accountable to the Ontario Legislature through the Minister of Finance.
The AMF is the entity mandated by the government of Québec to regulate the province’s financial markets and provide assistance to consumers of financial products and services. Established on February 1, 2004 under
an Act regarding the Autorité des marchés financiers , the AMF integrates the regulation of the Québec financial sector, notably in the areas of insurance, securities, deposit institutions (other than banks) and the distribution of financial products and services. Specifically, the AMF’s mission is to:·
| provide assistance to consumers of financial products and services
|
·
| ensure that financial institutions and other regulated financial sector entities comply with applicable solvency and obligations imposed by law
|
provide assistance to consumers of financial products and services;·
| supervise activities connected with distribution of financial products and services
|
ensure that financial institutions and other regulated financial sector entities comply with applicable solvency and obligations imposed by law;·
| supervise stock market and clearing house activities and monitor the securities market
|
supervise activities connected with distribution of financial products and services;·
| supervise derivatives markets, including derivatives exchanges and clearing houses and ensure that regulated entities and other derivatives market practitioners comply with obligations imposed by law
|
supervise stock market and clearing house activities and monitor the securities market;·
| implement protectionsupervise derivatives markets, including derivatives exchanges and clearing houses and ensure that regulated entities and other derivatives market practitioners comply with obligations imposed by law; and compensation programs for consumers of financial products and services, and administer compensation funds set up by law.
|
implement protection and compensation programs for consumers of financial products and services, and administer compensation funds set up by law.
Westwood International has entered into a
Memorandum of Understanding (“MOU”)MOU with Westwood Management pursuant to which Westwood International is considered a “participating affiliate” of Westwood Management. Subject to certain conditions, the SEC staff allows U.S. registered investment
advisersadvisers to use portfolio management or research resources of advisory participating affiliates subject to the supervision of a registered adviser. Pursuant to the MOU, Westwood International professionals can provide advisory and subadvisory services to U.S clients subject to SEC rules and regulations and under the supervision of Westwood Management.Employee Retirement Income Security Act of 1974
We are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to
theits related regulations insofar as we are a “fiduciary” under ERISA with respect to some clients. ERISA and applicable provisions of the Internal Revenue Code impose certain duties on fiduciaries under ERISA or on
thoseentities that provide services to ERISA plan clients and
prohibit certain transactions involving ERISA plan clients. Our failure to comply with these requirements could have a material adverse effect.At December 31,
2013,2015, we had
106168 full-time employees
(93(153 based in the United States and
1315 based in Canada). No employees are represented by a labor union, and we believe our employee relations to be good.
For information about our operating segments, Advisory and Trust, please see Note
1514 to the
consolidated financial statements accompanying this Report.
9
We believe these represent the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. You should carefully consider the risks
describeddescribed below before making an investment decision. You should also refer to the other information included or incorporated by reference in this Report, including our financial statements and related notes.Poor investment performance
Risks Related to the Investment Industry
Our results of operations depend upon the market value and composition of assets managedunder management, which can fluctuate significantly based on various factors, some of which are beyond our control.
Our revenues are primarily generated from fees derived as a percentage of assets under management (“AUM”). The value of our AUM can be negatively impacted by usseveral factors, including:
Market performance: Performance of the securities markets could
be impacted by a number of factors beyond our control, including, among others, general economic downturns, political uncertainty or acts of terrorism. Negative performance within the securities markets or short-term volatility within the securities markets could result in investors withdrawing assets, decreasing their rates of investment or shifting assets to cash or other asset classes or strategies that we do not manage, all of which could reduce our revenues. In addition, during periods of slowing growth or declining revenues, profits and profit margins are adversely
affect our results of operations.affected because certain expenses remain relatively fixed.
Investment performance: Because we compete with many asset management firms on the basis of
theour investment strategies,
we offer, the maintenance and growth of assets under management
is dependent, to a significant extent, on the investment performance of the assets that we manage. Because our revenue is primarily generated from fees derived as a percentage of assets under management, poorPoor performance tends to result in the loss or reduction of client accounts, which correspondingly decreases revenues. Underperformance relative to peer groups for our various investment strategies could adversely affect our results of operations, especially if such underperformance continues for an extended period of time. The historical returns of our strategies and the ratings and rankings we, or the mutual funds that we advise, have received in the past should not be considered indicative of the future results of these strategies or of any other strategies that we may develop in the future. The investment performance we achieve for our customers varies over time and variances can be wide. In addition, certain of our investment strategies have capacity constraints, as there is a limit to the number of securities available for the strategycertain strategies to operate effectively. In those instances, we may choose to limit access to new or existing investors.Recently, we have experienced client outflows that may have resulted in part from the underperformance of our LargeCap Value
Our business is subject to extensive regulation with attendant compliance costs and
SMidCap Value strategies. These strategies collectively represents about 49% of our consolidated revenue. While our LargeCap Value and SMidCap Value strategies have outperformed their respective benchmark indices since the strategies’ inception dates, these strategies have underperformed their respective benchmark indices and ranked below the median return of their respective peer groups over the trailing three year period ended December 31, 2013. Additionally, our Emerging Markets strategy has underperformed its benchmark index and ranked below the median return of its peer group since its inception in 2012. While we believe this recent underperformance has resulted in some client outflows, many factors are involved in client investment and allocation decisions and we cannot specifically quantify the amount of outflows resulting from this recent underperformance.Our success depends on certain key employees and our ability to attract and develop new talented investment professionals. Our inability to attract and retain key employees could compromise our future success.
We believe that our future success will depend to a significant extent upon the services of our certain key employees, particularly Brian Casey, President and Chief Executive Officer, Mark Freeman, Chief Investment Officer, and Patricia Perez-Coutts, Senior Portfolio Manager. As with other asset management businesses, our future performance depends to a significant degree upon the continued contributions of these and other key officers, investment professionals, as well as marketing, client service and management personnel. Additionally, attracting and developing new talented investment professionals is an essential component of our business strategy. There is substantial competitionserious consequences for skilled personnel and the loss of key employees or our failure to attract, develop, retain and motivate qualified personnel, could negatively impact our business, financial condition, results of operations and future prospects.
Our revenues are dependent upon the performance of the securities markets and negative performance of the securities markets could reduce our revenues.
Our results of operations are affected by many economic factors, including the performance of the securities markets. Performance of the securities markets could be impacted by a number of factors beyond our control, including, among others, general economic downturns, political uncertainty or acts of terrorism. Negative performance within the securities markets or short-term volatility within the securities markets could result in investors withdrawing assets, decreasing their rates of investment or shifting assets to cash or other asset classes or strategies that we do not manage, all of which could reduce our revenues. Because most of our revenues are based on the value of assets under management, a decline in the value of those assets would also adversely affect our revenues. In addition, in periods of slowing growth or declining revenues, profits and profit margins are adversely affected because certain expenses remain relatively fixed.
In particular, a significant portion of our assets under management is invested in equity securities of companies with large market capitalizations. As a consequence, we are particularly susceptible to the volatility associated with changes in the market for large capitalization stocks. Due to this concentration, any change or reduction in such markets, including a shift of our clients’ and potential clients’ preference from investments in equity securities of large capitalization stocks to other equity or fixed income securities could have a significant negative impact on our revenues and results of operations. This negative impact could occur due to
10
the depreciation in value of our assets under management, the election by clients to select other firms to manage their assets or the election by clients to allocate assets away from asset classes that we manage. Any of these events would result in decreased assets under management and therefore reduced revenues and a decline in results of operations.
If we are unable to realize benefits from the costs we have incurred and are continuing to incur to develop new investment strategies and otherwise broaden our capabilities, our growth opportunities may be adversely affected.
We have incurred significant costs to develop new investment strategies, to launch new mutual funds under the Westwood Funds ™ name and to upgrade our business infrastructure. We expect to continue to incur significant costs related to such improvements in the future. We may not realize the benefits of these investments and, if unable to do so, our results of operations and growth opportunities may be adversely affected.
Expansionviolations; expansion into international markets and introduction of new products and services increases our operational, regulatory and operational risks.
Virtually all aspects of our business are subject to laws and regulations, including the Investment Advisers Act, the Investment Company Act, the USA Patriot Act of 2001, the Finance Code and anti-money laundering laws. These laws and regulations generally grant regulatory agencies broad administrative powers, including the power to limit or restrict us from operating our business, as well as powers to place us under conservatorship or closure if we fail to comply with such laws and regulations. Violations of such laws or regulations could subject us or our employees to disciplinary proceedings and civil or criminal liability, including revocation of licenses, censures, fines or temporary suspensions, permanent barring from the conduct of business, conservatorship, or closure. Any such proceeding or liability could have a material adverse effect upon our business, financial condition, results of operations and business prospects.
In addition, the regulatory environment in which we operate is subject to change. We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. In recent years, regulators have increased their oversight of the financial services industry. Some regulations are focused directly on the investment management industry, while others are more broadly focused but affect our industry as well. The Dodd-Frank Act of 2010 significantly increased and revised the federal rules and regulations governing the financial services industry and, in addition to other
risks.Weregulations, has generally resulted in increased compliance and administrative requirements. For example, the SEC’s adoption of Form PF and revisions to Form ADV impose additional reporting requirements for SEC-registered investment advisors. Additionally, ERISA Section 408(b)(2) and related regulations require additional information to be provided to ERISA-governed retirement plans. While we believe that changes in laws, rules and regulations, including those discussed above, have increased our administrative and compliance costs, we are unable to quantify the increased costs attributable to such changes. See “Item 1. Business — Regulation.”
Recently, we have expanded our product offerings,
vehicles offered and international business activities
recently with
the establishment of Westwood International and itsstrategies in global and emerging markets,
strategies.global multi-asset and global convertible securities. Additionally, our client base continues to expand internationally. As of December 31, 2015, approximately 18% of our AUM is managed for clients who are domiciled outside the United States. As a result, we face increased operational, regulatory, compliance, reputation and foreign exchange rate risks.
In particular, rapid regulatory change is occurring internationally with respect to financial institutions, including, but not limited to, anticipated revisions to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011. The failure of our compliance and internal control systems to properly identify and mitigate such additional risks, or of our operating infrastructure to support international activities, could result in operational failures and actions by regulatory agencies, which could have a material adverse effect on our business. We devote considerable time and resources to both domestic and international compliance; however, we may fail to timely and properly identify regulatory requirements or modify our compliance procedures for changes in our regulatory environment, which may subject us to legal proceedings, domestic and foreign government investigations, penalties and fines.
The investment management and private wealth industry is highly competitive and innovative.
The investment management and private wealth industry is highly competitive, with competition based on a variety of factors, including investment performance, fee rates, continuity of investment professionals and client relationships, the quality of services provided to clients, corporate positioning and business reputation and differentiated products. A number of factors increase our competitive risks, including the following:
Potential competitors have a relatively low cost of entering the investment management industry.
Many competitors have greater financial, technical, marketing and other resources, more comprehensive name recognition and more personnel than we do.
The recent trend toward consolidation in the investment management industry, and the securities business in general, has served to increase the size and strength of some of our competitors.
The enhanced ability for firms offering passive management to effectively compete with us.
Some competitors may invest in different investment styles or alternative asset classes that may be perceived as more attractive than our investment strategies.
Other industry participants, hedge funds and alternative asset managers may seek to recruit our investment professionals.
Some competitors charge lower fees for their investment management services than we do.
Some competitors may provide additional client services, including banking, financial planning and tax planning.
If we are unable to compete effectively, our earnings could be reduced and our business could be adversely affected.
Westwood
International invests
principally in the securities of non-U.S. companies, which involve foreign currency
exchange, tax, political, social and economic uncertainties and risks.As of December 31,
2013,2015, approximately 13%16% of our assets under management were invested in strategies offering access to global and emerging markets which are mostly comprised of securities ofwith significant exposure to non-U.S. companies. Fluctuations in foreign currency exchange rates could negatively affect the returns of our clients that are invested in these strategies. Investments in non-U.S. issuers may also be affected by tax positions taken in countries or regions in which we are invested as well as political, social and economic uncertainty, including, for example, as a result of the broad decline in global economic conditions beginningthat began in 2008 and the slow recovery thereafter. Additionally, many2015. Many financial markets are not asless developed or efficient as thethan U.S. financial markets and as a result, those marketstherefore may have limited liquidity and higher price volatility, and may lack an established regulations.regulatory framework. Liquidity may also be adversely affected by political or economic events, government policies, and social or civil unrest within a particular country. These risks, among others, could adversely affect the performance of our strategies that are invested in securities of non-U.S. issuers and may be particularly acute in the emerging or less developed markets in which we invest. As a result, we may be unable to attract or retain client investments in these strategies or assets invested in these strategies may experience significant declines in value, and our results of operations may be negatively affected.
Due to the substantial cost and time required to introduce new investment strategies,
in our industry, we may not be able to successfully introduce new investment strategies in a timely manner, or at all.
We have incurred significant costs to develop new investment strategies, launch new mutual funds under the Westwood Funds® name, launch UCITS funds and upgrade our business infrastructure. We expect to continue to incur significant costs related to such improvements.
The development of new investment strategies, whether through acquisition or internal development, requires a substantial amount of time and significant financial resources, including expenses related to compensation, sales and marketing, information technology, legal counsel and other professional services. Our ability
to market and sell a new investment strategy depends on our financial resources, the investment performance of the specific strategy, the timing of the offering and our marketing strategies. Once an investment strategy is developed, we must effectively marketintroduce the strategy to existing and prospective clients. Our ability to sell new investment strategies to existing and prospective clients depends on our ability to meet or exceed the performance of our competitors offering the same or a similar strategy. We may not be able to manage the assets within a given investment strategy profitably. Moreover,profitably, and it may take years before we are able to produce the level of results that will enable us to attract clients. If we are unable to realize the benefits of the costs and expenses incurred in developing new investment strategies, we may experience losses as a result of our management of these investment strategies, and our ability to introduce further new investment strategies and compete in our industry may be hampered.11
Our efforts to establish new investment teams may be unsuccessful and could negatively affect our results of operation and reputation.
As part of our growth strategy, and toTo introduce new investment strategies, we may also seek to add new investment teams. To the extent we are unable to recruit and retain investment teams that will complement our existing business model, we may not be successful in further diversifying and increasing our investment strategies and client assets, which could have a material adverse effect on our business and future prospects. The addition of a new team using an investment strategy with which we may have limited or no experience could strain our operational resources and increase the possibility of operational error. If any such new teams or strategies perform poorly and fail to attract sufficient assets, to manage, our results of operations and reputation will be adversely affected.
Our business is dependent on investment advisory, subadvisory and trust agreements that are subject to termination or non-renewal. As a result, we could lose any of our clients on very short notice.
Substantially all of our revenues are derived pursuant to investment advisory, subadvisory and trust agreements with our clients. In general, either party may terminate these agreements upon 30 days’ notice. Any termination of, or failure to renew, a material number of these agreements could have a material adverse impact, particularly because many of our costs are relatively fixed.
Investors in the funds that we advise can redeem their investments in those funds at any time without prior notice, which could adversely affect our earnings.
Investors in the funds that we advise or subadvise may redeem their investments in those funds at any time without prior notice, thereby reducing our assets under management. These investors may redeem for any number of reasons, including general financial market conditions, our absolute or relative investment performance, or their own financial condition and requirements. In a declining stock market, the pace of redemptions could accelerate. The redemption of a substantial amount of investments in our funds could adversely affect our revenues and have a material adverse effect on our earnings and financial condition.
A small number of clients account for a substantial portion of our business. As such, the reduction or loss of business with any of these clients could have a material adverse effect on our business, financial condition and results of operations.
Our four largest clients accounted for approximately 13.7% of fee revenues for the year ended December 31, 2013. We are dependent to a significant degree on our ability to maintain our relationships with these clients. There can be no assurance that we will be successful in maintaining existing client relationships, securing additional clients or achieving the superior investment performance necessary to earn performance-based advisory fees. Any failure by us to retain one or more of these large clients or establish profitable relationships with additional clients could have a material adverse effect on our business, financial condition and results of operations.
The investment management industry is highly competitive.
The investment management industry is highly competitive, with competition based on a variety of factors, including investment performance, investment management fee rates, continuity of investment professionals and client relationships, the quality of services provided to clients, corporate positioning and business reputation and differentiated products. A number of factors increase our competitive risks, including the following:
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| Potential competitors have a relatively low cost of entering the investment management industry.
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| Many of our competitors have greater financial, technical, marketing and other resources, more comprehensive name recognition and more personnel than we do.
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| The recent trend toward consolidation in the investment management industry, and the securities business in general, has served to increase the size and strength of some of our competitors.
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| Some competitors may invest according to different investment styles or in alternative asset classes that may be perceived as more attractive than the investment strategies we offer.
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| Other industry participants, hedge funds and alternative asset managers may seek to recruit our investment professionals.
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| Some competitors charge lower fees for their investment management services than we do.
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If we are unable to compete effectively, our earnings could be reduced and our business could be adversely affected.
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Competitive fee pressures could reduce revenues and profit margins.
To the extent we have to compete on the basis of price, we may not be able to maintain our current fee structure. Although our investment management fees vary from product to product, we have competed primarily on the performance of our products and client service rather than on the level of our investment management fees relativeRisks Related to our competitors. In recent years there has been a trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service levels that make investors willing to pay our fees. We cannot be assured that we will succeed in providing investment returns and service levels that will allow us to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.
Performance fees could have a significant effect on our revenues and results of operations.
We have performance fee agreements with a few clients, which pay us a fee if we outperform a specified index over predetermined periods of time. We may not be able to outperform such indexes and failure to do so would cause us to earn none or only part of those potential revenues, which would have a material adverse effect on our revenues and results of operations. Our revenues from performance-based fees could fluctuate significantly from one measurement period to the next, depending on how we perform relative to the indexes specified in these agreements. For example, we earned performance fees of $2.6 million in 2013, $1.3 million in 2012 and $1.0 million in 2011.
Any event that negatively affects the asset management industry in general could have a material adverse effect on us.
Any event affecting the asset management industry that results in a general decrease in assets under management or a significant general decline in the number of advisory clients or accounts could negatively impact our revenues. Our future growth and success depends in part upon the growth of the asset management industry.
Our business is subject to extensive regulation with attendant costs of compliance and serious consequences for violations.
Virtually all aspects of our business are subject to laws and regulations, including the Investment Advisers Act, the Investment Company Act, and anti-money laundering laws. These laws and regulations generally grant regulatory agencies broad administrative powers, including the power to limit or restrict us from operating our business as well as the powers to place us under conservatorship or closure in the event we fail to comply with such laws and regulations. Violations of such laws or regulations could subject us or our employees to disciplinary proceedings and civil or criminal liability, including revocation of licenses, censures, fines or temporary suspensions, permanent barring from the conduct of business, conservatorship, or closure. Any such proceeding or liability could have a material adverse effect upon our business, financial condition, results of operations and business prospects. Due to the extensive regulations and laws to which we are subject, we devote substantial time and effort to legal and regulatory compliance issues.
In recent years, regulators have shown an increasing interest in oversight of the financial services industry. Some newly adopted regulations are focused directly on the investment management industry, while others are more broadly focused but affect our industry as well. The Dodd-Frank Act of 2010 significantly increased and revised the federal rules and regulations governing the financial services industry and, in addition to other regulations, has generally resulted in increased compliance and administrative burdens. For example, the SEC’s recent adoption of Form PF and revisions to Form ADV impose additional reporting requirements for SEC registered investment advisors, including us. Additionally, ERISA Section 408(b)(2) and related regulations require additional information to be provided to ERISA-governed retirement plans. While we believe that changes in laws, rules and regulations, including the ones discussed above, have increased our administrative and compliance costs, we are not able to quantify the amount of increased costs attributable to those changes.
In addition, the regulatory environment in which we operate is subject to change. We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. See “Item 1. Business — Regulation.”
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Misuse of assets and information in the possession of our employees could result in costly litigation and liability for us and our clients.
Our employees handle significant amounts of assets along with financial and personal information for our clients. We have implemented a system of controls to minimize the risk of a fraudulent use of assets and information, however our controls may not be sufficiently adequate to prevent fraudulent actions by employees. If our controls are ineffective, we could be subject to costly litigation, which could consume financial resources, distract management and result in regulatory sanctions. Such fraudulent actions could also adversely affect clients, causing them to seek redress.
Acquisitions involve inherent risks that could compromise the success of the combined business and dilute the holdings of current stockholders.
As part of our long-term business strategy, we may pursue corporate development transactions including the acquisition of asset management firms, mutual funds, private wealth firms, investment professionals or teams. See “Item 1. Business — Growth Strategy.” If we are
incorrectincorrect when assessing the value, strengths, weaknesses, liabilities and potential profitability of such transactions, or if we fail to adequately integrate the acquired businesses or individuals, the success of the combined business could be compromised. Any businessBusiness acquisitions are subject to the risks commonly associated with such transactions including, among others, potential exposure to unknown liabilities of acquired companies and to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, potential disruptions to the business of the combined company and potential diversion of management’s time and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of changes in management, potential litigation or other legal risks, potential write-downs related to goodwill impairments in connection with acquisitions, and dilution to the stockholders of the combined company if the acquisition is made for stock of the combined company. In addition, investment strategies, technologies or businesses of acquired companies may not be effectively assimilated into our business or may have a negative effect on the combined company’s revenues or earnings. The combined company may also incur significant expenseexpenses to complete acquisitions and support acquired investment strategies and businesses. Further, any such acquisitions may be funded with cash, debt or equity, which could have the effect of dilutingdilute the holdings or limitinglimit the rights of stockholders. Finally, we may not be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms.Our acquisitions were forecasted
The Woodway acquisition is subject to add revenues, expensesrisks and earnings touncertainties, including the successful integration of Woodway's business and personnel. We may not realize the anticipated benefits of the Woodway acquisition.
On April 1, 2015, we completed the acquisition of Woodway via the merger of Woodway into our
business.wholly-owned subsidiary, Westwood Trust. The
failure to realize these revenues and earnings could adversely impact our results of operations.Our acquisitions of McCarthy Group Advisors, LLC (“McCarthy”) in 2010 and the Philadelphia Fund business of Baxter Financial Corporation in 2009acquisition may not yield the forecasted benefits that we forecasted due to a variety of factors, including our failurefactors. Woodway may have unanticipated liabilities, for which we cannot be fully indemnified under the Merger Agreement. We may not be able to retainmaintain or increase the clientslevels of revenue, earnings and operating efficiency, or the client relationships, that Woodway achieved prior to the acquisition. The success of the businesses we acquired. If thisWoodway acquisition does not yield the expected benefits, our revenues and results of operations could be negatively impacted and we could be required to record an impairment against earnings for the intangible assets and goodwill acquiredwill depend, in this transaction.
Damage to our reputation could harm our business and have a material adverse effectpart, on our results of operations.
Our brand is a valuable intangible asset that could be vulnerable to threats that can be difficult or impossible to anticipate or control. Regulatory inquiries and rumors could damage our reputation, even if they are unfounded or satisfactorily addressed. Damage to our brand could impede our ability to attractrealize the anticipated synergies and retain customersother benefits from continuing to integrate Woodway’s business with our existing businesses. The integration process may be complex, costly and key employees,time-consuming. If we experience difficulties, delays or unexpected costs with the integration process or if the Woodway business deteriorates, the anticipated cost savings, growth opportunities and could reduce our assets under management, which would have a material adverse effect on our resultsother synergies of operations.
Wethe Woodway acquisition may not be realized fully, or realized at all, or may take longer to realize than expected. Additionally, because we are engaged in litigation related to the hiring of some employeesissuing shares of Westwood International that, depending on the outcome, could increase our expenses and have a material adverse effect on our results of operations.
On August 3, 2012, AGF Management Limited and AGF Investments Inc. (“AGF”) filed a lawsuitcommon stock as consideration in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and executive recruiting firm Warren International, LLC. The action relates toacquisition, the hiring of certain members of Westwood’s global and emerging markets investment team who were previously employed by AGF. AGF is alleging that the former employees breached certain obligations when they resigned from AGF, and that Westwood and Warren induced such breaches. AGF is seeking an unspecified amount of damages and punitive damages of $10 million (CAD) in the lawsuit. On November 5, 2012, Westwood issued a response to AGF’s lawsuit with a counterclaim against AGF for defamation. Westwood is seeking $1 million (CAD) in general damages, $10 million (CAD) in special damages, $1 million (CAD) in punitive damages, and costs. On November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a Westwood subsidiary, alleging that the employee made defamatory statements about AGF. In this second lawsuit, AGF is seeking $5 million (CAD) in general damages, $1 million (CAD) per defendant in punitive damages, unspecified special damages, interest and costs.
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While we intend to vigorously defend both actions and pursue our counterclaims, we are currently unable to estimate the ultimate aggregate amount of monetary gain, loss or financial impact of these actions and counterclaims. Defending these actions and pursuing these counterclaims may be expensive for us and time consuming for our personnel. While we do not currently believe these proceedingstransaction will have a material impact, adverse resolutionsthe effect of these actions and counterclaims could have a material adverse effect ondiluting the holdings of our existing stockholders.
If any of the above risks occur, our business, financial condition,
or results of
operations.operations and cash flows may be materially and adversely impacted, and our stock price may decline as a result. For further information on our acquisition of Woodway, see Note 5 “Acquisitions, Goodwill and Intangible Assets” to our consolidated financial statements.
Our business involves risks of being engaged in litigation and liability that could increase our expenses and reduce our results of operations.
Many aspects of our business involve substantial risks of liability. We could be named as defendants or co-defendants in lawsuits or could be involved in disputes that involve the threat of lawsuits seeking substantial damages. As an SEC-registered adviser, mutual fund adviser and publicly traded entity, we are subject to governmental and self-regulatory
organizationorganization examinations, investigations and proceedings. Similarly, the investment strategies that we manage could be subject to actual or threatened lawsuits and governmental and self-regulatory organization investigations and proceedings, any of which could harm the investment returns or reputation of the applicable fund or result in our being liable for any resulting damages. There has been an increased incidence of litigation and regulatory investigations in the asset management industry in recent years, including customer claims, as well as class action suits seeking substantial damages. While customers do not have legal recourse against us solely on the basis of poor investment results, if our investment strategies perform poorly, we are more likely to become subject to litigation brought by dissatisfied clients. In addition, to the extent customers are successful in claiming that their losses resulted from fraud, negligence, willful misconduct, breach of contract or other similar misconduct, these clients may have remedies against us, the mutual funds and other funds we advise or our investment professionals under the federal securities laws or state law. See the discussion of our current legal proceedings in Item 3. “Legal Proceedings”.
Misuse of assets and information in the possession of our employees could damage our reputation and result in costly litigation and liability for our clients and us.
Our employees handle significant amounts of assets along with financial and personal information for our clients. Our employees could misuse or improperly disclose such information, which could harm our reputation. We
have implemented a system of controls to minimize the risk of fraudulent use of assets and information; however, our controls may be
unableinsufficient to
fully realize deferred tax assets related to net operating losses at Westwood International.As a result of start-up and ongoing operating costs, we have incurred net operating losses at Westwood International, our Canadian subsidiary. We have not recorded an allowance against the related deferred tax asset, as we currently anticipate that it is more-likely-than-not that we will generate sufficient taxable income at Westwood International to utilize these net operating losses. However, forecasting results involves making significant assumptions and estimates about future events. If those forecasts are incorrect, we could be required to record valuation allowances against the net operating loss deferred tax assets, which would reduce our net income in future periods.
We may be exposed to unanticipated losses if our techniques for managing risk are ineffective.
To manage the risks in our business, we must maintain effective policies, procedures and systems that enable us to identify, monitor and control our exposure to operational, legal and reputational risks. Our risk management methods may prove to be ineffective due to their design or implementation, or as a result of the lack of adequate, accurate or timely information or otherwise.prevent fraudulent actions by employees. If our risk management effortscontrols are ineffective, we could suffer losses thatbe subject to costly litigation, which could consume financial resources, distract management, damage our reputation and result in regulatory sanctions. Such fraudulent actions could also adversely affect clients, causing them to seek redress.
Our success depends on certain key employees and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees could compromise our future success.
Our future success depends upon our ability to attract and retain professional and executive employees, including investment, marketing, client service and management personnel. There is substantial competition for skilled personnel within the asset management business, and the failure to attract, develop, retain and motivate qualified personnel could negatively impact our business, financial condition, results of operations and future prospects. Only a limited number of our employees, including our Chief Executive Officer, Chief Investment Officer and certain investment employees, have employment contracts. Certain key employees do not have employment contracts and generally can terminate their employment at any time. In order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income. Additionally, investment and sales professionals often maintain strong relationships with their clients, and their departure may cause us to lose client accounts, which could have a material impact on our revenues and results of operations.
Damage to our reputation could harm our business and have a material adverse effect on our financial conditionresults of operations.
Our brand is a valuable intangible asset that could be vulnerable to threats that can be difficult or operating results. Additionally,impossible to anticipate or control. Regulatory inquiries and rumors could damage our reputation, even if they are unfounded or satisfactorily addressed. Damage to our brand could impede our ability to attract and retain customers and key employees, and could reduce our assets under management, which would have a material adverse effect on our results of operations.
Failure to properly address conflicts of interest could harm our reputation or cause clients to withdraw funds, each of which could adversely affect our business and results of operations.
The SEC and other regulators have increased their scrutiny of potential conflicts of interest, and we have implemented procedures and controls that we believe are reasonably designed to address these issues. However, appropriately dealing with conflicts of interest is complex and if we fail, or appear to fail, to deal appropriately with conflicts of interest, we could be subjectface reputational damage, litigation or regulatory proceedings, any of which may adversely affect our results of operations.
In addition, as we expand the scope of our business and our client base, we must continue to
litigation, particularly frommonitor and address any potential new conflicts between the interests of our stockholders and those of our clients. Our clients may withdraw funds if they perceive conflicts of interest between the investment decisions we make for strategies in which they have invested and our obligations to our stockholders. For example, we may limit the growth of assets in or close strategies or otherwise take action to slow the flow of assets when we believe it is in the best interest of our clients,
even though our assets under management and
sanctionsinvestment management fees may be negatively impacted. Similarly, we may establish or
fines from regulators. Our techniques for managing operational, legal and reputational risksadd new investment teams or expand operations into other geographic areas or jurisdictions if we believe such actions are in
client portfolios may not fully mitigate the
risk exposure in all economic or market environments, including exposure to risks that we might fail to identify or anticipate.Various factors may hinder the declaration and payment of dividends.
We have historically paid a quarterly dividend. However, payment of future dividends is subject to the discretionbest interest of our Board of Directors, and various factors may prevent us from paying dividends. Such factors includeclients, even though our financial position, capital requirements and liquidity, the existence of a stock repurchase program, state corporate and banking law restrictions, results of operations may be adversely affected in the short term. Although we believe such actions enable us to retain client assets and such other factors asmaintain our Boardprofit margins, if clients perceive a change in our investment or operational decisions favors a strategy to maximize short term results, they may withdraw funds, which could adversely affect our revenues and results of Directors may consider relevant. In addition, as a holding company, our ability to pay dividends is dependent on the dividends and income we receive from our subsidiaries. Currently, our primary source of cash consists of dividends from Westwood Management or Westwood Trust. The payment of dividends by Westwood Management or Westwood Trust is subject to the discretion of their Boards of Directors and compliance with applicable laws, including, in particular, the provisions of the Texas Finance Code applicable to Westwood Trust. Westwood International did not generate income for the years ended December 31, 2013 and 2012, and is consequently unable to contribute cash to the payment of dividends to our shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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operations.
Our business is vulnerable to systems failures that could have a material adverse effect on our business, financial condition and results of operations.
Any delays or inaccuracies in securities pricing information or information processing could give rise to claims
against us, whichthat could have a material adverse effect on our business, financial condition and results of operations. We are highly dependent on communications and information systems
andand on third-party vendors for securities pricing information and updates from certain software. We may suffer a systems failure or interruption, whether caused by an earthquake, fire, other natural disaster, power or telecommunications failure, unauthorized access, act of God, act of war, or otherwise, and our back-up procedures and capabilities may be inadequate to eliminate the risk of extended interruptions in operations.Failure to implement and maintain effective cyber security controls could disrupt our operations and have a material adverse effect on our results of operations and stock price.
Our business is dependent on information technology systems and the cyber security controls we have in place to protect those systems and the information contained therein. A failure of our controls to protect our information technology from an external or internal attack or to prevent a breach of confidential client or competitive information could materially interrupt our operations and expose us to regulatory
and legal actions, which could have a material adverse effect on our operating results, reputation and stock price.Insurance coverage may be inadequate or not cover legal and regulatory proceedings.
We maintain insurance coverage in amounts and on terms we believe appropriate to cover legal and regulatory matters; however, we can make no assurance that there will be adequate coverage or that a claim will be covered by our insurance policies at all. Additionally, insurance premiums may rise for substantially the same coverage amounts and terms, which will increase our expenses and reduce our net income.
Various factors may hinder the declaration and payment of dividends.
We have historically paid a quarterly dividend. However, payment of future dividends is subject to the discretion of our Board of Directors, and various factors may prevent us from paying dividends. Such factors include our financial position, capital requirements and liquidity, stock repurchase plans, state corporate and banking law restrictions, results of operations and such other factors as our Board of Directors may consider relevant. In addition, as a holding company, our ability to pay dividends is dependent on the dividends and income we receive from our subsidiaries. Currently, our primary source of cash consists of dividends from Westwood Management or Westwood Trust. The payment of dividends by Westwood Trust is subject to the discretion of its Board of Directors and compliance with applicable laws, including, in particular, the provisions of the Finance Code applicable to Westwood Trust. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We may not be able to fund future capital requirements on favorable terms, if at all.
We cannot be certain that financing to fund our working capital or other cash requirements, if needed, will be available on favorable terms, if at all. Our capital requirements may vary greatly from quarter to quarter depending on, among other things, capital expenditures, fluctuations in our operating
resultsresults and financing activities. If future financing becomes necessary, we may or may not be able to obtain financing on favorable terms, if at all. Further, any future equity financings could dilute the relative percentage ownership of then existing common stockholders and any future debt financings could involve restrictive covenants that limit our ability to take certain actions.Failure to maintain effective internal controls could have a material adverse effect on our business and stock price.
Effective internal controls are necessary to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations
and even systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.We cannot be certain that the measures we take to evaluate and improve our internal controls will ensure that we implement and maintain adequate controls over our financial processes and reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail
to meet our reporting obligations. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.Our stock is thinly traded and may be subject to volatility.
Although our common stock is traded on the New York Stock Exchange, it may remain relatively illiquid, or “thinly
traded,” which can increase share price volatility and make it difficult for larger investors to buy or sell shares in the public market without affecting the quoted share price. Investors may be unable to buy or sell a certain quantity of our shares in the public market within one or more trading days. If limited trading in our stock continues, it may be difficult for holders to sell their shares in the public market at any given time at prevailing prices.The prevailing market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including (among other factors): actual or anticipated fluctuations in operating results; changes in market valuations of other similarly situated companies; additions
or departures of key personnel; future sales of common stock; deviations in net revenues or in losses from levels expected by the investment community; and trading volume fluctuations.16
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.
Our organizational documents contain provisions that require a vote of two-thirds of the shares of stock entitled to vote to remove directors for cause, establish that stockholders cannot act by written consent, and that authorize our Board of Directors to issue, without shareholder approval, blank check preferred stock. In addition, as a Delaware corporation, we are subject to Section 203 of the
DelawareDelaware General Corporation Law relating to business combinations. These provisions could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving us that could include a premium over the market price of our common stock that some or a majority of our stockholders might consider to be in their best interests.We are a holding company
and are dependent on the operations and funds of our subsidiaries.
We are a holding company, with no revenue-generating operations and no assets other than our ownership interests in Westwood Management, Westwood Trust and Westwood International. Accordingly, we are dependent on the cash flow generated by these operating subsidiaries and
must rely on dividends or
otherother intercompany transfers from our operating subsidiaries to generate the funds necessary to meet our obligations.Risks Related to our Clients
Competitive fee pressures could reduce revenues and profit margins.
To the extent we have to compete on the basis of price, we may not be able to maintain our current fee structure. Although our investment management fees vary from product to product, we have competed primarily on the performance of our products and client service rather than on the level of our investment management fees relative to our competitors. In recent years there has been a trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service levels that make investors willing to pay our fees. We cannot be assured that we will succeed in providing investment returns and service levels that will allow us to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.
In addition, we have performance fee agreements with a few clients, which pay us a fee if we outperform a specified index over predetermined periods of time. We may not be able to outperform such indexes, and failure to do so would cause us to earn none or only part of those potential revenues, which would have a material adverse effect on our revenues and results of operations. Our revenues from performance-based fees could fluctuate significantly from one measurement period to the next, depending on how we perform relative to the indexes specified in these agreements. For example, we earned performance fees of $2.7 million in 2015, $3.8 million in 2014 and $2.6 million in 2013.
Our business is dependent on investment advisory, subadvisory and trust agreements that are subject to termination or non-renewal. As a result, we could lose any of our clients on very short notice.
Substantially all of our revenues are derived pursuant to investment advisory, subadvisory and trust agreements with our clients. Investors in funds that we advise or subadvise may redeem their investments at any time without prior notice, thereby reducing our assets under management. These investors may redeem for any reason, including general financial market conditions, our absolute or relative investment performance, or their own financial condition and requirements. In a declining stock market, the pace of redemptions could accelerate. Redemption of a substantial amount of investments or a termination or failure to renew a material number of these agreements would adversely affect our revenues and have a material adverse effect on our earnings and financial condition.
A small number of clients account for a substantial portion of our business, and a reduction or loss of business with any of these clients could have a material adverse effect on our business, financial condition and results of operations.
Our ten largest clients accounted for over 20% of fee revenues for each of the years ended December 31, 2015, 2014 and 2013. We are dependent to a significant degree on our ability to maintain our relationships with these clients. There can be no assurance that we will be successful in maintaining existing client relationships, securing additional clients or achieving the superior investment performance necessary to earn performance-based advisory fees. Our failure to retain one or more of these large clients or to establish profitable relationships with additional clients could have a material adverse effect on our business, financial condition and results of operations.
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| Item 1B. | Unresolved Staff Comments. |
None.
None.
Westwood, Westwood Management and Westwood Trust conduct their principal operations
throughusing approximately
28,23840,000 square feet of leased office space
located in Dallas, Texas pursuant to a lease with an initial term that expires in
November 2021.2026. In addition, we lease approximately
5,0458,000 square feet of office space in Houston, Texas pursuant to a lease with an initial term that expires in December 2016, approximately 5,000 square feet of office space in Omaha, Nebraska pursuant to a lease with an initial term that expires in July
20142019 and approximately
6,3362,000 square fee of office space in Framingham, Massachusetts pursuant to a lease with an initial term that expires in April 2018. Westwood International conducts its principal operations using approximately 6,000 square feet of office space in Toronto, Ontario pursuant to a lease with an initial
termterm that expires in May 2017. We believecontinue to assess these facilities will be adequateto ensure their adequacy to serve our currently anticipated business needs. | |
| Item 3. | Legal Proceedings. |
We are subject from time to time to certain claims and legal proceedings arising in the ordinary course of our business.
On August 3, 2012, AGF Management Limited and AGF Investments Inc.
(“AGF”(together “AGF”) filed a lawsuit in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and
Warren International, LLC, an executive recruiting
firm Warren International, LLC.firm. The action relates to the hiring of certain members of Westwood’s global and emerging markets investment team
who were previously employed by AGF. AGF is alleging that the former employees breached certain obligations when they resigned from AGF, and that
WestwoodWestwood and Warren induced such breaches. AGF is seeking an unspecified amount of damages and punitive damages of $10 million (CAD) in the lawsuit. On November 5, 2012, Westwood issued a response to AGF’s lawsuit with a counterclaim against AGF for defamation. Westwood is seeking $1 million (CAD) in general damages, $10 million (CAD) in special damages, $1 million (CAD) in punitive damages, and costs. On November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a Westwood subsidiary, alleging that the employee made defamatory statements about AGF. In this second lawsuit, AGF is seeking $5 million (CAD) in general damages, $1 million (CAD) per defendant in punitive damages, unspecified special damages, interest and costs. The pleadings phase is completewas completed in 2013, and we are nowcurrently in the discovery phase, which we hope to complete in the first half of 2014.phase.
While we intend to vigorously defend both actions and pursue the counterclaims, we are currently unable to estimate the ultimate aggregate amount of monetary gain, loss or financial impact of these actions and counterclaims. We have agreed with our Directors & Officers insurance provider that 50% of the defense costs related to both AGF claims, but not including Westwood’s counterclaim against AGF, will be covered by insurance. Defending these actions and pursuing these counterclaims may be expensive for us
and time consuming for our personnel. While we do not currently believe these proceedings will have a material impact, adverse resolution of these actions and counterclaims could have a material adverse effect on our business, financial condition or results of operations.17
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| Item 4. | Mine Safety Disclosures. |
Not applicable.
PART II
Item
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock
has tradedtrades on the New York Stock Exchange (the “NYSE”) under the symbol “WHG”
since July 1, 2002.. At December 31,
2013,2015, there were approximately
168228 record holders of our common stock, although we believe that the number of beneficial owners of our common stock is substantially greater. The table below sets forthpresents the high and low closing prices for our common stock, as reported by the NYSE for the periods indicated. | 2013 | | | 2012 | |
| High | | | Low | | | High | | | Low | |
For the Quarter Ended: | | | | | | | | | | | | | | | |
March 31 | $ | 45.21 | | | $ | 39.97 | | | $ | 40.87 | | | $ | 36.26 | |
June 30 | | 45.02 | | | | 40.66 | | | | 38.97 | | | | 34.15 | |
September 30 | | 50.95 | | | | 43.56 | | | | 39.29 | | | | 35.71 | |
December 31 | | 61.91 | | | | 48.02 | | | | 40.92 | | | | 38.32 | |
|
| | | | | | | | | | | | | | | | |
| | | 2015 | | 2014 |
| | | High | | Low | | High | | Low |
| For the Quarter Ended: | | | | | | | | |
| March 31 | | $ | 63.59 |
| | $ | 58.67 |
| | $ | 62.91 |
| | $ | 53.62 |
|
| June 30 | | 64.07 |
| | 55.90 |
| | 63.40 |
| | 54.41 |
|
| September 30 | | 62.30 |
| | 50.37 |
| | 62.40 |
| | 51.72 |
|
| December 31 | | 61.10 |
| | 51.76 |
| | 67.84 |
| | 55.74 |
|
We have declared a cash dividend on our common stock for each quarter since our common stock was first publicly traded. The table below sets forth the dividends declared for the periods indicated.
| Dividend per share
of common stock | |
2013 | | | |
Fourth Quarter | $ | 0.44 | |
Third Quarter | | 0.40 | |
Second Quarter | | 0.40 | |
First Quarter | | 0.40 | |
2012 | | | |
Fourth Quarter | $ | 0.40 | |
Third Quarter | | 0.37 | |
Second Quarter | | 0.37 | |
First Quarter | | 0.37 | |
|
| | | | | | | | |
| | | 2015 | | 2014 |
| First Quarter | | $ | 0.50 |
| | $ | 0.44 |
|
| Second Quarter | | 0.50 |
| | 0.44 |
|
| Third Quarter | | 0.50 |
| | 0.44 |
|
| Fourth Quarter | | 0.57 |
| | 0.50 |
|
In addition, on February
6, 20143, 2016 we declared a quarterly cash dividend of
$0.44$0.57 per share on our common stock payable on April 1,
20142016 to stockholders of record on March
14, 2014.11, 2016. We intend to continue paying cash dividends in such amounts as our Board of Directors may determine to be appropriate. Any future payments of cash dividends will be at the discretion of the Board of Directors and subject to limitations under the Delaware General Corporation Law.
Westwood Holdings Group is the sole stockholder of Westwood Management, Westwood Trust and Westwood International. Westwood Trust is limited under applicable Texas law in the payment of dividends to the amount of undivided profits, which is defined as that part of equity capital equal to the balance of net
profits, income, gains, and losses since its formation minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate Board of Directors’ resolutions.18
Issuer Purchases of Equity Securities
On July 20, 2012, our Board of Directors authorized management to repurchase up to $10 million of our outstanding common stock on the open market or in privately negotiated transactions. The share repurchase program has no expiration date and may be discontinued at any time by the Board of Directors. As of December 31, 2015, there had been no repurchases of our common stock under this plan, and $10 million remained available for repurchase.
Between January 1, 2016 and February 25, 2016, the Company repurchased 74,121 shares of our common stock at an average price of $46.93, including commissions, under our share repurchase program.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information as of December 31,
20132015 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under our Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan and the
ShareShare Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries, our only equity compensation plans in effect at that time. The material terms of this plan were approved by our stockholders at our 2011 Annual Meeting and are discussed in Note 109 "Employee Benefits" of the financial statements included in this Report.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 | | | — | | | $ | — | | | | 863,000 | (1 | ) |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | |
Total | | | — | | | $ | — | | | | 863,000 | | |
|
| | | | | | | | | | | |
| 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 | | — |
| | $ | — |
| | 773,000 |
| (1) |
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| |
| Total | | — |
| | $ | — |
| | 773,000 |
| |
(1)Includes 716,000679,000 shares available under our Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan and 147,00094,000 shares available under the Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries.19
The following graph compares total stockholder returns of Westwood since December 31,
20082010 with the total return of the Russell 2000 Index and the SNL Asset Manager
Index. The SNL Asset Manager Index,
is a composite of
35 publicly-traded44 publicly traded asset management companies.
Index | | Period ended | | | Cumulative
Five-Year
Total Return | |
12/31/08 | | | 12/31/09 | | | 12/31/10 | | | 12/31/11 | | | 12/31/12 | | | 12/31/13 |
Westwood Holdings Group, Inc. | | $ | 100.00 | | | $ | 132.21 | | | $ | 152.07 | | | $ | 144.83 | | | $ | 168.69 | | | $ | 264.29 | | | | 164.29 | % |
Russell 2000 Index | | | 100.00 | | | | 127.17 | | | | 161.32 | | | | 154.59 | | | | 179.86 | | | | 249.69 | | | | 149.69 | |
SNL Asset Manager Index | | | 100.00 | | | | 162.23 | | | | 186.74 | | | | 161.52 | | | | 207.23 | | | | 318.46 | | | | 218.46 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Index | | Period ended December 31, | | Cumulative Five-Year Total Return |
| 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | |
| Westwood Holdings Group, Inc. | | $ | 100.00 |
| | $ | 95.24 |
| | $ | 110.93 |
| | $ | 173.79 |
| | $ | 179.01 |
| | $ | 156.63 |
| | 56.63 | % |
| Russell 2000 Index | | 100.00 |
| | 95.82 |
| | 111.49 |
| | 154.78 |
| | 162.35 |
| | 155.18 |
| | 55.18 | % |
| SNL Asset Manager Index | | 100.00 |
| | 86.50 |
| | 110.97 |
| | 170.54 |
| | 179.91 |
| | 153.43 |
| | 53.43 | % |
The total return for our stock and for each index assumes $100 invested on December 31,
20082010 in our common stock, the Russell 2000 Index, and the SNL Asset Manager Index, including reinvestment of dividends. Our common stock is traded on the NYSE under the ticker symbol “WHG.”
The closing price of our common stock on the last trading day of the year ended December 31,
20132015 was
$61.91$52.09 per share. Historical stock price performance is not necessarily indicative of future price performance.20
| |
| Item 6. | Selected Financial Data. |
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data, together with assets under management data presented below, should be read in conjunction with “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Report.
Historical results are not necessarily indicative of future results. | | Year ended December 31,
(in thousands, except per share amounts) | |
| | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Consolidated Statements of Income Data: | | | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 91,825 | | | $ | 77,495 | | | $ | 68,909 | | | $ | 55,313 | | | $ | 42,553 | |
Total expenses | | | 63,556 | | | | 57,469 | | | | 45,800 | | | | 37,592 | | | | 30,235 | |
Income before income taxes | | | 28,269 | | | | 20,026 | | | | 23,109 | | | | 17,721 | | | | 12,318 | |
Provision for income taxes | | | 10,378 | | | | 7,936 | | | | 8,423 | | | | 6,441 | | | | 4,423 | |
Net income | | | 17,891 | | | | 12,090 | | | | 14,686 | | | | 11,280 | | | | 7,895 | |
Earnings per share – basic | | $ | 2.44 | | | $ | 1.69 | | | $ | 2.11 | | | $ | 1.62 | | | $ | 1.10 | |
Earnings per share – diluted | | $ | 2.34 | | | $ | 1.65 | | | $ | 2.04 | | | $ | 1.58 | | | $ | 1.09 | |
Cash dividends declared per common share | | $ | 1.64 | | | $ | 1.51 | | | $ | 1.42 | | | $ | 1.65 | | | $ | 1.23 | |
| | As of December 31, | |
| | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Consolidated Balance Sheet Data (in thousands): | | | | | | | | | | | | | | | | | | | | |
Cash and investments | | $ | 75,418 | | | $ | 63,723 | | | $ | 60,132 | | | $ | 45,044 | | | $ | 45,125 | |
Total assets | | | 116,020 | | | | 96,615 | | | | 90,597 | | | | 72,628 | | | | 59,886 | |
Stockholders’ equity | | | 88,633 | | | | 76,551 | | | | 70,757 | | | | 60,677 | | | | 47,218 | |
Assets Under Management (unaudited) (in millions) | | $ | 18,931 | | | $ | 14,167 | | | $ | 13,079 | | | $ | 12,477 | | | $ | 10,174 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31,
(in thousands, except per share amounts) |
| | 2015(1) | | 2014(2) | | 2013 | | 2012(3) | | 2011 |
| Consolidated Statements of Income Data: | |
| | |
| | |
| | |
| | |
|
| Total revenues | $ | 130,936 |
| | $ | 113,241 |
| | $ | 91,825 |
| | $ | 77,495 |
| | $ | 68,909 |
|
| Employee compensation and benefits | $ | 63,562 |
| | $ | 52,847 |
| | $ | 47,864 |
| | $ | 43,698 |
| | $ | 35,917 |
|
| Employee compensation and benefits as a % of Total revenues | 48.5 | % | | 46.7 | % | | 52.1 | % | | 56.4 | % | | 52.1 | % |
| Income before income taxes | $ | 42,220 |
| | $ | 42,036 |
| | $ | 28,185 |
| | $ | 20,020 |
| | $ | 22,273 |
|
| Income before income taxes as a % of Total revenues | 32.2 | % | | 37.1 | % | | 30.7 | % | | 25.8 | % | | 32.3 | % |
| | | | | | | | | | |
| Net income | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
| | $ | 12,086 |
| | $ | 14,155 |
|
| Earnings per share – basic | $ | 3.49 |
| | $ | 3.63 |
| | $ | 2.43 |
| | $ | 1.69 |
| | $ | 2.03 |
|
| Earnings per share – diluted | $ | 3.33 |
| | $ | 3.45 |
| | $ | 2.32 |
| | $ | 1.65 |
| | $ | 1.96 |
|
| Cash dividends declared per common share | $ | 2.07 |
| | $ | 1.82 |
| | $ | 1.64 |
| | $ | 1.51 |
| | $ | 1.42 |
|
| | | | | | | | | | |
Economic Earnings(4) | $ | 46,496 |
| | $ | 41,445 |
| | $ | 30,027 |
| | $ | 23,233 |
| | $ | 25,647 |
|
| Economic Earnings per common share | $ | 5.71 |
| | $ | 5.24 |
| | $ | 3.90 |
| | $ | 3.18 |
| | $ | 3.54 |
|
________________
| |
| (1) | The financial results of Woodway are included in our 2015 results from the acquisition date of April 1, 2015. Our 2015 results also include a pre-tax $1.0 million non-cash charge related to acceleration of stock based compensation expense for a particular grant and $807,000 tax expense for uncertain tax positions related to prior years. These items negatively impacted diluted earnings per share by $0.08 and $0.10, respectively. |
| |
| (2) | Our 2014 Income before income taxes as a percentage of Total revenues improved as increases in Total revenues outpaced increases in expenses. |
| |
| (3) | Our 2012 financial results were negatively impacted by start-up costs related to Westwood International, which was established in the second quarter of 2012. |
| |
| (4) | See the definition of Economic Earnings and the reconciliation to Net Income in “Supplemental Financial Information” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supplemental Financial Information.” |
|
| | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| Consolidated Balance Sheets Data (in thousands): | | |
| | |
| | |
| | |
| | |
|
| Cash and investments | | $ | 95,060 |
| | $ | 97,751 |
| | $ | 75,418 |
| | $ | 63,723 |
| | $ | 60,132 |
|
| Total assets | | 181,336 |
| | 139,874 |
| | 116,050 |
| | 96,617 |
| | 90,902 |
|
| Stockholders’ equity | | 133,967 |
| | 110,007 |
| | 88,663 |
| | 76,553 |
| | 71,062 |
|
| | | | | | | | | | | |
Assets Under Management (in millions)(1) | | $ | 20,762 |
| | $ | 20,168 |
| | $ | 18,861 |
| | $ | 14,102 |
| | $ | 13,011 |
|
________________
| |
| (1) | Due to an immaterial error relating to the aggregation of Private Wealth assets under management ("AUM"), AUM was overstated, and assets under advisement ("AUA") was understated, for certain prior periods. Adjustments to correct the immaterial error have been made in this Report. Specifically, previously-reported AUM as of December 31, 2011, 2012, 2013 and 2014 were overstated by $68.0 million, $64.9 million, $70.0 million and $82.6 million, respectively, and have been adjusted in the above table accordingly. The corrections to AUM represent a 2% adjustment to Private Wealth AUM and less than a 1% adjustment to Total AUM as previously reported as of each of such dates. |
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following discussion and analysis in conjunction with “Selected Financial Data” included in this Report, as well as our consolidated financial statements and related notes thereto appearing elsewhere in this Report.
Forward-Looking Statements
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,” “forecast”, “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “may,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and
otherother 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.Act. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Actual results, our financial condition, and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others:·
| our ability to identify and market services that appeal to our customers
|
·
| the significant concentration of our revenues in four of our customers
|
the composition and market value of our assets under management;·
| our relationships with investment consulting firms
|
regulations adversely affecting the financial services industry;·
| our relationships with current and potential customers
|
competition in the investment management industry;·
| our ability to retain qualified personnel
|
our investments in foreign companies;·
| our ability to develop and market new investment strategies successfully
|
our ability to develop and market new investment strategies successfully;·
| our ability to maintain our fee structure in light of competitive fee pressures
|
21
·
| competition in the marketplace
|
our ability to pursue and properly integrate acquired businesses;·
| downturns in financial markets
|
litigation risks;·
| new legislation adversely affecting the financial services industries
|
our ability to retain qualified personnel;our relationships with current and potential customers; ·
| changes in our effective tax rate
|
our ability to properly address conflicts of interest;·
| our ability to maintain an effective system of internal controls
|
our ability to maintain effective information systems;·
| other risks as detailed from time to time in our SEC reports
|
our ability to maintain effective cyber security;our ability to maintain adequate insurance coverage;
our ability to maintain an effective system of internal controls
our ability to maintain our fee structure in light of competitive fee pressures;
our relationships with investment consulting firms; and
the significant concentration of our revenues in a small number of customers.
Additional factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed under the section entitled
“Risk“Item 1A. Risk Factors” and elsewhere in this Report. The forward-looking statements are based only on currently available information and speak only as of the date of this Report. We are not obligated and do not undertake an obligation to publicly
releaserelease 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, Westwood Trust and Westwood International. Westwood Management
providesand Westwood International provide investment advisory services to
corporate and public retirement plans, endowments and foundations,institutional clients, the Westwood
Funds ™,Funds®, other mutual funds,
an Ireland-domiciled fund organized pursuant to the European Union’s Undertakings for Collective Investment in Transferable Securities (“UCITS”), individuals and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in common trust funds
that it sponsors to institutions and high net worth
individuals. Westwood International was established in 2012 and provides global equity and emerging markets investment advisory services to institutional clients, Westwood Funds ™, other mutual funds, an Ireland-domiciled UCITS fund and common trust funds sponsored by Westwood Trust. Our revenues are generally derived from fees based on a percentage of assets under management, and at December 31, 20132015 Westwood Management, Westwood TrustInternational and Westwood InternationalTrust collectively managed assets valued at approximately $18.9$20.8 billion. We believe we have established a track record of delivering competitive risk-adjusted returns for our clients.
With respect to the bulk of our client assets under management, we utilize a “value” investment style focused on achieving superior long-term, risk-adjusted returns by investing in companies with high levels of free cash flow, improving returns on equity, strengthening balance sheets and
that are well positioned for growth but whose value is not fully recognized in the marketplace. This investment approach is designed to preserve capital during unfavorable periods and provide superior real
returnsreturns over the long term. Our investment teams have significant industry experience. Our investment team members have average investment experience of fifteen years while one third of our team has worked together at Westwood for over five years.We have focused on building a foundation in terms of personnel and infrastructure to support a potentially much larger business. We have also developed investment strategies that we believe will be desirable within our target institutional, private wealth and
mutualmutual fund markets. The cost of developing new products and growing the organization as a whole has resulted in our incurring expenses that, in some cases, do not currently have significant offsetting revenues. While we continue to evolve our products, we believe that the appropriate foundation and products are in place such that investors will recognize the value in these products, thereby generating new revenue streams for Westwood.2013
The following items are highlights for the year ended December 31,
2013:·
| Assets under management as of December 31, 2013 were a record $18.9 billion, a 34% increase compared to December 31, 2012; average assets under management for 2013 were $16.3 billion, a 19% increase compared to 2012.
|
2015:·
| As of December 31, 2013, approximately 90 percent of our investment strategies have delivered above-benchmark performance and more than 90 percent have experienced below-benchmark volatility over the past ten years.
|
Assets under management as of December 31, 2015 were $20.8 billion, a 3% increase compared to December 31, 2014; average assets under management for 2015 were $21.5 billion, a 9% increase compared to 2014.·
| Our Westwood Funds ™ family of mutual funds ended the year with $2.8 billion in assets under management a 74% increase compared to December 31, 2012.
|
We launched three new mutual funds during 2015, bringing the mutual funds now offered to a total of 15.·
| Our Income Opportunity strategy, with its focus on current income and lower volatility, had net asset inflows of over $700 million and finished the year with $2.8 billion inWe completed the acquisition of Woodway on April 1, 2015, bringing Private Wealth assets to 26% of our firm-wide assets under management.
|
22
·
| Westwood International Advisors Inc., manager of our global equity and emerging markets equity strategies, grew assets under management to $2.5 billion as of December 31, 2013 from $888 million as of December 31, 2012. This increase included over $500 million of inflows to our newly launched Ireland-domiciled UCITS Fund.
|
·
| Total revenue was a record $91.8 million, a 18% increase over 2012
|
Our U.S. Value Equity, Multi-Asset and Global Convertibles strategies posted strong performance for clients.·
| In October 2013, the Board approved a 10% increase in our quarterly dividend to $0.44 per share, or an annual rate of $1.76, resulting in a dividend yield of 2.8% at the year-end stock price of $61.91.
|
Total revenue was a record $130.9 million, a 16% increase over 2014.·
| Our financial position remains strong with liquid cash and investments of $75.4 million as of December 31, 2013.
|
In October 2015, the Board approved a 14% increase in our quarterly dividend to $0.57 per share, or an annual rate of $2.28, resulting in a dividend yield of 4.4% using the year-end stock price of $52.09 per share.Our financial position remains strong with liquid cash and investments of $95.1 million as of December 31, 2015.
We derive
our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management and Westwood International, which manage client accounts under investment advisory and subadvisory agreements. Advisory fees are calculated
basedbased on a percentage of assets under management and are paid in accordance with the terms of the agreements. Westwood Management’s and Westwood International’s advisoryAdvisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the previous quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. Westwood Management and Westwood InternationalWe recognize advisory fee revenues as services are rendered. A limited number of our clients have agreed toa contractual performance-based fees,fee component in their contracts, which generategenerates 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 periods.period. Since most of our advance paying clients’ billing periods coincide with the calendar quarter to which payment relates,such payments relate, revenue related to those clients is fully recognized within the quarter. Consequently, no significant amount of deferred revenue is contained inquarter, and our consolidated financial statements.statements contain no deferred advisory fee revenues.
Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Most trust fees are paid quarterly in advance and are recognized as services are rendered. Since
billingbilling periods for the majority of Westwood Trust’s advance paying clients coincide with the calendar quarter, to which payment relates, revenue is fully recognized within the quarter and consequently noour consolidated financial statements do not contain a significant amount of deferred revenue is contained in our consolidated financial statements.revenues.
Our other revenues generally consist of interest and investment income. Although we generally invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds, including seed money for new investment strategies.
Employee Compensation and Benefits
Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity-based compensation expense and benefits.
Sales and Marketing
Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing and advertising costs.
Westwood Mutual Funds
Westwood Mutual Funds expenses relate to our marketing, distribution and administration efforts related to the Westwood Funds ™®.
Information Technology
Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and
common trust funds sponsored by Westwood Trust.support, computing hardware, software licenses, telecommunications and other related costs.
Professional Services
Professional services expenses generally consist of costs associated with subadvisory fees, audit, legal and other professional services.
General and Administrative
General and administrative expenses generally consist of costs associated with the lease of office space, investor relations, licenses and fees, depreciation, insurance, office supplies and other miscellaneous expenses.
Assets under management increased $4.7 $600 million, or 3%, to $20.8 billion at December 31, 2015 compared to $20.2 billion at December 31, 2014. Quarterly average assets under management increased $1.7 billion, up 8.6%, to $21.5 billion for 2015 compared with $19.8 billion for 2014.
Assets under management increased $1.3 billion, or
34%7%,
to $20.2 billion at December 31, 2014 compared to $18.9 billion at December 31,
2013 compared to $14.2 billion at December 31, 2012.2013. Quarterly average assets under management increased
$2.6$3.7 billion,
or 19%up 23.0%, to
$16.3$19.8 billion for
20132014 compared with
$13.7$16.1 billion for
2012.Assets under management increased $1.1 billion, or 8%, to $14.2 billion at December 31, 2012 compared to $13.1 billion at December 31, 2011. Quarterly average assets under management increased $786 million, or 6%, to $13.7 billion for 2012 compared with $12.9 billion for 2011.
2013.
The following table sets forth our assets under management as of December 31,
2013, 20122015, 2014 and
2011:2013: | As of December 31,
(in millions) | | | % Change | |
| 2013 | | | 2012 | | | 2011 | | | 2013 vs. 2012 | | | 2012 vs. 2011 | |
Institutional | $ | 12,139 | | | $ | 9,225 | | | $ | 8,735 | | | | 32 | % | | | 6 | % |
Private Wealth | | 4,008 | | | | 3,339 | | | | 3,051 | | | | 20 | | | | 9 | |
Mutual Funds | | 2,784 | | | | 1,603 | | | | 1,293 | | | | 74 | | | | 24 | |
Total Assets Under Management | $ | 18,931 | | | $ | 14,167 | | | $ | 13,079 | | | | 34 | % | | | 8 | % |
23
|
| | | | | | | | | | | | | | | | | | |
| | | As of December 31, (in millions) | | % Change |
| | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
| Institutional | | $ | 11,752 |
| | $ | 12,471 |
| | $ | 12,139 |
| | (6 | )% | | 3 | % |
Private Wealth(1) | | 5,393 |
| | 3,974 |
| | 3,938 |
| | 36 | % | | 1 | % |
| Mutual Funds | | 3,617 |
| | 3,723 |
| | 2,784 |
| | (3 | )% | | 34 | % |
Total Assets Under Management(2) | | $ | 20,762 |
| | $ | 20,168 |
| | $ | 18,861 |
| | 3 | % | | 7 | % |
________________
| |
| (1) | Due to an immaterial error relating to the aggregation of Private Wealth AUM, AUM was overstated, and AUA was understated, for certain prior periods. Adjustments to correct the immaterial error have been made in this Report. Specifically, previously-reported AUM as of December 31, 2013 and December 31, 2014 were overstated by $70.0 million and $82.6 million, respectively, and have been adjusted in the above table accordingly. The corrections to AUM represent a 2% adjustment to Private Wealth AUM and less than a 1% adjustment to Total AUM as previously reported as of each of such dates. |
| |
| (2) | AUM for 2015, 2014, and 2013 excludes approximately $336.8 million, $670.3 million, and $214.7 million of assets under advisement, respectively, related to model portfolios, for which we currently provide consulting advice but for which we do not have direct discretionary investment authority. During the fourth quarter of 2015, approximately $330 million of assets related to our market neutral income strategy transitioned from AUA to AUM. |
Our assets under management disclosure reflects management’s view of our three types of accounts: institutional, private wealth and mutual funds.
·
| Institutional includes separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; and managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers.
|
·
| Private Wealth includes assets for which Westwood Trust provides 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. Investment subadvisory services are provided for the common trust funds by Westwood Management, Westwood International and external, unaffiliated subadvisors. For certain assets in this category, Westwood Trust currently provides limited custody services for a minimal or no fee, but views these assets as potentially converting to fee-generating managed assets in the future. As an example, some assets in this category consist of low-basis stock currently being held in custody for clients, but we believe there is potential for these assets to convert to fee-generating managed assets during an inter-generational transfer of wealth at some future date. Also included are assets acquired in the McCarthy transaction, described in Note 6 of the financial statements included in this Report, representing institutional and high net worth clients for which Westwood provides investment management and advisory services.
|
Institutional includes separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft-Hartley plans, endowments, foundations and individuals; subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; pooled investment vehicles, including UCITS funds and collective investment trusts; and managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers.
·
| Mutual FundsPrivate Wealth includes assets for which Westwood Trust provides 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 Management provides advisory services in ten limited liability companies to high net worth individuals. Investment subadvisory services are provided for the common trust funds by Westwood Management, Westwood International and external, unaffiliated subadvisors. For certain assets in this category, Westwood Trust currently provides limited custody services for a minimal or no fee, but views these assets as potentially converting to fee-generating managed assets in the future. As an example, some assets in this category consist of low-basis stock currently held in custody for clients where we believe such assets may convert to fee-generating managed assets during an inter-generational transfer of wealth at a future date. include the Westwood Funds ™, a family of mutual funds for which Westwood Management serves as advisor.
|
Mutual Funds include the Westwood Funds®, a family of mutual funds for which Westwood Management serves as advisor. These funds are available to individual investors, as well as offered as part of our investment strategies for institutional and private wealth accounts.
Roll-Forward of Assets Under Management
| Year Ended December 31, 2013 (in millions) | |
| Institutional | | | Private Wealth | | | Mutual Funds | | | Total | |
Beginning of period assets | $ | 9,225 | | | $ | 3,339 | | | $ | 1,603 | | | $ | 14,167 | |
Client flows: | | | | | | | | | | | | | | | |
Inflows/new accounts | | 2,713 | | | | 535 | | | | 1,011 | | | | 4,259 | |
Outflows/closed accounts | | (2,094 | ) | | | (482 | ) | | | (210 | ) | | | (2,786 | ) |
Net inflows | | 619 | | | | 53 | | | | 801 | | | | 1,473 | |
Market appreciation | | 2,295 | | | | 616 | | | | 380 | | | | 3,291 | |
Net change | | 2,914 | | | | 669 | | | | 1,181 | | | | 4,764 | |
End of period assets | $ | 12,139 | | | $ | 4,008 | | | $ | 2,784 | | | $ | 18,931 | |
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2015 (1) |
| (in millions) | | Institutional | | Private Wealth (2) | | Mutual Funds | | Total |
| Beginning of period assets | | $ | 12,471 |
| | $ | 3,974 |
| | $ | 3,723 |
| | $ | 20,168 |
|
| Client flows: | | |
| | |
| | |
| | |
|
Inflows/new accounts(3) | | 2,456 |
| | 806 |
| | 1,541 |
| | 4,803 |
|
| Outflows/closed accounts | | (2,305 | ) | | (815 | ) | | (1,509 | ) | | (4,629 | ) |
| Net inflows (outflows) | | 151 |
| | (9 | ) | | 32 |
| | 174 |
|
| Acquisition related | | — |
| | 1,583 |
| | — |
| | 1,583 |
|
| Market depreciation | | (870 | ) | | (155 | ) | | (138 | ) | | (1,163 | ) |
| Net change | | (719 | ) | | 1,419 |
| | (106 | ) | | 594 |
|
| End of period assets | | $ | 11,752 |
| | $ | 5,393 |
| | $ | 3,617 |
| | $ | 20,762 |
|
________________
| |
| (1) | In the table above, we have revised the presentation of gross inflows and outflows for Institutional, Private Wealth and Mutual Fund AUM, as well as reclassified certain transactions for consistency. Prior periods have been revised to reflect the changes in Mutual Fund presentation; however, prior periods have not been revised for Institutional and Private Wealth presentation, as management believes these changes are not significant. |
| |
| (2) | Due to an immaterial error relating to the aggregation of Private Wealth AUM, AUM was overstated, and AUA was understated, for certain prior periods. Adjustments to correct the immaterial error have been made in this report. Specifically, previously-reported AUM as of December 31, 2014 were overstated by $82.6 million and has been adjusted in the above table accordingly. The corrections to AUM represent a 2% adjustment to Private Wealth AUM and less than a 1% adjustment to Total AUM as previously reported. |
| |
| (3) | Institutional inflows include approximately $330 million of assets related to our global convertibles strategy, which transitioned from AUA to AUM during the fourth quarter of 2015. |
The increase in assets under management for the year ended December 31, 2015 was due to the acquisition of Woodway, which contributed $1.6 billion of assets under management, and net inflows of $174 million, partially offset by market depreciation of $1.2 billion. Inflows were primarily inflows into institutional accounts in our Emerging Markets Plus, Income Opportunity, MLP and SmallCap Value strategies and inflows into our Emerging Markets, MLP and SmallCap Value mutual funds, as well as the movement of an account in our market neutral income strategy from assets under advisement to assets under management during the fourth quarter of 2015. Outflows were primarily related to withdrawals and rebalancing by certain clients in our LargeCap Value, SMidCap and Emerging Markets strategies and our Westwood Income Opportunity, SMidCap and Short Duration High Yield mutual funds.
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2014 (1) (2) |
| (in millions) | | Institutional | | Private Wealth | | Mutual Funds | | Total |
| Beginning of period assets | | $ | 12,139 |
| | $ | 3,938 |
| | $ | 2,784 |
| | $ | 18,861 |
|
| Client flows: | | |
| | |
| | |
| | |
|
| Inflows/new accounts | | 2,062 |
| | 355 |
| | 1,392 |
| | 3,809 |
|
| Outflows/closed accounts | | (2,655 | ) | | (412 | ) | | (721 | ) | | (3,788 | ) |
| Net inflows (outflows) | | (593 | ) | | (57 | ) | | 671 |
| | 21 |
|
| Market appreciation | | 925 |
| | 93 |
| | 268 |
| | 1,286 |
|
| Net change | | 332 |
| | 36 |
| | 939 |
| | 1,307 |
|
| End of period assets | | $ | 12,471 |
| | $ | 3,974 |
| | $ | 3,723 |
| | $ | 20,168 |
|
________________
| |
| (1) | In the table above, we have revised the presentation of gross inflows and outflows for Institutional, Private Wealth and Mutual Fund AUM, as well as reclassified certain transactions for consistency. Prior periods have been revised to reflect the changes in Mutual Fund presentation; however, prior periods have not been revised for Institutional and Private Wealth presentation, as management believes these changes are not significant. |
| |
| (2) | Due to an immaterial error relating to the aggregation of Private Wealth AUM, AUM was overstated, and AUA was understated, for certain prior periods. Adjustments to correct the immaterial error have been made in this report. Specifically, previously-reported AUM as of December 31, 2013 and December 31, 2014 were overstated by $70.0 million and $82.6 million, respectively, and have been adjusted in the above table accordingly. The corrections to AUM represent a 2% adjustment to Private Wealth AUM and less than a 1% adjustment to Total AUM as previously reported as of each of such dates. |
The increase in assets under management for the year ended December 31, 2014 was primarily due to market appreciation of $1.3 billion and neutral net client flows. Inflows were primarily inflows into institutional accounts in our Emerging Markets strategies and the Westwood Income Opportunity mutual fund. Outflows were primarily related to withdrawals and rebalancing by certain clients in our LargeCap Value strategy.
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2013 (1) (2) |
| (in millions) | | Institutional | | Private Wealth | | Mutual Funds | | Total |
| Beginning of period assets | | $ | 9,225 |
| | $ | 3,274 |
| | $ | 1,603 |
| | $ | 14,102 |
|
| Client flows: | | |
| | |
| | |
| | |
|
| Inflows/new accounts | | 2,713 |
| | 535 |
| | 1,294 |
| | 4,542 |
|
| Outflows/closed accounts | | (2,094 | ) | | (482 | ) | | (493 | ) | | (3,069 | ) |
| Net inflows | | 619 |
| | 53 |
| | 801 |
| | 1,473 |
|
| Market appreciation | | 2,295 |
| | 611 |
| | 380 |
| | 3,286 |
|
| Net change | | 2,914 |
| | 664 |
| | 1,181 |
| | 4,759 |
|
| End of period assets | | $ | 12,139 |
| | $ | 3,938 |
| | $ | 2,784 |
| | $ | 18,861 |
|
________________
| |
| (1) | In the table above, we have revised the presentation of gross inflows and outflows for Institutional, Private Wealth and Mutual Fund AUM, as well as reclassified certain transactions for consistency. Prior periods have been revised to reflect the changes in Mutual Fund presentation; however, prior periods have not been revised for Institutional and Private Wealth presentation, as management believes these changes are not significant. |
| |
| (2) | Due to an immaterial error relating to the aggregation of Private Wealth AUM, AUM was overstated, and AUA was understated, for certain prior periods. Adjustments to correct the immaterial error have been made in this report. Specifically, previously-reported AUM as of December 31, 2012 and December 31, 2013 were overstated by $64.9 million and $70.0 million, respectively, and have been adjusted in the above table accordingly. The corrections to AUM represent a 2% adjustment to Private Wealth AUM and less than a 1% adjustment to Total AUM as previously reported as of each of such dates. |
The increase in assets under management for the year ended December 31, 2013 was primarily due to
new inflows of
$4.3$4.5 billion and market appreciation of $3.3 billion, partially offset by outflows of
$2.8$3.1 billion. Inflows were primarily driven by inflows into institutional accounts in our Emerging Markets strategies,
managed by Westwood International; inflows into the Westwood Income Opportunity mutual fund and inflows from certain clients in our Master Limited Partnership Infrastructure Renewal (“MLP”)
strategy.strategy. Outflows were primarily related to withdrawals and rebalancing by certain clients in our LargeCap Value strategy. | Year Ended December 31, 2012 (in millions) | |
| Institutional | | | Private Wealth | | | Mutual Funds | | | Total | |
Beginning of period assets | $ | 8,735 | | | $ | 3,051 | | | $ | 1,293 | | | $ | 13,079 | |
Client flows: | | | | | | | | | | | | | | | |
Inflows/new accounts | | 1,183 | | | | 424 | | | | 451 | | | | 2,058 | |
Outflows/closed accounts | | (1,949 | ) | | | (467 | ) | | | (292 | ) | | | (2,708 | ) |
Net inflows/(outflows) | | (766 | ) | | | (43 | ) | | | 159 | | | | (650 | ) |
Market appreciation | | 1,256 | | | | 331 | | | | 151 | | | | 1,738 | |
Net change | | 490 | | | | 288 | | | | 310 | | | | 1,088 | |
End of period assets | $ | 9,225 | | | $ | 3,339 | | | $ | 1,603 | | | $ | 14,167 | |
30
24
The increase in assets under management for the year ended December 31, 2012 was primarily due to new inflows of $2.1 billion and market appreciation of $1.7 billion, partially offset by outflows of $2.7 billion. Inflows were driven primarily by inflows into institutional separate accounts, subadvisory mandates, the Westwood Funds ™ and private wealth accounts. Outflows were primarily related to outflows and some account closings by institutional separate account clients and subadvisory mandates and outflows from private wealth accounts.
| Year Ended December 31, 2011 (in millions) | |
| Institutional | | | Private Wealth | | | Mutual Funds | | | Total | |
Beginning of period assets | $ | 8,359 | | | $ | 3,148 | | | $ | 970 | | | $ | 12,477 | |
Client flows: | | | | | | | | | | | | | | | |
Inflows/new accounts | | 1,566 | | | | 308 | | | | 563 | | | | 2,437 | |
Outflows/closed accounts | | (1,133 | ) | | | (385 | ) | | | (254 | ) | | | (1,772 | ) |
Net inflows/(outflows) | | 433 | | | | (77 | ) | | | 309 | | | | 665 | |
Market appreciation/(depreciation) | | (57 | ) | | | (20 | ) | | | 14 | | | | (63 | ) |
Net change | | 376 | | | | (97 | ) | | | 323 | | | | 602 | |
End of period assets | $ | 8,735 | | | $ | 3,051 | | | $ | 1,293 | | | $ | 13,079 | |
The increase in assets under management for the year ended December 31, 2011 was primarily due to new inflows of $2.4 billion, partially offset by outflows of $1.8 billion and market depreciation of $63 million. Inflows were driven primarily by inflows into institutional separate accounts, subadvisory mandates and the Westwood Funds ™. Outflows were primarily related to outflows and some account closings by institutional separate account clients and subadvisory mandates and outflows from the Westwood Funds ™.
Results of Operations
In the second quarter of 2012, as part of our strategy to expand our research capabilities and product offerings, we established Westwood International, based in Toronto, Canada, to manage global and emerging markets equity strategies. Westwood International began providing investment management services during the third quarter of 2012. Our Consolidated Statement of Comprehensive Income for the year ended December 31, 2013 and 2012 includes $12.2 million and $10.3 million in costs and $9.6 million and $1.8 million of revenues, respectively related to Westwood International’s operations.
The following table and discussion of our results of operations is based upon data derived from our consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with these statements, which are included elsewhere in this Report.
| Years ended December 31,
(in thousands) | | | % Change | |
| 2013 | | | 2012 | | | 2011 | | | 2013 vs. 2012 | | | 2012 vs. 2011 | |
Revenues | | | | | | | | | | | | | | | | | | | |
Advisory fees | | | | | | | | | | | | | | | | | | | |
Asset-based | $ | 70,027 | | | $ | 57,936 | | | $ | 54,246 | | | | 21 | % | | | 7 | % |
Performance-based | | 2,561 | | | | 1,251 | | | | 991 | | | | 105 | | | | 26 | |
Trust fees | | 18,367 | | | | 14,969 | | | | 13,453 | | | | 23 | | | | 11 | |
Other revenues | | 870 | | | | 3,339 | | | | 219 | | | | (74 | ) | | | 1,425 | |
Total revenues | | 91,825 | | | | 77,495 | | | | 68,909 | | | | 18 | | | | 12 | |
Expenses | | | | | | | | | | | | | | | | | | | |
Employee compensation and benefits | | 47,780 | | | | 43,692 | | | | 35,081 | | | | 9 | | | | 25 | |
Sales and marketing | | 1,252 | | | | 1,132 | | | | 994 | | | | 11 | | | | 14 | |
Westwood mutual funds | | 2,153 | | | | 1,153 | | | | 790 | | | | 87 | | | | 46 | |
Information technology | | 2,882 | | | | 2,555 | | | | 2,054 | | | | 13 | | | | 24 | |
Professional services | | 4,223 | | | | 4,420 | | | | 2,981 | | | | (4 | ) | | | 48 | |
General and administrative | | 5,266 | | | | 4,517 | | | | 3,900 | | | | 17 | | | | 16 | |
Total expenses | | 63,556 | | | | 57,469 | | | | 45,800 | | | | 11 | | | | 25 | |
Income before income taxes | | 28,269 | | | | 20,026 | | | | 23,109 | | | | 41 | | | | (13 | ) |
Provision for income taxes | | 10,378 | | | | 7,936 | | | | 8,423 | | | | 31 | | | | (6 | ) |
Net income | $ | 17,891 | | | $ | 12,090 | | | $ | 14,686 | | | | 48 | % | | | (18 | )% |
25
|
| | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, (in thousands) | | % Change |
| | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
| Revenues | | |
| | |
| | |
| | |
| | |
|
| Advisory fees: | | |
| | |
| | |
| | |
| | |
|
| Asset-based | | $ | 99,275 |
| | $ | 88,473 |
| | $ | 70,027 |
| | 12 | % | | 26 | % |
| Performance-based | | 2,698 |
| | 3,806 |
| | 2,561 |
| | (29 | ) | | 49 |
|
| Trust fees | | 28,795 |
| | 20,525 |
| | 18,367 |
| | 40 |
| | 12 |
|
| Other revenues, net | | 168 |
| | 437 |
| | 870 |
| | (62 | ) | | (50 | ) |
| Total revenues | | 130,936 |
| | 113,241 |
| | 91,825 |
| | 16 |
| | 23 |
|
| Expenses | | |
| | |
| | |
| | |
| | |
|
| Employee compensation and benefits | | 63,562 |
| | 52,847 |
| | 47,864 |
| | 20 |
| | 10 |
|
| Sales and marketing | | 1,839 |
| | 1,673 |
| | 1,252 |
| | 10 |
| | 34 |
|
| Westwood mutual funds | | 3,435 |
| | 2,543 |
| | 2,153 |
| | 35 |
| | 18 |
|
| Information technology | | 5,732 |
| | 3,469 |
| | 2,882 |
| | 65 |
| | 20 |
|
| Professional services | | 5,617 |
| | 4,905 |
| | 4,223 |
| | 15 |
| | 16 |
|
| General and administrative | | 8,531 |
| | 5,768 |
| | 5,266 |
| | 48 |
| | 10 |
|
| Total expenses | | 88,716 |
| | 71,205 |
| | 63,640 |
| | 25 |
| | 12 |
|
| Income before income taxes | | 42,220 |
| | 42,036 |
| | 28,185 |
| | — |
| | 49 |
|
| Provision for income taxes | | 15,115 |
| | 14,787 |
| | 10,348 |
| | 2 |
| | 43 |
|
| Net income | | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
| | (1 | )% | | 53 | % |
Year Ended December 31, 20132015 Compared to Year Ended December 31, 20122014
Total Revenue.Revenues. Total revenues increased $17.7 million, or 16%, to $130.9 million for fiscal 2015 compared with $113.2 million for fiscal 2014. The increase was attributable to a 12%, or $10.8 million, increase in asset-based advisory fees and a 40%, or $8.3 million, increase in Trust fees. Advisory-based fees increased as a result of higher average assets under management and higher average advisory fee rates in 2015 compared to 2014. The Woodway acquisition contributed $7.7 million of the increase in Trust fees. These increases were partially offset by a decrease in performance-based fees of $1.1 million.
Employee Compensation and Benefits. Employee compensation and benefit costs increased $10.8 million, or 20%, to $63.6 million in fiscal 2015 compared with $52.8 million in fiscal 2014. This increase was primarily due to increases of $3.8 million in salary expense and incentive compensation, primarily relating to additional hires at Westwood Holdings, Westwood Management and Westwood Trust, $3.5 million in restricted stock expense, including a $1.0 million non-cash charge related to acceleration of stock based compensation expense for a particular grant, and $3.1 million in compensation and benefits related to 27 Woodway employees. These increases were partially offset by a decrease in the amortization of long-term incentive awards for Westwood International employees. We had 168 full-time employees as of December 31, 2015 compared to 130 at December 31, 2014.
Sales and Marketing. Sales and marketing expenses increased 10% to $1.8 million for fiscal 2015 compared to $1.7 million for fiscal 2014, primarily due to incremental costs associated with the Woodway acquisition.
Westwood Mutual Funds. Westwood mutual funds expenses increased 35% to $3.4 million for fiscal 2015 compared to $2.5 million for fiscal 2014. The launch of two new mutual funds during the fourth quarter of 2014 and the launch of three new mutual funds during the second quarter of 2015, along with increased overall shareholder servicing costs and higher subadvisor fees based on a percentage of assets under management, drove the increase.
Information Technology. Information technology expenses increased 65%, to $5.7 million for fiscal 2015 compared with $3.5 million for fiscal 2014 due to increased research and support expenses, increased costs associated with implementing a new information technology platform, and incremental support costs related to the Woodway acquisition.
Professional Services. Professional services expenses increased 15% to $5.6 million for fiscal 2015 compared to $4.9 million for fiscal 2014, primarily due to $0.7 million in transaction costs related to the Woodway acquisition recognized in 2015.
General and Administrative. General and administrative expenses increased 48%, to $8.5 million for fiscal 2015 compared with $5.8 million for fiscal 2014, primarily due to an incremental $1.2 million in amortization of intangible assets related to the Woodway acquisition, with the remainder of the increase related to other support items.
Provision for Income Taxes. Provision for income taxes increased 2% to $15.1 million for fiscal 2015 compared to $14.8 million for fiscal 2014. The effective tax rate increased to 35.8% in 2015 compared to 35.2% in 2014. The increase is related to a $1.0 million tax charge for uncertain tax positions related to current and prior years (net of federal benefit), partially offset by an increase in operating income generated by Westwood International, which is taxed at a lower Canadian tax rate.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Total Revenues. In 20132014 our total revenues increased by 18%23% to $91.8$113.2 million compared with $77.5$91.8 million in 2012.2013. Asset-based advisory fees increased by 21%26% to $70$88.5 million in 20132014 from $57.9$70.0 million in 20122013 due to higher average assets under management, primarily reflectingdue to market appreciation of assets and net inflows.appreciation. We earned a performance-based advisory fee of $3.8 million in 2014 compared to $2.6 million in 2013 compared to $1.3 million in 2012.2013. Trust fees increased by 23%12% to $20.5 million in 2014 from $18.4 million in 2013 from $15 million in 2012 due to higher averageas a result of increased assets under management at Westwood Trust, primarily reflectingdue to market appreciation of assets.appreciation. Other revenues, which generally consist of interest and investment income, decreased by $2.5$0.5 million to $0.4 million in 2014 compared with $0.9 million in 2013 compared with $3.3 million in 2012 primarily due to a $1.9 million decrease in net realized gains and a $670,000 decrease in unrealized gains on investments. The decrease in realized gains was primarily due to the $1.9 million gain on sale of 200,000 shares of Teton Advisors, Inc. recorded in 2012.dividend income. Employee Compensation and Benefits. Employee compensation and benefits which generally consist of salaries, incentive compensation, equity-based compensation and benefits, increased by 9%10% to $47.8$52.8 million compared with $43.7$47.9 million in 2012.2013. This increase was primarily due to net increases of $1.6$2.1 million in salary expense, primarily relating to additional hires at Westwood Management, Westwood Trust and Westwood International; $0.9International, $2.0 million in performance-based restricted stock expense and $1.8 million incentive compensation includingcompensation. These increases were partially offset by a decrease in the amortization of long-term incentive awards for Westwood International employees; and $0.8 million in performance-based restricted stock expense and $0.3 million in service-based restricted stock due to shares granted in 2013.employees. We had 106130 full-time employees as of December 31, 20132014 compared to 96106 at December 31, 2012.2013. Sales and Marketing. Sales and marketing costs consist of expenses associated with our marketing efforts, including travel and entertainment, direct marketing, and advertising costs. Sales and marketing costs increased by 11%34% to $1.7 million in 2014 compared with $1.3 million in 2013 compared with $1.1 million in 2012 primarily due to increased direct marketing and travel expenses.referral fees. Westwood Mutual Funds. Westwood Mutual Funds expenses generally consist of costs associatedincreased by 18% to $2.5 million in 2014 compared with our marketing, distribution, administration and acquisition efforts related to the Westwood Funds ™. Westwood Mutual Funds expenses increased 87% to $2.2 million in 2013, compared with $1.2 million in 2012 primarily due to an increase of $0.6 millionincreases in shareholder servicing and subadvisor fees based on higher funda percentage of assets and an increaseunder management.The expense has remained consistent as a percentage of $140,000 in subadvisor fees.total revenues. Information Technology. Information technology expense increased by 20% to $3.5 million in 2014 compared with $2.9 million in 2013primarily due to increased research expenses are generally costs associated with proprietary investment research tools, computing hardware, software licenses,and maintenance and support telecomexpenses.munications and other related costs. Information technologyThe expense increased by 13% to $2.9 million in 2013 compared with $2.6 million in 2012 primarily due to an increasehas remained consistent as a percentage of $135,000 in software maintenance and licenses mainly for upgraded client portfolio accounting and performance reporting systems, an increase of $70,000 in research tools and a $56,000 increase in telecommunications expense.total revenues. Professional Services. Professional services expenses generally consist of audit, external subadvisor expense, increased by 16% to $4.9 million in 2014 compared with $4.2 million in 2013,legalprimarily due to increases in subadvisory fees and other professional fees. Professional services expenses decreased by 4% to $4.2 million in 2013 compared with $4.4 million in 2012. The decrease is primarily due to one-time recruiting and other fees related to the hiring of Westwood International employees in 2012expense, partially offset by an increasea decrease in legal expense in 2013.and tax advisory expenses. General and Administrative. General and administrative expenses generally consist of costs associated with the lease of office space, insurance, amortization of intangible assets, office supplies, custody expense, investor relations, charitable contributions and other miscellaneous expenses. General and administrative expenses increased by 17%10% to $5.8 million in 2014 compared with $5.3 million in 2013 compared with $4.5 million in 2012 primarily due to increased rent expense for our new Toronto office, increased subscriptions and research expense, increased investor relations expense, increased custody expenses and an increaseincreases in non-income taxes.various support services. Provision for Income Taxes. Provision for income taxes increased by 31%43% to $10.4$14.8 million in 20132014 compared with $7.9$10.3 million in 2012.2013. The effective tax rate decreased to 35.2% in 2014 from 36.7% from 39.6% in 2012 2013primarily due to reduced operating losses fromincome generated by Westwood International in the 2014 period, which are taxed at a lower Canadian tax rate.Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Total Revenue. In 2012 our total revenues increased by 12% to $77.5 millionrate, compared with $68.9 million in 2011. Asset-based advisory fees increased by 7% to $57.9 million in 2012 from $54.2 million in 2011 due to higher average assets under management primarily reflecting market appreciation of assets. We earned a performance-based advisory fee of $1.3 million in 2012 compared $1.0 million in 2011. Trust fees increased by 11% to $15.0 million in 2012 from $13.5 million in 2011 due to higher average assets under management primarily reflecting market appreciation of assets. Other revenues, which generally consist of interest and investment income, increased by $3.1 million to $3.3 million in 2012 compared with $219,000 in 2011 primarily due to a $2.2 million increase in net realized gains, a $635,000 increase in unrealized gains and a $293,000 increase in dividend income, partially offset by a $34,000 decrease in interest income. The increase in realized gains was primarily due to the $1.9 million gain on sale of 200,000 shares of Teton Advisors, Inc.
26
Employee Compensation and Benefits. Employee compensation and benefits, which generally consist of salaries, incentive compensation, equity-based compensation expense and benefits, increased by 25% to $43.7 million compared with $35.1 million in 2011. This increase was primarily due to increases of $6.2 million in incentive compensation due to amortization of long-term incentive awards for Westwood International employees, $2.3 million in salary expense primarily due to additional hires at Westwood Management and Westwood Trust, salaries related to Westwood International and $632,000 in performance-based restricted stock expense due to shares granted in February 2012. We had 96 full-time employees as of December 31, 2012 compared to 80 at December 31, 2011.
Sales and Marketing. Sales and marketing costs consist of expenses associated with our marketing efforts, including travel and entertainment, direct marketing, and advertising costs. Sales and marketing costs increased by 14% to $1.1 million in 2012 compared with $1.0 million in 2011 primarily due to increased direct marketing and travel expenses.
Westwood Mutual Funds. Westwood Mutual Funds expenses generally consist of costs associated with our marketing, distribution, administration and acquisition efforts related to the Westwood Funds ™. Westwood Mutual Funds expenses increased 46% to $1.2 million in 2012 compared with $790,000 in 2011 primarily due to an increase of $219,000 in shareholder servicing fees due to higher fund assets and an increase of $104,000 in subadvisor fees.
Information Technology. Information technology expenses are generally costs associated with proprietary investment research tools, computing hardware, software licenses, maintenance and support, telecommunications and other related costs. Information technology expense increased by 24% to $2.6 million in 2012 compared with $2.1 million in 2011 primarily due to an increase of $236,000 in software maintenance and licenses mainly for upgraded client portfolio accounting and performance reporting systems and an increase of $149,000 in research tools.
Professional Services. Professional services expenses generally consist of audit, external subadvisor expense, legal and other professional fees. Professional services expenses increased by 48% to $4.4 million in 2012 compared with $3.0 million in 2011. The increase is primarily due to one-time recruiting and legal fees related to the hiring of Westwood International employees, increased legal fees and increased tax advisor expense. These increases were partially offset by decreased financial advisory expense due to the termination of subadvisors on international common trust funds in the fourth quarter of 2011 and the second quarter of 2012 and lower audit fee expense.
General and Administrative. General and administrative expenses generally consist of costs associated with the lease of office space, insurance, amortization of intangible assets, office supplies, custody expense, investor relations, charitable contributions and other miscellaneous expenses. General and administrative expenses increased by 16% to $4.5 million in 2012 compared with $3.9 million in 2011. The increase is primarily due to increased rent expense due to a new lease for our Dallas office effective September 2011 and rent expense for our new Toronto office, non-marketing travel expenses related to Westwood International, increased state and local tax expense, increased office supplies expense and increased custody expenses. Partially offsetting these increases were decreases in training expenses and expenses related to our office relocation in 2011.
Provision for Income Taxes. Provision for income taxes decreased by 6% to $7.9 million in 2012 compared with $8.4 million in 2011. The effective tax rate increased to 39.6% from 36.4% in 2011 primarily due to operating losses fromgenerated by Westwood International which is taxed at a lower Canadian tax rate, and provision to return adjustments from our 2011 federal tax return.in the 2013 period.
Supplemental Financial Information
As supplemental information, we
are providingprovide a
non-generallynon-U.S. generally accepted accounting principles (“non-GAAP”) performance measure that we refer to as Economic Earnings. We provide this measure in addition to, but not as a substitute for, net income which is reported on a U.S. generally accepted accounting principles (“GAAP”) basis. ManagementOur management and the Board of Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and review our dividend policy. We believe that this non-GAAP performance measure, while not a substitute for GAAP net income, is useful for both management and investors when evaluating our underlying operating and financial performance and our available resources. We do not advocate that investors consider this non-GAAP measure without considering financial information prepared in accordance with GAAP.In calculating Economic Earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock,
and stock options, amortization of intangible assets and
the deferred taxes related to the tax-basis amortization of goodwill. Although depreciation on property and equipment is a non-cash expense, we do not add it back when calculating Economic Earnings because
depreciationdepreciation charges represent a decline in the value of the related assets that will ultimately require replacement.27
For the year ended December 31, 2013,2015, our Economic Earnings increased by 29%12% to $30$46.5 million compared with $23.2$41.4 million for the year ended December 31, 2012,2014, primarily due to increaseincreases in total revenues partially offset by an increaseoutpacing increases in expenses.
expenses.
The following table provides a reconciliation of net income to Economic Earnings for the years presented:
| | | | | | | | | | | % Change | |
(in thousands) | | For the years ended December 31, | | | 2013 vs. | | | 2012 vs. | |
| | 2013 | | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
Net Income | | $ | 17,891 | | | $ | 12,090 | | | $ | 14,686 | | | | 48 | % | | | (18 | )% |
Add: Restricted stock expense | | | 11,595 | | | | 10,515 | | | | 9,969 | | | | 10 | | | | 5 | |
Add: Intangible amortization | | | 359 | | | | 472 | | | | 498 | | | | (24 | ) | | | (5 | ) |
Add: Tax benefit from goodwill amortization | | | 152 | | | | 154 | | | | 189 | | | | (1 | ) | | | (19 | ) |
Economic Earnings | | $ | 29,997 | | | $ | 23,231 | | | $ | 25,342 | | | | 29 | % | | | (8 | ) % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the years ended December 31,
(in thousands, except share data) | | % Change |
| | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2015 vs. 2014 | | 2014 vs. 2013 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| Net Income | | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
| | $ | 12,086 |
| | $ | 14,155 |
| | (1 | )% | | 53 | % | | 48 | % | | (15 | )% |
| Add: Restricted stock expense | | 17,574 |
| | 13,685 |
| | 11,679 |
| | 10,521 |
| | 10,805 |
| | 28 |
| | 17 |
| | 11 |
| | (3 | ) |
| Add: Intangible amortization | | 1,546 |
| | 359 |
| | 359 |
| | 472 |
| | 498 |
| | 331 |
| | — |
| | (24 | ) | | (5 | ) |
| Add: Tax benefit from goodwill amortization | | 271 |
| | 152 |
| | 152 |
| | 154 |
| | 189 |
| | 78 |
| | — |
| | (1 | ) | | (19 | ) |
| Economic Earnings | | $ | 46,496 |
| | $ | 41,445 |
| | $ | 30,027 |
| | $ | 23,233 |
| | $ | 25,647 |
| | 12 | % | | 38 | % | | 29 | % | | (9 | )% |
| Economic Earnings per Share | | $ | 5.71 |
| | $ | 5.24 |
| | $ | 3.90 |
| | $ | 3.18 |
| | $ | 3.54 |
| | 9 | % | | 34 | % | | 23 | % | | (10 | )% |
Liquidity and Capital Resources | | As of December 31, | |
(in thousands) | | 2013 | | | 2012 | | | 2011 | |
Balance Sheet Data: | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 10,864 | | | $ | 3,817 | | | $ | 5,264 | |
Accounts Receivable | | | 14,468 | | | | 8,920 | | | | 7,707 | |
Total liquid assets | | | 25,332 | | | | 12,737 | | | | 12,971 | |
Investments | | $ | 64,554 | | | $ | 59,906 | | | $ | 54,868 | |
| | For the years ended December 31, | |
| | 2013 | | | 2012 | | | 2011 | |
Cash Flow Data: | | | | | | | | | | | | |
Operating cash flows | | $ | 21,707 | | | $ | 13,780 | | | $ | 18,548 | |
Investing cash flows | | | (1,201 | ) | | | 1,636 | | | | (2,244 | ) |
Financing cash flows | | | (13,303 | ) | | | (16,891 | ) | | | (12,784 | ) |
|
| | | | | | | | |
| | | As of December 31, (in thousands) |
| Balance Sheet Data | | 2015 | | 2014 |
| Assets: | | |
| | |
|
| Cash and cash equivalents | | $ | 22,740 |
| | $ | 18,131 |
|
| Accounts receivable | | 19,618 |
| | 14,540 |
|
| Total liquid assets | | 42,358 |
| | 32,671 |
|
| Investments | | $ | 72,320 |
| | $ | 79,620 |
|
We had cash and investments of $95.1 million and $97.8 million as of December 31, 2015 and December 31, 2014, respectively. Cash and cash equivalents as of December 31, 2015 and December 31, 2014 includes $15.5 million and $12.9 million, respectively, of undistributed income from Westwood International that we consider to be permanently invested. If these funds were needed for our U.S. operations, we would be required to accrue and pay incremental U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
At December 31, 2015 and 2014, working capital aggregated $72.8 million and $91.6 million, respectively. As required by the Finance Code, Westwood Trust is subject to a required minimum capital requirement of $4.0 million. At December 31, 2015, Westwood Trust had approximately $8.9 million in excess of its minimum capital requirement. We had no debt at December 31, 2015 or December 31, 2014.
|
| | | | | | | | | | | | |
| | | For the years ended December 31, (in thousands) |
| Cash Flow Data | | 2015 | | 2014 | | 2013 |
| Operating cash flows | | $ | 55,208 |
| | $ | 26,523 |
| | $ | 21,705 |
|
| Investing cash flows | | (25,084 | ) | | (478 | ) | | (1,201 | ) |
| Financing cash flows | | (22,139 | ) | | (17,971 | ) | | (13,301 | ) |
Historically we have funded our operations and cash requirements with cash generated from operating activities.
We may also use cash from operations to pay dividends to our stockholders. As of December 31,
2013,2015 and December 31, 2014, we had no
long-term debt. The changes in net cash provided by operating activities generally reflect the changes in earnings plus the
effecteffects of non-cash items and changes in working capital. Changes in working capital, especially accounts receivable and accounts payable
are generally
the result
offrom timing differences between collection of fees billed and
paymentpayment of operating expenses.During
2013,2015, cash flow provided by operating activities, principally our investment advisory business,
was $21.7aggregated $55.2 million compared to cash provided by operations of
$13.8$26.5 million during
20122014 and
$18.5$21.7 million during
2011.2013. The increase of
$7.9$28.7 million in
2015 was primarily due to cash transferred from our investment accounts and working capital. The increase of $4.8 million from 2013
to 2014 was primarily due to increased net
income; a decreaseincome and working capital, partially offset by an increase in cash transferred to our investment
accounts, and an increase in compensation and benefits payable partially offset by decreases from accounts receivable and income taxes payable. The decrease of $4.8 million from 2011 to 2012 was primarily due to decreased net income and an increase in accounts receivable and decreased net purchases of U.S. Treasury Bills, partially offset by increases in income taxes and compensation and benefits payable.Cash flow used by investing activities during 2013 of $1.2 million was due to the purchase of property and equipment. Cash flow provided by investing activities during 2012 of $1.6 million was primarily due to the sale of an available for sale investment. accounts.
Cash flow used in investing activities during
20112015 of
$2.2$25.1 million
was primarily
reflectedrelated to the
purchaseacquisition of Woodway. Cash flow used in investing activities during 2014 and 2013 of $0.5 million and $1.2 million, respectively, was due to purchases of property and
equipment and cash paid to acquire businesses.equipment.
Cash used in financing activities of
$22.1 million, $18.0 million and $13.3 million
$16.9 millionduring 2015, 2014 and
$12.8 million during 2013,
2012 and 2011, respectively, primarily related to payment of cash dividends,
restricted stock returned for payment of taxes and
purchasepurchases of treasury
stock,shares for our Canadian share award plan, partially offset by excess tax benefits related to vested restricted shares.
28
We held cash and investments of $75.4 million and $63.7 million at December 31, 2013 and December 31, 2012, respectively. At December 31, 2013 and 2012, working capital aggregated $71.3 million and $58.5 million respectively. As required by the Texas Finance Code, Westwood Trust maintains current assets in an amount equal to the required minimum restricted capital of $1.0 million, which is included in Investments in the accompanying consolidated balance sheets. We had no liabilities for borrowed money at December 31, 2013 or December 31, 2012, and our accounts payable were paid in the ordinary course of business for each of the periods then ended.
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 “Item 1A. Risk Factors” in this Report. We believe that current cash and short-term investment balances andand 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.months and the payment of the contingent consideration related to the Woodway acquisition. However, there can be no assurance that we will not require additional financing within this time frame. AThe 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.
Cash Dividends
The following table summarizes dividends declared during 2015 and 2014:
|
| | | | | | |
| Declaration Date | | Record Date | | Paid Date | | Dividend per Share Declared |
| 2015: | | | | | | |
| February 4, 2015 | | March 13, 2015 | | April 1, 2015 | | $0.50 |
| April 29, 2015 | | June 12, 2015 | | July 1, 2015 | | $0.50 |
| July 29, 2015 | | September 11, 2015 | | October 1, 2015 | | $0.50 |
| October 28, 2015 | | December 15, 2015 | | January 4, 2016 | | $0.57 |
| | | | | | $2.07 |
|
| | | | | | |
| Declaration Date | | Record Date | | Paid Date | | Dividend per Share Declared |
| 2014: | | | | | | |
| February 6, 2014 | | March 14, 2014 | | April 1, 2014 | | $0.44 |
| April 17, 2014 | | June 13, 2014 | | July 1, 2014 | | $0.44 |
| July 29, 2014 | | September 15, 2014 | | October 1, 2014 | | $0.44 |
| October 23, 2014 | | December 15, 2014 | | January 2, 2015 | | $0.50 |
| | | | | | $1.82 |
The following table summarizes our contractual obligations as of December 31,
20132015 (in thousands).
| | Payments due in: | |
Contractual Obligations | | Total | | | Less than
1 year | | | 1-3
years | | | 4-5
years | | | After 5
years | |
Operating lease obligations | | $ | 9,169 | | | $ | 1,422 | | | $ | 2,663 | | | $ | 2,160 | | | $ | 2,924 | |
Accounting Developments
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The ASU also requires presentation, either on the face of the statement where net income is presented or in the notes to the consolidated financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. However, such disclosure is only required if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity should cross-reference to other disclosures that provide additional detail about those amounts. For public entities, the ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have an impact on our consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The ASU clarifies the interaction between ASC 810-10, Consolidation – Overall, and ASC 830-30, Foreign Currency Matters – Translation of Financial Statement, when releasing the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due in: |
| | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
Purchase obligations(1) | | $ | 9,298 |
| | $ | 1,636 |
| | $ | 3,831 |
| | $ | 3,831 |
| | $ | — |
|
| Operating lease obligations | | $ | 15,560 |
| | $ | 2,275 |
| | $ | 3,802 |
| | $ | 2,683 |
| | $ | 6,800 |
|
________________
| |
| (1) | A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including (a) fixed or minimum quantities to be purchased; (b) fixed, minimum or variable price provisions; and (c) the approximate timing of the transaction. Our purchase obligations relate to obligations associated with implementing and operating new information technology platforms and outsourcing services. The above purchase obligations exclude agreements that are cancelable without significant penalty. The contractual obligations in the table above exclude contingent consideration of $9.0 million related to the Woodway acquisition. |
Off-Balance Sheet Arrangements
We do not
currently expect the adoption of this ASU to have
an impact on our consolidated financial statements.In June 2013, the FASB issued ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU changes the approach to the investment company assessment in Topic 946, clarifying the characteristics of an investment company and provides comprehensive guidance for assessing whether an entity is an investment company. This update would also require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting and to include additional disclosures. The ASU is effective for reporting periods beginning after December 15, 2013. Although this update is relevant to our variable interest entity analysis, we do not currently expect the adoption of this ASU to have an impact on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendment is effective prospectively for fiscal years (and interim periods within those years) beginning after December 15, 2013 and is not expected to have a material impact on our consolidated financial statements.
29
any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we often must make individual estimates
andand assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make accounting policies critical. Historically, actual results have not differed materially from estimates.The primary beneficiary of variable interest entities (“VIE”s) consolidate("VIEs") consolidates the VIEs. A VIE is an entity in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities without subordinated financial support or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. That is, the at-risk equity holders do not have the obligation to absorb losses, the right to receive residual returns and/or the right to direct the activities of the entity that most significantly impact the entity’s economic performance. Westwood Trust sponsors common trust funds (“CTFs”) for its clients. These fundsthat allow clients to commingle assets to achieve economies of scale. Westwood Management provides investment advisory services to the Westwood Funds™Funds®, a family of mutual funds, and to two collective investment trusts (“CITs”). Some clients of Westwood Management hold their investments in ten limited liability companies (“LLCs”) that were formed and sponsored by McCarthy Group Advisors, L.L.C.. Westwood International providesand Westwood Management provide investment advisory services to the Westwood Investment Funds PLC (the “UCITS Fund”), an Ireland domiciled umbrella-type open ended self-managed investment company which was authorized by the Central Bank of Ireland on June 18, 2013 pursuant to the European Communities (Undertakings for Collective Investment in Transferrable Securities) Regulations 2011. The CTFs, Westwood Funds™Funds®, CITs, LLCs and the UCITS Fund (the “Westwood VIEs”) are considered VIEs because our clients, who hold the equity at risk, do not have a direct or indirect ability through voting or similar rights to make decisions about the funds that have a significant effect on their success. We receive fees for managing assets in these entities commensurate with market rates. We evaluate all of our advisory relationships and CTFs to determine whether or not we qualify as the primary beneficiary based on whether there is an obligation to absorb the majority of expected losses or a right to receive the majority of residual returns. Since all losses and returns are distributed to the shareholders of the Westwood VIEs, we are not the primary
beneficiarybeneficiary and consequently the Westwood VIEs are not included in our consolidated financial statements. We have not provided any financial support that we were not previously contractually obligated to provide and there are no arrangements that would require us to provide additional financial support to any of the Westwood VIEs.
Assessing ifwhether or not an entity is a VIE involves judgment and analysis. Factors included in this assessment include the legal organization of the entity, the Company’sour contractual involvement with the entity and any related party or de facto agent implications of the Company’s involvement with the entity. Determining if the Company is the primary beneficiary of a VIE also requires significant judgment. There is judgment involved to assess if the CompanyCompany has the power to direct the activities that most significantly impact the entity’s economic results and to assess if the Company has an obligation to absorb the majority of expected losses or a right to receive the majority of residual returns.
Business Combinations
In allocating the purchase price of a business combination, the Company records all assets acquired and liabilities assumed at fair value, with the excess of the purchase price over the aggregate fair values recorded as goodwill. ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed such excess is allocated to goodwill. The Company determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The fair value assigned to identifiable intangible assets acquired is based on estimates and assumptions made by management at the time of the acquisition. The Company adjusts the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to the facts and circumstances existing as of the acquisition date. Acquisition-related costs are recognized separately from the acquisition purchase price and are expensed as incurred.
Goodwill is not amortized but is tested for impairment, at least annually. We assess the recoverability of the carrying amount of goodwill either qualitatively or quantitatively annually as of July 1 of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.
When assessing the recoverability of goodwill, we may first assess qualitative factors. If an initial qualitative assessment indicates that it is more likely than not that the carrying amount exceeds fair value, a quantitative analysis may be required. We may also elect to skip the qualitative assessment and proceed directly to the quantitative analysis.
Recoverability of the carrying value of goodwill is measured at the reporting unit level. We have identified two reporting units, which are consistent with our reporting segments. In performing a quantitative analysis, we measure the recoverability of goodwill for our reporting units using a market multiple approach. The key assumptions used in the market multiple valuation require significant management judgment, including the determination of our peer group and the valuation multiples of such peer group.
If the calculated fair value of a reporting unit is less than the current carrying amount, impairment of the reporting unit may exist. When the recoverability test indicates potential impairment, we will calculate an implied fair value of goodwill for the reporting unit in a manner similar to how goodwill is calculated in a business combination. If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned to the reporting unit, there is no impairment. If the carrying amount of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment loss is recorded to write down the carrying amount.
During
the third quarters of2015, 2014 and 2013,
2012, and 2011, we completed our annual impairment
assessment as required by ASC 350 “Goodwillassessments and
Other Intangible Assets”. Noconcluded no impairment losses were required.
We perform our annual impairment assessment as of July 1 and would perform a reassessment if circumstances indicated a potential impairment between our annual assessment dates. We assess the fair value of our reporting units with goodwill using a market multiple approach. We updated our assessment at the end of 2013 and determined that no events occurred in the last half of 2013 that would indicate that these assets should be retested for impairment.
Our
definite-lived intangible assets represent the acquisition date fair value of the intangible assets acquired, net of amortization. The values of these assets are comprised mostly of
customer listsclient relationships but also include valuations of trade names and non-compete agreements. In valuing these assets, we made significant estimates regarding the useful life, growth
ratesrates and potential attrition of the assets acquired. We periodically review our intangible assets for events or circumstances that would indicate impairment andimpairment. If we determine the carrying value exceeds fair value, we would record an impairment to remove the excess amount if their carrying valuethat exceeded fair value.30
During 2015, 2014 and 2013, we completed our annual impairment assessments and concluded no impairment losses were required.
We have granted restricted stock to employees and non-employee directors. We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued,
an adjustment for restrictions on dividends and an estimate of shares that will not vest due to forfeitures.
ThisThe estimated number of awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We update our estimated forfeitures quarterly. We amortize compensation cost
is amortized on a straight-line basis over the applicable service period.
Actual forfeitures may vary from our assumptions, which will result in modifications to future compensation costs.
We grant performance-based share awards to certain employees, the vesting of which is subject to the employee’s continuing employment and the Company's achievement of certain performance goals. We assess actual performance versus the predetermined performance goals and record compensation costs once we conclude that it is probable that we will meet the performance goals required to vest the applicable performance based awards.
Accounting for Income Taxes
Our
We operate in several states and countries and are required to allocate our income, expenses and earnings under the various laws and regulations of these tax jurisdictions. Accordingly, our provision for income taxes reflects the statutory tax obligations of the jurisdictions in which we operate. Significant judgment and complex calculations are used when determining our tax liability and in evaluating our tax positions.positions, and we are subject to audits by taxing authorities in each of the jurisdictions in which we operate. We adjust our income tax provision in the period in which we determine that actual outcomes will likely be different from our estimates. Changes in tax laws may result in changes to our tax position and effective tax rates. We classifyinclude penalties and interest on income-based taxes in the “General and administrative” line on our consolidated statements of comprehensive income.
We have not recognized a deferred tax liability on the undistributed earnings of our foreign subsidiary, Westwood International, because we intend to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any
interest or penalties related toforeign income taxes
as a component of income tax expense.Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities as measured at enacted income tax rates. Our deferred taxes relate principally to stock-based compensation expense, which is deductible for tax purposes at the time restricted stock vests and stock options are exercised. previously paid on these earnings.
We are required to assess whether a valuation allowance should be established against our deferred tax assets based on
considerationconsideration of all available evidence, using a more-likely-than-not standard.As a result of start-upDecember 31, 2015 and ongoing operating costs,2014, we have incurred net operating losses at Westwood International, our Canadian subsidiary. We have not recorded ana valuation allowance against the relatedon any deferred tax asset, as we currently anticipateassets. In the event that it is more-likely-than-not that we will generate sufficient taxable income at Westwood International to utilize these net operating losses. However, forecasting results involves making significant assumptions and estimations about future events. If those forecasts are incorrect, we could be required to record valuation allowances against the net operating loss deferred tax assets, which would reduce our net incomedoes not result in future periods.
years, a valuation allowance may be required.We account for uncertain tax positions by recognizing the impact of a tax position in our consolidated financial statements when we believe it is more likely than not that the tax position would not be sustained upon examination by the appropriate tax authority, based on the merits of the position. We periodically review our tax positions and adjust the balances as new information becomes available. In making these assessments, we often must analyze complex tax laws of multiple domestic and international jurisdictions. Upon completion of our analysis in the fourth quarter of 2015, we recorded a liability for specific uncertain tax positions related to current and prior years.
Accounting Developments
See Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for a description of new accounting standards and their anticipated effects on our Consolidated Financial Statements.
| |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
We
Our revenues are primarily generated from fees derived as a percentage of our AUM, which is subject to market risks. Additionally, we invest
our corporate capital in various financial instruments,
such asincluding United States treasury bills and equity mutual funds, all of which
entail certainpresent inherent market risks. We do not currently participate in any hedging activities, nor do we currently utilize any derivative financial instruments. The following information describes the key aspects of certain financial instruments that involve market risks.
Securities Markets and Interest Rates
The value of assets under management is affected by fluctuations in securities markets and
Securities Marketschanges in interest rates. Since we derive a substantial portion of our revenues from investment advisory and trust fees based on the value of assets under management, our revenues may be adversely affected by a decline in the prices of securities or changing interest rates. A hypothetical 10% decrease in our average assets under management during the year ended December 31, 2015 would have reduced our reported consolidated total revenue by approximately $13 million.
Our cash equivalents and other investment instruments are exposed to financial market risk due to fluctuations in interest rates, which may affect interest income. We do not expect interest income to be significantly affected by sudden changes in market interest rates.
The value of assets under management is affected by
Foreign Currency Risk
We are exposed to foreign currency fluctuation risk associated with changes in
interest rates and fluctuations in securities markets. Since we derive a substantial portion of our revenues from investment advisory and trust fees based on the value of
assets under management,the Canadian dollar relative to the United States dollar, as Westwood International operates in Toronto, Canada. For the year ended December 31, 2015, Westwood International represented 35.3% of our
revenues may be adversely affected by changing interest rates or a declineconsolidated income before income taxes. Changes in the
pricescurrency exchange rate result in cumulative translation adjustments included in “Accumulated other comprehensive loss” on our consolidated balance sheets and potentially result in transaction gains or losses, which are included in our earnings. The low and high currency exchange rates for a Canadian dollar into a United States dollar for the year ended December 31, 2015 were 0.7163 and 0.8613, respectively. A hypothetical 10% devaluation in the average quoted United States dollar-equivalent of
securities generally.the Canadian dollar exchange rate during the year ended December 31, 2015 would have reduced our reported consolidated income before income taxes by approximately $1.5 million.
| |
| Item 8. | Financial Statements and Supplementary Data. Data |
The
reports of independent registered public accounting
firm’s reportsfirms and
our consolidated financial statements listed in the accompanying index are included in Item 15 of this Report. See “Index to Financial Statements” on page F-1.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
During 2015, the Audit Committee of the Board of Directors of the Company completed a competitive process to determine which audit firm would serve as the Company's independent registered public accounting firm. As a result of that process and following careful deliberation, the Company, with the approval of the Audit Committee, dismissed Grant Thornton LLP (“Grant Thornton") as the Company's independent registered public accounting firm on October 3, 2015, effective October 7, 2015.
None.
On and effective as of October 7, 2015, the Company entered into an engagement letter with Deloitte & Touche LLP (“Deloitte") appointing Deloitte as the Company's new independent registered public accounting firm. The Audit Committee of the Company's Board of Directors approved the engagement.
Grant Thornton’s reports on the Company’s consolidated financial statements for the years ended December 31, 2013 and December 31, 2014 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
The Company had no disagreements with its current or former independent registered public accounting firms.
| |
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
OurWe performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
are designed to ensure that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report. Based on thisthat evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that as of December 31, 2013, our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2015 to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, iswas (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and that such information is(b) accumulated and communicated to our management, including the Company’sour Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.Please refer to Westwood Holdings Group, Inc.’s Management Assessment
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by management and other personnel, and overseen by the Board of Directors, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on
page F-3the financial statements. Because of
this Report.its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
The scope of our assessment of internal control over financial reporting does not include Woodway Financial Advisors (“Woodway”), which we acquired on April 1, 2015. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our assessment in the year of acquisition. Woodway represents approximately $37.6 million of our total assets and $7.7 million of our total revenues for the year ended December 31, 2015.
Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting. This report can be found on page
F-2.For41.
Changes in Internal Control over Financial Reporting
During the
fiscal yearquarterly period ended December 31,
2013,2015, there
werehas been no
changeschange in our internal control over financial reporting that
has materially affected, or
areis reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF WESTWOOD HOLDINGS GROUP, INC.’S MANAGEMENT ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Westwood Holdings Group, Inc.:
The management of Westwood Holdings Group, Inc. (“Westwood”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Westwood’s internal control system was designed to provide reasonable assurance to the company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, contain inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of Westwood assessed the effectiveness of Westwood’s internal control over financial reporting as of December 31, 2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2015, Westwood’s internal control over financial reporting is effective based on those criteria.
The scope of our assessment of internal control over financial reporting does not include Woodway Financial Advisors (“Woodway”), which we acquired on April 1, 2015. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our assessment in the year of acquisition. Woodway constitutes 5.9% of our Total revenues and 8.0% of Net income of the consolidated financial statement amounts for the year ended December 31, 2015.
Westwood’s independent registered public accounting firm has issued an audit report on our assessment of Westwood’s internal control over financial reporting. This report appears on page 41.
|
| | |
| By: | /s/ Brian O. Casey | |
| Brian O. Casey, President & Chief Executive Officer | |
| | |
| /s/ Tiffany B. Kice | |
| Tiffany B. Kice, Chief Financial Officer | |
February 25, 2016
Dallas, Texas
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Westwood Holdings Group, Inc.
Dallas, Texas
We have audited the internal control over financial reporting of Westwood Holdings Group, Inc. and subsidiaries (the "Company") as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in the Report of Westwood Holdings Group, Inc.'s Management’s Assessment of Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Woodway Financial Advisors, which was acquired on April 1, 2015 and whose financial results constitute 5.9% of Total revenues and 8.0% of Net income of the consolidated financial statement amounts for the year ended December 31, 2015. Accordingly, our audit did not include the internal control over financial reporting at Woodway Financial Advisors. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying the Report of Westwood Holdings Group, Inc.'s Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements.
|
|
|
| /s/ Deloitte & Touche LLP |
|
| Dallas, Texas |
| February 25, 2016 |
| |
| Item 9B. | Other Information. |
None.
None.
32
PART III
Item
| |
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this item is or will be set forth in the definitive proxy statement relating to the
20142016 Annual Meeting of Stockholders of Westwood Holdings Group, Inc., which is to be filed with the
Securities and Exchange CommissionSEC pursuant to Regulation 14A under the
Securities Exchange Act
of 1934, as amended (the “Proxy Statement”). The Proxy Statement relates to a meeting of stockholders involving the election of
directorsdirectors and the portions therefrom required to be set forth in this Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.Item
| |
| Item 11. | Executive Compensation. |
The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
Item
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Report by this item are incorporated herein by reference pursuant to
GeneralGeneral Instruction G(3) to Form 10-K.Item
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
Item
| |
| Item 14. | Principal Accounting Fees and Services. |
The information required by this item is or will be set forth in the Proxy Statement. The Proxy Statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
33
PART IV
Item
| |
| Item 15. | Exhibits, Financial Statement Schedules. |
Financial Statement Schedules
The financial statements included in this Report are listed in the Index to Financial Statements on page F-1 of this Report. Schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange CommissionSEC are either not required under the related instructions or
are inapplicable.The exhibits required to be furnished pursuant to Item 15 are listed in the
Exhibit Index
to Exhibits filed herewith, which
Exhibit Index
to Exhibits is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| WESTWOOD HOLDINGS GROUP, INC. |
| | |
| By: | /s/ Brian O. Casey |
| | Brian O. Casey |
| | President, Chief Executive Officer and Director |
Dated: February 25, 2016
KNOW ALL MEN BY THESE PRESENTS that each of Westwood Holdings Group, Inc., a Delaware corporation, and the undersigned directors and officers of Westwood Holdings Group, Inc. hereby constitutes and appoints Brian O. Casey
and Mark A. Wallace, or any one of them, its, his or her true and lawful attorney-in-fact and agent, for it, him or her and in its, his or her name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each
suchsuch amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it, he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WESTWOOD HOLDINGS GROUP, INC.
|
| | |
| By:
| /s/ Brian O. Casey
|
| | Brian O. Casey
|
| | President, Chief Executive Officer and Director
|
Dated: February 28, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
| | Title
|
| | |
Signatures | | Title |
| | |
| /s/ Brian O. Casey | | President, Chief Executive Officer and Director |
Brian O. Casey | | (Principal Executive Officer) |
| | |
/s/ Mark A. Wallace Tiffany B. Kice | | Chief Financial Officer |
Mark A. Wallace
Tiffany B. Kice | | (Principal Financial Officer) |
| | |
/s/ Peter F. Pastorelle
| | Vice President - Accounting
|
Peter F. Pastorelle
| | (Officer and Principal Accounting Officer)
|
| | |
/s/ SusanRichard M. Byrne Frank | | Chairman of the Board of Directors |
Richard M. Frank | | |
| | |
| /s/ Susan M. Byrne | | Vice Chairman of the Board of Directors |
| Susan M. Byrne | | |
/s/ Richard M. Frank
| | Director
|
Richard M. Frank
/s/ Ellen H. Masterson | | Director |
| Ellen H. Masterson | | |
| | |
| /s/ Robert D. McTeer | | Director |
Robert D. McTeer | | |
| | |
/s/ Geoffrey R. Norman | | Director |
Geoffrey R. Norman | | |
| | |
/s/ Martin J. Weiland | | Director |
Martin J. Weiland | | |
| | |
/s/ Raymond E. Wooldridge | | Director |
Raymond E. Wooldridge | | |
35
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Westwood Holdings Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheetssheet of Westwood Holdings Group Inc. and subsidiaries (the "Company") as of December 31, 2015 and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Westwood Holdings Group, Inc. and subsidiaries as of December 31, 2015 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
|
|
|
| /s/ Deloitte & Touche LLP |
|
| Dallas, Texas |
| February 25, 2016 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Westwood Holdings Group, Inc.
We have audited the accompanying consolidated balance sheet of Westwood Holdings Group, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
2013 and 2012,2014, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the
threetwo years in the period ended December 31,
2013. We also have audited2014. These financial statements are the
Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizationsresponsibility of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Westwood Holdings Group, Inc.’s Management Assessment of Internal Control over Financial Reporting.Company's management. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includedmisstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
andas well as evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westwood Holdings Group, Inc. and subsidiaries as of December 31,
2013 and 2012,2014, and the results of their operations and their cash flows for each of the
threetwo years in the period ended December 31,
2013,2014 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO./s/ Grant Thornton LLP
Dallas, Texas
February 28, 2014
F-2
REPORT OF WESTWOOD HOLDINGS GROUP, INC.’S MANAGEMENT ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Westwood Holdings Group, Inc.:
The management of Westwood Holdings Group, Inc. (“Westwood”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Westwood’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, contain inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of Westwood assessed the effectiveness of Westwood’s internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 1992 Internal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2013, Westwood’s internal control over financial reporting is effective based on those criteria.
Westwood’s independent registered public accounting firm has issued an audit report on our assessment of Westwood’s internal control over financial reporting. This report appears on page F-2.
By:
| /s/ Brian O. Casey
| |
| Brian O. Casey, President & Chief Executive Officer
| |
| | |
| /s/ Mark A. Wallace | Grant Thornton LLP |
|
Mark A. Wallace, Chief Financial Officer
Dallas, Texas |
| February 25, 2016 |
February 28, 2014
Dallas, Texas
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 20132015 and 20122014
(in thousands, except par values and share amounts)
| 2013 | | | 2012 | |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | $ | 10,864 | | | $ | 3,817 | |
Accounts receivable | | 14,468 | | | | 8,920 | |
Investments, at fair value | | 64,554 | | | | 59,906 | |
Deferred income taxes | | 3,782 | | | | 3,362 | |
Other current assets | | 2,521 | | | | 1,365 | |
Total current assets | | 96,189 | | | | 77,370 | |
Goodwill | | 11,255 | | | | 11,255 | |
Deferred income taxes | | 2,041 | | | | 1,696 | |
Intangible assets, net | | 3,789 | | | | 4,149 | |
Property and equipment, net of accumulated depreciation of $2,155 and $1,747 | | 2,746 | | | | 2,145 | |
Total assets | $ | 116,020 | | | $ | 96,615 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable and accrued liabilities | $ | 2,082 | | | $ | 1,650 | |
Dividends payable | | 3,935 | | | | 1,201 | |
Compensation and benefits payable | | 17,805 | | | | 14,537 | |
Income taxes payable | | 1,031 | | | | 1,438 | |
Total current liabilities | | 24,853 | | | | 18,826 | |
Accrued dividends | | 1,266 | | | | — | |
Deferred rent | | 1,268 | | | | 1,238 | |
Total long-term liabilities | | 2,534 | | | | 1,238 | |
Total liabilities | | 27,387 | | | | 20,064 | |
Commitments and contingencies (Note 14) | | | | | | | |
Stockholders’ Equity: | | | | | | | |
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 8,778,613 and outstanding 8,176,417 shares at December 31, 2013; issued 8,526,598 and outstanding 8,031,045 shares at December 31, 2012 | | 88 | | | | 85 | |
Additional paid-in capital | | 100,955 | | | | 88,483 | |
Treasury stock, at cost – 602,196 shares at December 31, 2013; 495,553 shares at December 31, 2012 | | (23,169 | ) | | | (18,502 | ) |
Accumulated other comprehensive (loss) income | | (257 | ) | | | 30 | |
Retained earnings | | 11,016 | | | | 6,455 | |
Total stockholders’ equity | | 88,633 | | | | 76,551 | |
Total liabilities and stockholders’ equity | $ | 116,020 | | | $ | 96,615 | |
|
| | | | | | | | |
| | | 2015 | | 2014 |
| ASSETS | | |
| | |
|
| Current Assets: | | |
| | |
|
| Cash and cash equivalents | | $ | 22,740 |
| | $ | 18,131 |
|
| Accounts receivable | | 19,618 |
| | 14,540 |
|
| Investments, at fair value | | 72,320 |
| | 79,620 |
|
| Deferred income taxes | | — |
| | 4,060 |
|
| Other current assets | | 2,926 |
| | 2,413 |
|
| Total current assets | | 117,604 |
| | 118,764 |
|
| Goodwill | | 27,144 |
| | 11,255 |
|
| Deferred income taxes | | 11,042 |
| | 3,792 |
|
| Intangible assets, net | | 23,354 |
| | 3,430 |
|
| Property and equipment, net of accumulated depreciation of $3,687 and $2,720 | | 2,192 |
| | 2,633 |
|
| Total assets | | $ | 181,336 |
| | $ | 139,874 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
|
| Current Liabilities: | | |
| | |
|
| Accounts payable and accrued liabilities | | $ | 3,549 |
| | $ | 2,334 |
|
| Dividends payable | | 5,749 |
| | 4,868 |
|
| Compensation and benefits payable | | 20,264 |
| | 18,504 |
|
| Contingent consideration | | 9,023 |
| | — |
|
| Income taxes payable | | 6,268 |
| | 1,498 |
|
| Total current liabilities | | 44,853 |
| | 27,204 |
|
| Accrued dividends | | 1,699 |
| | 1,450 |
|
| Deferred rent | | 817 |
| | 1,213 |
|
| Total long-term liabilities | | 2,516 |
| | 2,663 |
|
| Total liabilities | | 47,369 |
| | 29,867 |
|
| Commitments and contingencies (Note 13) | |
|
| |
|
|
| Stockholders’ Equity: | | |
| | |
|
| Common stock, $0.01 par value, authorized 25,000,000 shares, issued 9,425,309 and outstanding 8,630,687 shares at December 31, 2015; issued 9,010,255 and outstanding 8,308,460 shares at December 31, 2014 | | 94 |
| | 90 |
|
| Additional paid-in capital | | 143,797 |
| | 119,859 |
|
| Treasury stock, at cost – 794,622 shares at December 31, 2015; 701,795 shares at December 31, 2014 | | (34,910 | ) | | (29,028 | ) |
| Accumulated other comprehensive loss | | (4,688 | ) | | (1,231 | ) |
| Retained earnings | | 29,674 |
| | 20,317 |
|
| Total stockholders’ equity | | 133,967 |
| | 110,007 |
|
| Total liabilities and stockholders’ equity | | $ | 181,336 |
| | $ | 139,874 |
|
See notes to consolidated financial statements.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
| For the Years Ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
REVENUES: | | | | | | | | | | | |
Advisory fees | | | | | | | | | | | |
Asset-based | $ | 70,027 | | | $ | 57,936 | | | $ | 54,246 | |
Performance-based | | 2,561 | | | | 1,251 | | | | 991 | |
Trust fees | | 18,367 | | | | 14,969 | | | | 13,453 | |
Other revenues, net | | 870 | | | | 3,339 | | | | 219 | |
Total revenues | | 91,825 | | | | 77,495 | | | | 68,909 | |
EXPENSES: | | | | | | | | | | | |
Employee compensation and benefits | | 47,780 | | | | 43,692 | | | | 35,081 | |
Sales and marketing | | 1,252 | | | | 1,132 | | | | 994 | |
Westwood mutual funds | | 2,153 | | | | 1,153 | | | | 790 | |
Information technology | | 2,882 | | | | 2,555 | | | | 2,054 | |
Professional services | | 4,223 | | | | 4,420 | | | | 2,981 | |
General and administrative | | 5,266 | | | | 4,517 | | | | 3,900 | |
Total expenses | | 63,556 | | | | 57,469 | | | | 45,800 | |
Income before income taxes | | 28,269 | | | | 20,026 | | | | 23,109 | |
Provision for income taxes | | 10,378 | | | | 7,936 | | | | 8,423 | |
Net income | $ | 17,891 | | | $ | 12,090 | | | $ | 14,686 | |
Other comprehensive income (loss): | | | | | | | | | | | |
Available-for-sale investments: | | | | | | | | | | | |
Change in unrealized gain on investment securities | | — | | | | (40 | ) | | | 1,014 | |
Less: reclassification adjustment for net gains included in earnings | | — | | | | (1,900 | ) | | | — | |
Net change (net of income taxes of $0, (1,058) and $560, respectively) | | — | | | | (1,940 | ) | | | 1,014 | |
Foreign currency translation adjustments | | (287 | ) | | | 30 | | | | — | |
Other comprehensive income (loss) | | (287 | ) | | | (1,910 | ) | | | 1,014 | |
Total comprehensive income | $ | 17,604 | | | $ | 10,180 | | | $ | 15,700 | |
Earnings per share: | | | | | | | | | | | |
Basic | $ | 2.44 | | | $ | 1.69 | | | $ | 2.11 | |
Diluted | $ | 2.34 | | | $ | 1.65 | | | $ | 2.04 | |
Weighted average shares outstanding: | | | | | | | | | | | |
Basic | | 7,331,874 | | | | 7,145,701 | | | | 6,970,382 | |
Diluted | | 7,643,051 | | | | 7,338,104 | | | | 7,208,515 | |
See notes to consolidated financial statements.
F-5
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2013, 20122015, 2014 and 2011
2013
(in thousands, except shares and per share data)
|
| | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| Revenues: | | |
| | |
| | |
|
| Advisory fees | | |
| | |
| | |
|
| Asset-based | | $ | 99,275 |
| | $ | 88,473 |
| | $ | 70,027 |
|
| Performance-based | | 2,698 |
| | 3,806 |
| | 2,561 |
|
| Trust fees | | 28,795 |
| | 20,525 |
| | 18,367 |
|
| Other revenues, net | | 168 |
| | 437 |
| | 870 |
|
| Total revenues | | 130,936 |
| | 113,241 |
| | 91,825 |
|
| Expenses: | | |
| | |
| | |
|
| Employee compensation and benefits | | 63,562 |
| | 52,847 |
| | 47,864 |
|
| Sales and marketing | | 1,839 |
| | 1,673 |
| | 1,252 |
|
| Westwood mutual funds | | 3,435 |
| | 2,543 |
| | 2,153 |
|
| Information technology | | 5,732 |
| | 3,469 |
| | 2,882 |
|
| Professional services | | 5,617 |
| | 4,905 |
| | 4,223 |
|
| General and administrative | | 8,531 |
| | 5,768 |
| | 5,266 |
|
| Total expenses | | 88,716 |
| | 71,205 |
| | 63,640 |
|
| Income before income taxes | | 42,220 |
| | 42,036 |
| | 28,185 |
|
| Provision for income taxes | | 15,115 |
| | 14,787 |
| | 10,348 |
|
| Net income | | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
|
| Other comprehensive income (loss), net of tax: | | |
| | |
| | |
|
| Foreign currency translation adjustments | | (3,457 | ) | | (974 | ) | | (287 | ) |
| Other comprehensive loss | | (3,457 | ) | | (974 | ) | | (287 | ) |
| Total comprehensive income | | $ | 23,648 |
| | $ | 26,275 |
| | $ | 17,550 |
|
| | | | | | | |
| Earnings per share: | | |
| | |
| | |
|
| Basic | | $ | 3.49 |
| | $ | 3.63 |
| | $ | 2.43 |
|
| Diluted | | $ | 3.33 |
| | $ | 3.45 |
| | $ | 2.32 |
|
| Weighted average shares outstanding: | | |
| | |
| | |
|
| Basic | | 7,756,647 |
| | 7,512,348 |
| | 7,331,874 |
|
| Diluted | | 8,149,399 |
| | 7,906,545 |
| | 7,692,756 |
|
See notes to consolidated financial statements.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except share and per share data)
| | Westwood Holdings
Group, Inc.
Common Stock, Par | | | Additional
Paid-In
Capital | | | Treasury
Stock | | | Accumulated
Other
Comprehensive Income (Loss) | | | Retained
Earnings | | | Total | |
| | Shares | | | Amount | | | | | | | | | | | |
BALANCE, January 1, 2011 | | | 7,645,678 | | | $ | 79 | | | $ | 65,639 | | | $ | (8,749 | ) | | $ | 926 | | | $ | 2,782 | | | $ | 60,677 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 14,686 | | | | 14,686 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | 1,014 | | | | | | | | 1,014 | |
Issuance of restricted stock, net of forfeitures | | | 207,995 | | | | 2 | | | | (2 | ) | | | | | | | | | | | | | | | — | |
Amortization of stock compensation | | | | | | | | | | | 9,969 | | | | | | | | | | | | | | | | 9,969 | |
Tax benefit related to equity compensation | | | | | | | | | | | 1,077 | | | | | | | | | | | | | | | | 1,077 | |
Dividends declared ($1.42 per share) | | | | | | | | | | | | | | | | | | | | | | | (10,995 | ) | | | (10,995 | ) |
Stock options exercised | | | 22,150 | | | | | | | | 286 | | | | | | | | | | | | | | | | 286 | |
Purchases of treasury stock | | | (168,634 | ) | | | | | | | | | | | (5,957 | ) | | | | | | | | | | | (5,957 | ) |
BALANCE, December 31, 2011 | | | 7,707,189 | | | $ | 81 | | | $ | 76,969 | | | $ | (14,706 | ) | | $ | 1,940 | | | $ | 6,473 | | | $ | 70,757 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 12,090 | | | | 12,090 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | (1,910 | ) | | | | | | | (1,910 | ) |
Issuance of restricted stock, net of forfeitures | | | 405,330 | | | | 4 | | | | (4 | ) | | | | | | | | | | | | | | | — | |
Amortization of stock compensation | | | | | | | | | | | 10,515 | | | | | | | | | | | | | | | | 10,515 | |
Tax benefit related to equity compensation | | | | | | | | | | | 793 | | | | | | | | | | | | | | | | 793 | |
Dividends declared ($1.51 per share) | | | | | | | | | | | | | | | | | | | | | | | (12,108 | ) | | | (12,108 | ) |
Stock options exercised | | | 16,250 | | | | | | | | 210 | | | | | | | | | | | | | | | | 210 | |
Purchases of treasury stock | | | (97,724 | ) | | | | | | | | | | | (3,796 | ) | | | | | | | | | | | (3,796 | ) |
BALANCE, December 31, 2012 | | | 8,031,045 | | | $ | 85 | | | $ | 88,483 | | | $ | (18,502 | ) | | $ | 30 | | | $ | 6,455 | | | $ | 76,551 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 17,891 | | | | 17,891 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | (287 | ) | | | | | | | (287 | ) |
Issuance of restricted stock, net of forfeitures | | | 252,015 | | | | 3 | | | | (3 | ) | | | | | | | | | | | | | | | — | |
Amortization of stock compensation | | | | | | | | | | | 11,595 | | | | | | | | | | | | | | | | 11,595 | |
Reclassification of compensation liability to be paid in shares | | | | | | | | | | | 120 | | | | | | | | | | | | | | | | 120 | |
Tax benefit related to equity compensation | | | | | | | | | | | 760 | | | | | | | | | | | | | | | | 760 | |
Dividends declared ($1.64 per share) | | | | | | | | | | | | | | | | | | | | | | | (13,330 | ) | | | (13,330 | ) |
Purchases of treasury stock | | | (106,643 | ) | | | | | | | | | | | (4,667 | ) | | | | | | | | | | | (4,667 | ) |
BALANCE, December 31, 2013 | | | 8,176,417 | | | $ | 88 | | | $ | 100,955 | | | $ | (23,169 | ) | | $ | (257 | ) | | $ | 11,016 | | | $ | 88,633 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Westwood Holdings Group, Inc. Common Stock, Par | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
| | | Shares | | Amount | | | | | |
| BALANCE, January 1, 2013 | | 8,031,045 |
| | $ | 85 |
| | $ | 91,299 |
| | $ | (18,502 | ) | | $ | 30 |
| | $ | 3,641 |
| | $ | 76,553 |
|
| Net income | | |
| | |
| | |
| | |
| | |
| | 17,837 |
| | 17,837 |
|
| Other comprehensive loss | | |
| | |
| | |
| | |
| | (287 | ) | | |
| | (287 | ) |
| Issuance of restricted stock, net of forfeitures | | 252,015 |
| | 3 |
| | (3 | ) | | |
| | |
| | |
| | — |
|
| Stock based compensation expense | | |
| | |
| | 11,679 |
| | |
| | |
| | |
| | 11,679 |
|
| Reclassification of compensation liability to be paid in shares | | |
| | |
| | 120 |
| | |
| | |
| | |
| | 120 |
|
| Tax benefit related to stock based compensation | | |
| | |
| | 758 |
| | |
| | |
| | |
| | 758 |
|
| Dividends declared ($1.64 per share) | | |
| | |
| | |
| | |
| | |
| | (13,330 | ) | | (13,330 | ) |
| Stock options exercised | | (20,251 | ) | | |
| | |
| | (878 | ) | | |
| | |
| | (878 | ) |
| Restricted stock returned for payment of taxes | | (86,392 | ) | | |
| | |
| | (3,789 | ) | | |
| | |
| | (3,789 | ) |
| BALANCE, December 31, 2013 | | 8,176,417 |
| | $ | 88 |
| | $ | 103,853 |
| | $ | (23,169 | ) | | $ | (257 | ) | | $ | 8,148 |
| | $ | 88,663 |
|
| Net income | | |
| | |
| | |
| | |
| | |
| | 27,249 |
| | 27,249 |
|
| Other comprehensive loss | | |
| | |
| | |
| | |
| | (974 | ) | | |
| | (974 | ) |
| Issuance of restricted stock, net of forfeitures | | 231,642 |
| | 2 |
| | (2 | ) | | |
| | |
| | |
| | — |
|
| Stock based compensation expense | | |
| | |
| | 13,685 |
| | |
| | |
| | |
| | 13,685 |
|
| Reclassification of compensation liability to be paid in shares | | |
| | |
| | 170 |
| | |
| | |
| | |
| | 170 |
|
| Tax benefit related to stock based compensation | | |
| | |
| | 2,153 |
| | |
| | |
| | |
| | 2,153 |
|
| Dividends declared ($1.82 per share) | | |
| | |
| | |
| | |
| | |
| | (15,080 | ) | | (15,080 | ) |
| Purchases of treasury stock | | (11,476 | ) | | |
| | |
| | (669 | ) | | |
| | |
| | (669 | ) |
| Restricted stock returned for payment of taxes | | (88,123 | ) | | |
| | |
| | (5,190 | ) | | |
| | |
| | (5,190 | ) |
| BALANCE, December 31, 2014 | | 8,308,460 |
| | $ | 90 |
| | $ | 119,859 |
| | $ | (29,028 | ) | | $ | (1,231 | ) | | $ | 20,317 |
| | $ | 110,007 |
|
| Net income | | |
| | |
| | |
| | |
| | |
| | 27,105 |
| | 27,105 |
|
| Other comprehensive loss | | |
| | |
| | |
| | |
| | (3,457 | ) | | |
| | (3,457 | ) |
| Issuance of common stock for acquisition | | 109,712 |
| | 1 |
| | 5,291 |
| | | | | | | | 5,292 |
|
| Issuance of restricted stock, net of forfeitures | | 305,342 |
| | 3 |
| | (3 | ) | | |
| | |
| | |
| | — |
|
| Stock based compensation expense | | |
| | |
| | 17,574 |
| | |
| | |
| | |
| | 17,574 |
|
| Reclassification of compensation liability to be paid in shares | | |
| | |
| | 338 |
| | |
| | |
| | |
| | 338 |
|
| Tax benefit related to stock based compensation | | |
| | |
| | 1,831 |
| | |
| | |
| | |
| | 1,831 |
|
| Dividends declared ($2.07 per share) | | |
| | |
| | |
| | |
| | |
| | (17,748 | ) | | (17,748 | ) |
| Purchases of treasury stock | | (21,818 | ) | | |
| | |
| | (1,327 | ) | | |
| | |
| | (1,327 | ) |
| Issuance of treasury stock under employee stock plans | | 20,375 |
| | | | (1,093 | ) | | 1,093 |
| | | | | | — |
|
| Restricted stock returned for payment of taxes | | (91,384 | ) | | |
| | |
| | (5,648 | ) | | |
| | |
| | (5,648 | ) |
| BALANCE, December 31, 2015 | | 8,630,687 |
| | $ | 94 |
| | $ | 143,797 |
| | $ | (34,910 | ) | | $ | (4,688 | ) | | $ | 29,674 |
| | $ | 133,967 |
|
See notes to consolidated financial statements.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015, 2014 and 2013 | For the Years Ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | |
Net income | $ | 17,891 | | | $ | 12,090 | | | $ | 14,686 | |
Adjustments to reconcile net income to net cash provided by operating activities, net of business combinations: | | | | | | | | | | | |
Depreciation | | 410 | | | | 349 | | | | 264 | |
Amortization of intangible assets | | 359 | | | | 472 | | | | 498 | |
Fair value adjustment of deferred acquisition liabilities | | — | | | | — | | | | (31 | ) |
Gain on sale of available for sale investment | | — | | | | (1,900 | ) | | | — | |
Unrealized losses (gains) on investments | | 325 | | | | (344 | ) | | | 291 | |
Loss on disposal of property | | — | | | | 1 | | | | 20 | |
Stock based compensation | | 11,595 | | | | 10,515 | | | | 9,969 | |
Deferred income taxes | | (907 | ) | | | (1,817 | ) | | | (93 | ) |
Excess tax benefits from stock based compensation | | (694 | ) | | | (676 | ) | | | (805 | ) |
Net purchases of investments – trading securities | | (4,993 | ) | | | (7,692 | ) | | | (10,285 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | |
Accounts receivable | | (5,702 | ) | | | (1,208 | ) | | | (359 | ) |
Other current assets | | (887 | ) | | | 61 | | | | (755 | ) |
Accounts payable and accrued liabilities | | 450 | | | | (39 | ) | | | 381 | |
Compensation and benefits payable | | 3,598 | | | | 1,846 | | | | 3,308 | |
Income taxes payable and prepaid taxes | | 160 | | | | 2,147 | | | | 989 | |
Other liabilities | | 102 | | | | (25 | ) | | | 470 | |
Net cash provided by operating activities | | 21,707 | | | | 13,780 | | | | 18,548 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
Sales of available for sale investments | | — | | | | 1,900 | | | | — | |
Cash paid for business combination, net of cash acquired | | — | | | | — | | | | (816 | ) |
Purchases of property and equipment | | (1,201 | ) | | | (264 | ) | | | (1,431 | ) |
Sale of property and equipment | | — | | | | — | | | | 3 | |
Net cash (used in) provided by investing activities | | (1,201 | ) | | | 1,636 | | | | (2,244 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
Purchases of treasury stock | | (4,667 | ) | | | (3,796 | ) | | | (5,957 | ) |
Excess tax benefits from stock based compensation | | 694 | | | | 676 | | | | 805 | |
Proceeds from exercise of stock options | | — | | | | 210 | | | | 286 | |
Cash dividends | | (9,330 | ) | | | (13,981 | ) | | | (7,918 | ) |
Net cash used in financing activities | | (13,303 | ) | | | (16,891 | ) | | | (12,784 | ) |
Effect of currency rate changes on cash | | (156 | ) | | | 28 | | | | — | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 7,047 | | | | (1,447 | ) | | | 3,520 | |
Cash and cash equivalents, beginning of year | | 3,817 | | | | 5,264 | | | | 1,744 | |
Cash and cash equivalents, end of year | $ | 10,864 | | | $ | 3,817 | | | $ | 5,264 | |
Supplemental cash flow information: | | | | | | | | | | | |
Cash paid during the year for income taxes | $ | 11,031 | | | $ | 7,600 | | | $ | 7,502 | |
|
| | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| Cash flows from operating activities: | | |
| | |
| | |
|
| Net income | | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
|
| Depreciation | | 1,050 |
| | 579 |
| | 410 |
|
| Amortization of intangible assets | | 1,546 |
| | 359 |
| | 359 |
|
| Unrealized losses (gains) on trading investments | | 613 |
| | (75 | ) | | 325 |
|
| Stock based compensation expense | | 17,574 |
| | 13,685 |
| | 11,679 |
|
| Deferred income taxes | | (3,285 | ) | | (2,133 | ) | | (937 | ) |
| Excess tax benefits from stock based compensation | | (1,455 | ) | | (1,850 | ) | | (696 | ) |
| Net sales (purchases) of investments – trading securities | | 6,684 |
| | (14,991 | ) | | (4,993 | ) |
| Other | | (58 | ) | | — |
| | — |
|
| Changes in operating assets and liabilities: | | |
| | |
| | |
|
| Accounts receivable | | (5,192 | ) | | (369 | ) | | (5,702 | ) |
| Other current assets | | (375 | ) | | 70 |
| | (887 | ) |
| Accounts payable and accrued liabilities | | 1,174 |
| | 353 |
| | 450 |
|
| Compensation and benefits payable | | 2,912 |
| | 1,307 |
| | 3,598 |
|
| Income taxes payable | | 6,890 |
| | 2,406 |
| | 160 |
|
| Other liabilities | | 25 |
| | (67 | ) | | 102 |
|
| Net cash provided by operating activities | | 55,208 |
| | 26,523 |
| | 21,705 |
|
| Cash flows from investing activities: | | |
| | |
| | |
|
| Acquisition of Woodway, net of cash acquired | | (24,133 | ) | | — |
| | — |
|
| Purchases of property, equipment and other | | (951 | ) | | (478 | ) | | (1,201 | ) |
| Net cash used in investing activities | | (25,084 | ) | | (478 | ) | | (1,201 | ) |
| Cash flows from financing activities: | | |
| | |
| | |
|
| Purchases of treasury stock | | (1,327 | ) | | (669 | ) | | (878 | ) |
| Restricted stock returned for payment of taxes | | (5,648 | ) | | (5,190 | ) | | (3,789 | ) |
| Excess tax benefits from stock based compensation | | 1,455 |
| | 1,850 |
| | 696 |
|
| Cash dividends paid | | (16,619 | ) | | (13,962 | ) | | (9,330 | ) |
| Net cash used in financing activities | | (22,139 | ) | | (17,971 | ) | | (13,301 | ) |
| | | | | | | |
| Effect of currency rate changes on cash | | (3,376 | ) | | (807 | ) | | (156 | ) |
| | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | 4,609 |
| | 7,267 |
| | 7,047 |
|
| Cash and cash equivalents, beginning of year | | 18,131 |
| | 10,864 |
| | 3,817 |
|
| Cash and cash equivalents, end of year | | $ | 22,740 |
| | $ | 18,131 |
| | $ | 10,864 |
|
| Supplemental cash flow information: | | |
| | |
| | |
|
| Cash paid during the year for income taxes | | $ | 11,639 |
| | $ | 14,418 |
| | $ | 11,031 |
|
| Common stock issued for acquisition | | $ | 5,292 |
| | $ | — |
| | $ | — |
|
| Non-cash accrued contingent consideration | | $ | 9,023 |
| | $ | — |
| | $ | — |
|
| Accrued dividends | | $ | 7,448 |
| | $ | 6,318 |
| | $ | 5,201 |
|
See notes to consolidated financial statements.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31,
2013, 20122015, 2014 and
20112013
1. DESCRIPTION OF THE BUSINESS:
Westwood Holdings Group, Inc. (“Westwood”,
“we”“the Company”, we”, “us” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood manages investment assets and provides services for its clients through its subsidiaries, Westwood Management Corp.
(“and Westwood
Advisors, LLC (together, “Westwood Management”), Westwood Trust (“Westwood Trust”) and Westwood International Advisors Inc. (“Westwood International”). Westwood Management
providesand Westwood International provide investment advisory services to
corporate retirement plans, public retirement plans, endowments and foundations,institutional clients, a family of mutual funds called the Westwood Funds®, other mutual funds, an Ireland-domiciled fund organized pursuant to the European Union’s Undertakings for Collective Investment in Transferable Securities (“UCITS”), individuals and clients of Westwood Trust. Westwood Trust provides institutions and high net worth individuals with trust and custodial services and participation in its sponsoredself-sponsored common trust funds. Westwood International provides investment advisory servicesfunds to corporate retirement plans, public retirement plans, endowmentsinstitutions and foundations, mutual funds and other pooled investment vehicles.high net worth individuals. Revenue is largely dependent on the total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the composition of AUM impact our revenues and results of operations.Westwood Management is a registered investment adviser under the Investment Advisers Act of 1940. Westwood Trust is chartered and regulated by the Texas Department of Banking. Westwood International is registered as a portfolio manager and exempt market dealer with the Ontario Securities Commission and the Autorité des marchés financiers (AMF)(“AMF”) in Québec.
Acquisition of Woodway Financial Advisors
On January 15, 2015, we entered into an agreement (the "Merger Agreement") to acquire Woodway Financial Advisors (“Woodway”), a Houston-based private wealth and trust company with managed assets of approximately $1.6 billion at December 31, 2014. We completed the acquisition on April 1, 2015. Pursuant to the Merger Agreement, on April 1, 2015 Woodway merged with Westwood Trust, a wholly-owned subsidiary of Westwood, with Westwood Trust being the surviving entity (the “Merger”). The total Merger consideration consisted of (i) $30.6 million in cash and stock, as described below, and (ii) contingent consideration equal to the annualized revenue from the post-closing business of Woodway for the twelve-month period ending March 31, 2016 (the “Earn-Out Period”), adjusted for certain clients or accounts that have terminated, and capped at $15 million (the “Earn-Out Amount”).
The Merger consideration of $39.7 million consisted of (i) closing date consideration of $25.3 million paid in cash and the issuance of 109,712 shares of Westwood common stock, valued at $5.3 million (discounted from $6.7 million due to certain required holding periods), and (ii) contingent consideration of $9.1 million, based on estimates and assumptions as of the closing date of the acquisition, to be paid after the Earn-Out Period. The acquired assets were deemed to constitute a business in a transaction using the purchase method of accounting for business combinations. Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date. See further discussion of the acquisition of Woodway in Note 5 “Acquisitions, Goodwill and Other Intangible Assets.”
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Westwood and its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.
We assess each legal entity that we manage to determine whether consolidation is appropriate at the onset of the relationship. We first determine whether the entity is a variable interest entity (“VIE”), or a voting interest entity (“VOE”), or a variable interest entityunder U.S. generally accepted accounting principles (“VIE”GAAP”), under GAAP and then whether we have a controlling financial interest in the entity. Assessing whether or not an entity is a VOE or VIE and if it requires consolidation involves judgment and analysis. Factors considered in this assessment include, but are not limited to, the legallegal organization of the entity, our equity ownership and contractual involvement with the entity and any related party or de facto agent implications of our involvement with the entity. We reconsider whether entities are a VOEVIE or VIEVOE whenever contractual arrangements change, the entity receives additional equity or returns equity to its investors or changes in facts and circumstances occur that change the investors’ ability to direct the activities of the entity.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A VIE is an entity in which (i) the total equityequity investment at risk is not sufficient to enable the entity to finance its activities without subordinated financial support or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. That is, the at-risk equity holders do not have the obligation to absorb losses, the right to receive residual returns and/or the right to direct the activities of the entity that most significantly impact the entity’s economic performance.An enterprise must consolidate all VIEs of which it is the primary beneficiary. We determine if a sponsored investment meets the definition of a VIE by considering whether the fund’s equity investment at risk is sufficient to finance its activities without additional subordinated financial support and whether the fund’s at-risk equity holders absorb any losses, have the right to receive residual returns and have the right to direct the activities of the entity most responsible for the entity’s economic performance. For VIEs that are investment companies, the primary beneficiary of the VIE is the party that absorbs a majority of the expected losses of the VIE, receives a majority of the expected residual returns of the VIE, or both. For VIEs that are not investment companies, the primary beneficiary of a VIE is defined as the party who, considering the involvement of related parties and de facto agents, has (i) the power to direct the activities of the VIE that most significantly affect its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This evaluation is updated continuously.A VOE is an entity that is not within the scope of the guidance for VIEs. Consolidation of a VOE is required when a reporting entity owns a controlling financial interest in a VOE. Ownership of a majority of the voting interests is the usual condition for a controlling financial interest. At December 31, 2013, none of our sponsored investment entities were VOEs subject to this assessment by the Company.
Westwood Investment Funds PLC (the “UCITS Fund”), which was authorized by the Central Bank of Ireland on June 18, 2013 pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, is an Ireland domiciled umbrella-type open-ended self-managed investment company. The UCITS Fund is
established as an umbrella fund with segregated assets and liabilities between
sub-funds. Notwithstandingsub-funds, and notwithstanding the
segregation of assets and liabilities within eachF-8
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sub-fund, the UCITS Fund is a single legal entity and no sub-fund constitutes a legal entity separate from the UCITS Fund itself. The Company’s first UCITS sub-fund is focused on Westwood’s Emerging Markets strategy. Shares of the sub-fund are listed on the Irish Stock Exchange, all of which are owned by the third-party investors.Fund. The base currency of the UCITS Fund is the British pound sterling. We determined that the UCITS Fund was a VIE as its at-risk equity holders do not have the ability to direct the activities of the UCITS Fund that most significantly impact the entity’s economic performance. Although theThe Company does not have an equity investment in the UCITS Fund, throughand its representatives havinghave a majority control of the UCITS Fund’s Board of Directors its representativesand can influence the UCITS Fund’s management and affairs. The UCITS Fund’s Board of Directors maintains this control through its duties, which are stated in the UCITS Fund’s Memorandum, and Articles of Association, which have no expiration date. We concluded that the Company was not the primary beneficiary of the UCITS Fund because, even though it has the power to direct the activities of the UCITS Fund (thatthat most significantly impact the fund’s economic performance),performance, it does not absorb a majority of the UCITS Fund’s expected losses and does not receive a majority of the UCITS Fund’s expected residual returns. As a result,Therefore, the results of the UCITS Fund are not included in the Company’s consolidated financial results.
We have also evaluated all of our
other advisory relationships
with the Westwood Funds®, collective investment trusts and limited liability companies and our relationship as sponsor of the common trust funds to determine whether or not we qualify as the primary beneficiary based on whether there is an obligation to absorb the majority of expected losses or a right to receive the majority of residual returns. Since all losses and returns are distributed to the shareholders of
the Westwoodthese VIEs, we are not the primary beneficiary and consequently
the Westwood VIEsthese VIEs are not included in our consolidated financial statements. We have included the disclosures related to VIEs in Note 12.11 "Variable Interest Entities".
A VOE is an entity that is outside the scope of the guidance for VIEs. Consolidation of a VOE is required when a reporting entity owns a controlling financial interest in a VOE. Ownership of a majority of the voting interests is the usual condition for a controlling financial interest. At December 31, 2015, none of our sponsored investment entities were VOEs subject to this assessment by the Company.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amountsamounts of revenues and expenses during the reporting period. We believe the most significant estimates and assumptions are associated with the valuation of deferred taxes, stock-based compensation and impairment assessments of goodwill and intangible assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of money market funds and other short-term, highly liquid investments with maturities of three months or less, other than pooled investment vehicles that are considered investments. We maintain some cash and cash equivalents balances with financial institutions that are in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced losses on uninsured cash accounts.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable
Accounts receivable represents balances arising from services provided to customers and are recorded on an accrual basis, net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical amounts written off, existing conditions in the industry, and the financial stability of the customer. The majority of our accounts receivable balances consist of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectible. Accordingly our consolidated financial statements do not include an allowance for bad debt nor any bad debt expense.
Investments
Investments are classified as trading securities and are carried at quoted market values on the accompanying consolidated balance sheets. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. We measure realized gains and losses on investments using the specific identification method.
Fair Value of Financial Instruments
We determined the estimated fair values of our financial instruments using available information. The fair value amounts discussed in Notes 3 "Investments" and 4 "Fair Value of Financial Instruments" are not necessarily indicative of either the amounts realizable upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, dividends payable, compensation and benefits payable and income taxes payable approximates their carrying value due to their short-term maturities. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations, money market funds, Westwood Funds® mutual funds and Westwood Trust common trust fund shares, equals fair value based on prices quoted in active markets and, with respect to funds, the reported net asset value of the shares held. Market values of our money market holdings generally do not fluctuate.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Goodwill is not amortized but is tested at least annually for impairment.
We test more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings or cash flows, or the development of a material adverse change in the business climate. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We have identified two reporting units, which are consistent with our reporting segments: Advisory and Trust. The Company is not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than the carrying amount. We assess goodwill for impairment using either a qualitative or quantitative assessment. The qualitative assessment includes consideration of the current trends in the industry in which we operate, macroeconomic conditions, recent financial performance of our reporting units and a market multiple approach valuation. In performing the annual impairment test during the third quarter, or more frequently when impairment indicators exist, and after assessing the qualitative factors, we may be required to utilize the two-step approach prescribed by ASC 350 “Goodwill and Other Intangible Assets”. We may also elect to skip the qualitative assessment and proceed directly to the quantitative analysis. The quantitative analysis requires a comparison of each reporting unit’s carrying value to the fair value of the respective unit. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss, if any. The fair value of each reporting unit is estimated, entirely or predominantly, using a market multiple approach. During the third quarter of 2015, we completed our annual goodwill impairment assessment and determined that no impairment loss was required. No impairments were recorded during any of the periods presented.
Our intangible assets represent the acquisition date fair value of the acquired client relationships, trade names and non-compete agreements, as well as the cost of internally-developed software, each of which is reflected net of amortization. In valuing these assets, we made significant estimates regarding the useful lives, growth rates and potential attrition. We periodically review our intangible assets for events or circumstances that would indicate impairment. See Note 5 "Acquisitions, Goodwill and Other Intangible Assets."
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of furniture and equipment is provided over the estimated useful lives of the assets (from 3 to 7 years), and depreciation on leasehold improvements is provided over the lesser of the estimated useful life or lease term using the straight-line method. We capitalize leasehold improvements, furniture and fixtures, computer hardware and most office equipment purchases.
Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between our subsidiaries and their clients and are generally based on a percentage of assets under management. A limited number of our clients have contractual performance-based fee arrangements, which
would pay us an additional fee if we outperform a specified index over a specific period of time. We record
revenuerevenue for performance-based fees at the end of the measurement period. Most advisory and trust fees are payable in advance or in arrears on a calendar quarterly basis. Advance payments are deferred and recognized over the periods services are performed. Since billing periods for most of our advance paying clients coincide with the calendar quarter to which payment relates, revenue is fully recognized within the quarter. Consequently no significant amount of deferred revenue is contained in our consolidated financial statements. Deferred revenue is shown on the consolidated balance sheets under the heading of “Accounts payable and accrued liabilities”. Other revenues generally consist of interest and investment income, andwhich are recognized as earned.Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly liquid investments with maturities of three months or less, other than pooled investment vehicles that are considered investments. We maintain some cash and cash equivalents balances with financial institutions that are in excess of Federal DepositInsurance Corporation insurance limits. The Company has not experienced losses on uninsured cash accounts.
Accounts Receivable
Accounts receivable represents balances arising from services provided to customers and are recorded on an accrual basis, net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical amounts written off, existing conditions in the industry, and the financial stability of the customer. The majority of our accounts receivable balances consist of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectible. Accordingly our consolidated financial statements do not include an allowance for bad debt or any bad debt expense.
F-9
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments
Class A shares of Teton Advisors, Inc. (“Teton shares”), which we sold during 2012, were classified as available for sale. The Teton shares were carried at quoted market value less a 25% discount for lack of marketability. Unrealized gains and losses on the Teton shares were recorded through other comprehensive income. All other marketable securities are classified as trading securities and are carried at quoted market values on the accompanying consolidated balance sheets. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. We measure realized gains and losses on investments using the specific identification method.
Fair Value of Financial Instruments
We determined the estimated fair values of our financial instruments using available information. The fair value amounts discussed in Notes 4 and 5 are not necessarily indicative of either the amounts realizable upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable, dividends payable, income taxes payable and accrued liabilities, approximates their carrying value due to their short-term maturities and are classified as level 1 fair value measurements. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations, money market funds, Westwood Funds ™ mutual funds and Westwood Trust common trust fund shares, equals fair value based on prices quoted in active markets and, with respect to funds, the reported net asset value of the shares held. Market values of our money market holdings generally do not fluctuate.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of furniture and equipment is provided over the estimated useful lives of the assets (from 3 to 11 years), and depreciation on leasehold improvements is provided over the lesser of the estimated useful life or lease term using the straight-line method. We capitalize leasehold improvements, furniture and fixtures, computer hardware and most office equipment purchases.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Goodwill is not amortized but is tested at least annually for impairment.
We test more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings or cash flows, or the development of a material adverse change in the business climate. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We have identified two reporting units, which are consistent with our reporting segments: Advisory and Trust. The Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than the carrying amount. The Company assesses goodwill for impairment using a qualitative assessment which includes consideration of the current trends in the industry in which the Company operates, macroeconomic conditions, recent financial performance of the Company’s reporting units and a market multiple approach valuation. In performing the annual impairment test, which is performed during the third quarter or more frequently when impairment indicators exist and after assessing the qualitative factors, we may be required to utilize the two-step approach prescribed by ASC 350 “Goodwill and Other Intangible Assets”. The first step requires a comparison of each reporting unit’s carrying value to the fair value of the respective unit. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss, if any. The fair value of each reporting unit is estimated, entirely or predominantly, using a market multiple approach. During the third quarter of 2013, we completed our annual goodwill impairment assessment and determined that no impairment loss was required. No impairments were recorded during any of the periods presented.
Our intangible assets represent the acquisition date fair value of the acquired client relationships, trade names and non-compete agreements and are reflected net of amortization. In valuing these assets, we made significant estimates regarding the useful lives, growth rates and potential attrition. We periodically review our intangible assets for events or circumstances that would indicate impairment. See Note 6.
Income Taxes
We file a United States federal income tax return as a consolidated group for Westwood and its subsidiaries based in the US. We file a Canadian income tax return for Westwood International. Deferred income tax assets and liabilities are determined based
F-10
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on temporary differences between the financial statement and income tax bases of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in deferred tax assets and liabilities. Deferred taxes relate primarily to stock-based compensation expense and net operating losses at Westwood International.
We record net deferred tax assets to the extent we believe such assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of the net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.No valuation allowance has been recorded in our consolidated financial statements.
We recognize tax liabilities in accordance with ASC 740,Income Taxes, and we adjust these liabilities when our judgment changes as a result of the evaluation of new information. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. At December 31, 2013 and 2012, the Company had not established any reserves for, nor recorded any unrecognized tax benefits related to, uncertain tax positions.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The ASU also requires presentation, either on the face of the statement where net income is presented or in the notes to the consolidated financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. However, such disclosure is only required if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity should cross-reference to other disclosures that provide additional detail about those amounts. For public entities, the ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have an impact on our consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The ASU clarifies the interaction between ASC 810-10, Consolidation – Overall, and ASC 830-30, Foreign Currency Matters – Translation of Financial Statement, when releasing the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not currently expect the adoption of this ASU to have an impact on our consolidated financial statements.
In June 2013, the FASB issued ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU changes the approach to the investment company assessment in Topic 946, clarifying the characteristics of an investment company and provides comprehensive guidance for assessing whether an entity is an investment company. This update would also require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting and to include additional disclosures. The ASU is effective for reporting periods beginning after December 15, 2013. Although this update is relevant to our VIE analysis, we do not currently expect the adoption of this ASU to have an impact on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendment is effective prospectively for fiscal years (and interim periods within those years) beginning after December 15, 2013 and is not expected to have a material impact on our consolidated financial statements.
F-11
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Currency Translation
Assets and liabilities of Westwood International, our non-U.S. dollar functional currency subsidiary, are translated at exchange rates as of applicable reporting dates. Revenues and expenses are translated at average exchange rates during the periods indicated. The gains and losses resulting from translating non-U.S. dollar functional currency into U.S. dollars are recorded through other comprehensive income.
Long-term Compensation Agreements
We entered into employment agreements with certain employees of Westwood International that provide for specified payments over four years. In certain circumstances, these payments would be forfeited to us if the employment of these individuals is terminated before completion of the contractual earning period. Payments made in advance under these agreements are included in “Other current assets” on our Consolidated Balance Sheets, net of amounts already amortized.
Stock-Based Compensation
We account for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) No.ASC 718, Compensation-Stock Compensation (“ASC 718”). Under ASC 718, stock-based compensation expense reflects the fair value of stock-based awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. We expense the fair value of stock-based compensation awards granted to our employees and directors in our consolidated financial statements on a straight-line basis over the period that services are required to be provided in exchange for the award (“requisite service period”), which is typically the period over which the award vests. Stock-based compensation is recognized only for awards that vest, and our periodic accrual of compensation cost is based on the estimated number of awards expected to vest. We measure the fair value of compensation cost related to restricted stock awards based on the closing market price of our common stock on the grant date. For performance-based share awards, we assess actual performance versus the predetermined performance goals and record compensation expense once we conclude it is probable that we will meet the performance goals required to vest the applicable performance-based awards. We have issued restricted stock
and stock options in accordance with our Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”). We apply judgment in developing an expectation of awards of restricted stock that may be forfeited. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.
We have
The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”) provides compensation
arrangements with certainin the form of common stock for services performed by employees of Westwood
International pursuant to which these employees are able to earn cash awards based on the performance of certain investment products. A portion of such awards may be paid in shares of our stock that vest over a multi-year period.International. We accrue a liabilityrecord compensation costs for these awards on a straight-line basis over both the annualvesting period, in whichonce we determine it is probable that the award will be earned and, for the portion to be settled in shares, over the following three-year vesting period. For the years ended December 31, 2013, 2012 and 2011, the expense recorded for these awards was $344,000, $124,000 and $0, respectively. Cash awardsearned. Awards expected to be settled in shares are funded into a trust pursuant to an established Canadian employee benefit plan. Generally, the Canadian trust subsequently acquires Westwood common shares in market transactions and holds such shares until the shares are vested and distributed, or forfeited. Shares held in the trust are shown on our consolidated balance sheet as treasury shares. During the second quarter of 2013, the trust purchased 20,251 Westwood common shares in the open market for approximately $878,000. Until shares are acquired by the trust, we record compensation costs and measure the liability as a cash basedcash-based award, which is included in “Compensation and benefits payable” on our consolidated balance sheets. For the years ended December 31, 2015, 2014 and 2013, the compensation expense recorded for these awards was $145,000, $359,000 and $344,000, respectively. When the number of shares related to an award is determinable, the award becomes an equity award accounted for in a manner similar to restricted stock, which is described in Note 10.9 "Employee Benefits".
Tax benefits realized upon the vesting of restricted shares that
are in excess ofexceed the expense previously recognized for reporting purposes are recorded in stockholder’s equity and reflected as a financing activity in our Consolidated Statements of Cash Flows. If the tax benefit upon
vestingvesting is less than the expense previously recorded, the shortfall is recorded in stockholder’s equity. If the shortfall exceeds available windfall benefits in equity, they are recorded in our Consolidated Statements of Comprehensive Income and as an operating activity on our Consolidated Statements of Cash Flows.3. ACCOUNTS RECEIVABLE:
Some of our directors, executive officers and their affiliates invest their personal funds directly in trust accounts that we manage. There were no amounts due from these accounts as of December 31, 2013 and 2012. For the years ended December 31, 2013, 2012 and 2011, we recorded trust fees from these accounts of $278,000, $314,000, and $429,000, respectively.
F-12
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4.
Currency Translation
Assets and liabilities of Westwood International, our non-U.S. dollar functional currency subsidiary, are translated at exchange rates as of applicable reporting dates. Revenues and expenses are translated at average exchange rates during the periods indicated. The gains and losses resulting from translating non-U.S. dollar functional currency into U.S. dollars are recorded through other comprehensive income.
Income Taxes
We file a United States federal income tax return as a consolidated group for Westwood and its subsidiaries based in the US. We file a Canadian income tax return for Westwood International. Deferred income tax assets and liabilities are determined based on temporary differences between the financial statements and income tax bases of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in deferred tax assets and liabilities. Deferred taxes relate primarily to incentive compensation and stock-based compensation expense.
We record net deferred tax assets to the extent we believe such assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future, we would record a valuation allowance. No valuation allowance has been recorded in our consolidated financial statements.
We account for uncertain tax positions by recognizing the impact of a tax position in our consolidated financial statements when we believe it is more likely than not that the tax position would not be sustained upon examination by the appropriate tax authority, based on the merits of the position. We include penalties and interest on income-based taxes, if any, in the “General and administrative” line on our consolidated statements of comprehensive income. At December 31, 2015, we had $1.6 million of unrecognized tax benefits accrued, net of $607,000 federal deferred tax assets, related to uncertain tax positions. At December 31, 2014, the Company had not established any reserves for, nor recorded any unrecognized tax benefits related to, uncertain tax positions. See Note 7 "Income Taxes."
Business Combinations
In allocating the purchase price of a business combination, the Company records all assets acquired and liabilities assumed at fair value, with the excess of the purchase price over the aggregate fair values recorded as goodwill. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. The Company determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The fair value assigned to identifiable intangible assets acquired is based on estimates and assumptions made by management at the time of the acquisition. The Company adjusts the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances existing as of the acquisition date. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
The acquired customer accounts, trade names and non-compete agreements are subject to fair value measurements based primarily on significant inputs not observable in the market and thus represent level 3 measurements. The valuation of an acquired customer list utilizes an income approach, which provides an estimate of the fair value of an asset based on discounted cash flows and management estimates, including the estimated growth associated with existing clients, market growth and client attrition. The valuation of acquired trade names uses a relief from royalty method in which the fair value of the intangible asset is estimated to be the present value of royalties saved because the Company owns the intangible asset. Revenue projections and estimated useful lives are used in estimating the fair value of the trade names. The non-compete agreements are calculated using the with-or-without method, which utilizes the probability of these employees competing with the Company and revenue projections to calculate the valuation of non-competition agreements.
When an acquisition includes future contingent consideration on achieving certain annualized revenue from the post-closing acquired business over a specified time period, the Company estimates the fair value of the earn-out using overall revenue growth projections combined with existing customer base lost revenue projections, both discounted and probability-weighted. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date, and the fair value of the contingent consideration is remeasured at each subsequent reporting period with any change in fair value recognized as income or expense within the consolidated statement of comprehensive income.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which resulted from a joint project by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards ("IFRS"). The issuance of a comprehensive and converged standard on revenue recognition is expected to improve the ability of financial statement users to understand and consistently analyze an entity’s revenue across industries, transactions, and geographies. The standard will require additional disclosures to help financial statement users better understand the nature, amount, timing, and potential uncertainty of the revenue being recognized. In August 2015, in order to amend the effective date of ASU 2014-09, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date. Under the amendment, the effective date of ASU 2014-09 has been extended by one year for all entities. For public entities, the ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Retrospective application is required, with the entity either applying the change to each prior reporting period presented or applying the cumulative effect of each prior reporting period presented at the date of initial application. Early adoption is permitted based on the initial effective date of December 15, 2016. We are currently evaluating the impact that the application will have on our consolidated financial statements and disclosures and expect to adopt the new standard within the required time frame.
In February 2015, the FASB issued ASU 2015-02, Consolidation – Amendments to the Consolidation Analysis. This amendment modifies the analysis required to evaluate whether certain legal entities should be consolidated, including variable interest entities. This amendment changes the evaluation of fee arrangements and related party transactions when determining whether to consolidate a variable interest entity. The amendment is effective for annual reporting periods beginning after December 15, 2016 and for interim periods within reporting periods beginning after December 15, 2017, although early adoption is permitted. We are currently evaluating the impact that the application of ASU 2015-02 will have on our consolidated financial statements and disclosures.
In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software. This amendment provides guidance about whether a cloud computing arrangement includes a software license. The new guidance clarifies that software licenses included in a cloud computing software should be accounted for in the same manner as other software licenses. If the cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This amendment is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2015, with early adoption permitted. We have elected to early adopt this amendment in the current fiscal year, which did not have a material impact on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurements – Disclosures for Certain Entities that Calculate Net Asset Value per Share. This amendment updates guidance intended to eliminate the diversity in practice surrounding how investments measured at net asset value under the practical expedient with future redemption dates have been categorized in the fair value hierarchy. Under the updated guidance, investments for which fair value is measured at net asset value per share using the practical expedient should no longer be categorized in the fair value hierarchy. The updated guidance requires retrospective adoption for all periods presented and is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Except for the disclosure requirements, we do not expect the adoption of this guidance to impact our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments. The amendment applies to entities that have reported provisional amounts related to a business combination for which the accounting is incomplete by the end of the reporting period and have an adjustment to provisional amounts previously recognized during a later measurement period. Changes in provisional amounts recorded for acquired assets and liabilities are to be adjusted in the period the adjustment is known, with a corresponding adjustment booked to goodwill. The acquirer is no longer required to revise comparative information from prior years for the effect of changes in provisional amounts. For public business entities, the amendment is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. We have elected to early adopt this amendment in the current fiscal year. This amendment may impact our disclosure of the Woodway acquisition, should we adjust the fair value of the acquired assets and liabilities during the year ended December 31, 2016.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes. The purpose of this amendment is to simplify the presentation of deferred taxes on the statement of financial position and further align the presentation of deferred taxes with IFRS. The amendment requires that deferred tax assets and liabilities be classified as noncurrent in the classified balance sheet, where before they were required to be classified as current and noncurrent based on their nature. This amendment applies to all entities with deferred taxes. The amendment may be applied prospectively or retrospectively. For public business entities, the amendment is affective for interim periods and fiscal years beginning after December 31, 2016, with early adoption permitted. We have elected to prospectively early adopt this amendment in the current fiscal year, and all deferred taxes are classified as noncurrent in our consolidated balance sheet at December 31, 2015. See further discussion in Note 7 "Income Taxes."
Investments are presented below (in thousands). All investments are carried at fair value, and all investments are accounted for as trading securities. Our investment in Teton shares, which we sold in 2012 for a gain of $1.9 million, was accounted for as available for sale securities. | Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair
Value | |
December 31, 2013: | | | | | | | | | | | | | | | |
U.S. Government and Government agency obligations | $ | 42,595 | | | $ | 16 | | | $ | — | | | $ | 42,611 | |
Money market funds | | 8,584 | | | | — | | | | — | | | | 8,584 | |
Equity funds | | 2,130 | | | | 200 | | | | (54 | ) | | | 2,276 | |
Fixed income funds | | 10,984 | | | | 99 | | | | — | | | | 11,083 | |
Marketable securities | $ | 64,293 | | | $ | 315 | | | $ | (54 | ) | | $ | 64,554 | |
| Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair
Value | | |
December 31, 2012: | | | | | | | | | | | | | | |
| | | | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| December 31, 2015: | | | |
| | |
| | |
| | |
|
U.S. Government and Government agency obligations | $ | 42,588 | | | $ | 1 | | | $ | — | | | $ | 42,589 | | | $ | 50,972 |
| | $ | 15 |
| | $ | (15 | ) | | $ | 50,972 |
|
Money market funds | | 1,856 | | | | — | | | | — | | | | 1,856 | | | 9,179 |
| | — |
| | — |
| | 9,179 |
|
Equity funds | | 4,401 | | | | 519 | | | | — | | | | 4,920 | | | 12,653 |
| | — |
| | (484 | ) | | 12,169 |
|
Fixed income funds | | 10,468 | | | | 73 | | | | — | | | | 10,541 | | |
Marketable securities | $ | 59,313 | | | $ | 593 | | | $ | — | | | $ | 59,906 | | | $ | 72,804 |
| | $ | 15 |
| | $ | (499 | ) | | $ | 72,320 |
|
|
| | | | | | | | | | | | | | | | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| December 31, 2014: | | |
| | |
| | |
| | |
| U.S. Government and Government agency obligations | | $ | 66,761 |
| | $ | 20 |
| | $ | (8 | ) | | $ | 66,773 |
|
| Money market funds | | 8,250 |
| | — |
| | — |
| | 8,250 |
|
| Equity funds | | 4,477 |
| | 223 |
| | (103 | ) | | 4,597 |
|
| Marketable securities | | $ | 79,488 |
| | $ | 243 |
| | $ | (111 | ) | | $ | 79,620 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following amounts, except for income tax amounts, are included in our consolidated statements of comprehensive income under the heading “Other revenues” for the years indicated (in thousands):
| 2013 | | | 2012 | | | 2011 | |
Realized gains | $ | 629 | | | $ | 2,467 | | | $ | 407 | |
Realized losses | | (4) | | | | (13 | ) | | | (182 | ) |
Net realized gains/(losses) | | 625 | | | | 2,454 | | | | 225 | |
Income tax expense from gains | | 225 | | | | 891 | | | | 82 | |
Interest income – trading | | 28 | | | | 27 | | | | 61 | |
Dividend income | | 541 | | | | 514 | | | | 221 | |
Unrealized gains/(losses) | | (325 | ) | | | 344 | | | | (291 | ) |
5.
|
| | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| Realized gains | | $ | 283 |
| | $ | 156 |
| | $ | 629 |
|
| Realized losses | | (43 | ) | | (50 | ) | | (4 | ) |
| Net realized gains | | $ | 240 |
| | $ | 106 |
| | $ | 625 |
|
| Income tax expense from gains | | $ | 84 |
| | $ | 37 |
| | $ | 225 |
|
| Interest income – trading | | $ | 143 |
| | $ | 51 |
| | $ | 28 |
|
| Dividend income | | $ | 284 |
| | $ | 212 |
| | $ | 541 |
|
| Unrealized gains/(losses) | | $ | (613 | ) | | $ | 75 |
| | $ | (325 | ) |
As of December 31, 2015, corporate funds totaling $8.7 million were invested in the Westwood Funds® and Westwood Common Trust Funds and corporate funds aggregating $2.0 million were invested in a UCITS fund. See Note 11 "Variable Interest Entities".
4. FAIR VALUE OF FINANCIAL
INSTRUMENTSINSTRUMENTS:
ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value as follows:·
| Level 1 – quoted market prices in active markets for identical assets,
|
·
| Level 2 – inputs other than quoted prices that are directly or indirectly observable
|
·
| Level 3 – unobservable inputs where there is little or no market activity.
|
Level 1 – quoted market prices in active markets for identical assets and liabilities,F-13
Level 2 – inputs other than quoted prices that are directly or indirectly observableWESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Level 3 – unobservable inputs where there is little or no market activity.
The following table summarizes the values of our assets as of the dates indicated within the fair value hierarchy (in thousands).
| Level 1 | | | Level 2 | | | Level 3 | | | Total | |
As of December 31, 2013 | | | | | | | | | | | | | | | |
Investments in securities: | | | | | | | | | | | | | | | |
Trading | $ | 64,554 | | | $ | — | | | $ | — | | | $ | 64,554 | |
Total Financial instruments | $ | 64,554 | | | $ | — | | | $ | — | | | $ | 64,554 | |
As of December 31, 2012 | | | | | | | | | | | | | | | |
Investments in securities: | | | | | | | | | | | | | | | |
Trading | $ | 55,389 | | | $ | 4,517 | | | $ | — | | | $ | 59,906 | |
Total Financial instruments | $ | 55,389 | | | $ | 4,517 | | | $ | — | | | $ | 59,906 | |
|
| | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2015 | | |
| | |
| | |
| | |
|
| Investments in trading securities | | $ | 69,260 |
| | $ | 3,060 |
| | $ | — |
| | $ | 72,320 |
|
| Contingent consideration | | — |
| | — |
| | (9,023 | ) | | (9,023 | ) |
| | | $ | 69,260 |
| | $ | 3,060 |
| | $ | (9,023 | ) | | $ | 63,297 |
|
| As of December 31, 2014 | | |
| | |
| | |
| | |
|
| Investments in trading securities | | $ | 77,327 |
| | $ | 2,293 |
| | $ | — |
| | $ | 79,620 |
|
| | | $ | 77,327 |
| | $ | 2,293 |
| | $ | — |
| | $ | 79,620 |
|
Investments categorized as level 2 assets consist of investments in
a common trust
fundfunds sponsored by Westwood Trust. Common trust funds are private investment vehicles comprised of commingled investments held in trusts that are valued using the Net Asset Value (“NAV”) calculated by us as administrator of the funds. The NAV is
quoted on a private market that is not active; however,calculated using indirectly observed inputs, as the unit price is based on the market value of the underlying investments
that are traded on an active market.
We sold allcan make withdrawals from the common trust funds on a daily basis, as needed for liquidity, and there are no restrictions on redemption as of our 200,000 Class A shares of Teton Advisors, Inc. in 2012. Prior to disposition, we usedDecember 31, 2015.
Contingent consideration categorized as a level 3 liability is related to the acquisition of Woodway (see Note 5 “Acquisitions, Goodwill and Other Intangible Assets”). As of the acquisition date, the Company estimated that the Earn-Out Amount would be $9.1 million, based on then existing facts and circumstances. The fair value of contingent consideration is measured using the projected payment date, discount rates, probabilities of payment, and projected revenues. The projected contingent payment is discounted back to the current period using a discounted cash flow model. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases or decreases in projected revenues, probabilities of payment, discount rates or projected payment dates may result in higher or lower fair value measurements. Fluctuations in any of the inputs may result in a significantly lower or higher fair value measurement.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For periods subsequent to determine theirthe initial measurement of the contingent consideration, changes in the fair value. value of the contingent consideration are recorded in Other revenues, net on the consolidated statements of comprehensive income. During the fourth quarter of 2015, the Company revised its estimate of the acquisition date Earn-Out Amount to $9.0 million and recorded $78,600 in other revenues.
The following table
presents information regarding this investment.represents the range of the unobservable inputs utilized in the fair value measurement of the contingent consideration classified as level 3: | For the years ended | |
Investments in available-for-sale securities (in thousands) | 2013 | | | 2012 | |
Beginning balance | $ | — | | | $ | 2,999 | |
Proceeds from sale | | — | | | | (1,900 | ) |
Change in unrealized gains included in Other Comprehensive Income | | — | | | | (1,099 | ) |
Ending balance | $ | — | | | $ | — | |
6.
|
| | | |
| Valuation Technique | Unobservable Input | Range | Weighted Average Rate |
| Discounted Cash Flow | Discount rate | 6.0 % | 6.0% |
| | AUM growth rate | (7.5)% to 8.1% | 0.9 % |
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (in thousands):
|
| | | |
| | Contingent Consideration |
| Beginning balance, December 31, 2014 | $ | — |
|
| Acquisition of Woodway | 9,102 |
|
| Change in carrying value | (79 | ) |
| Cash payments | — |
|
| Equity payments | — |
|
| Ending balance, December 31, 2015 | $ | 9,023 |
|
5. ACQUISITIONS, GOODWILL AND
OTHER INTANGIBLE
ASSETSOn November 18, 2010, we acquiredASSETS:
Acquisition of Woodway Financial Advisors
Westwood completed the businessacquisition of Woodway on April 1, 2015. The total Merger consideration consisted of (i) $30.6 million in cash and all related assets of McCarthy Group Advisors, L.L.C. (“McCarthy”), a Nebraska limited liability companystock, as described below, and registered investment advisor based in Omaha, Nebraska. The McCarthy business, now referred(ii) contingent consideration equal to as Westwood Trust-Omaha, was initially added to our Advisory segment. Since then a significant portion of client assets have transitioned to Trust segment products and we expect this to continue. In addition, new client assets added by the Omaha office are generally invested in Trust segment products. This acquisition was made in order to increase assets in our private wealth and Westwood Trust operating units, increaseannualized revenue from the Westwood Funds throughpost-closing business of Woodway for the reorganizationtwelve-month period ending March 31, 2016 (the “Earn-Out Period”), adjusted for certain clients or accounts that have terminated, and capped at $15 million (the “Earn-Out Amount”). The Earn-Out Amount will be paid 54.84% in cash and 45.16% in shares of Westwood’s common stock, valued using the average closing price during the last 30 calendar days of the McCarthy Multi-Cap Stock FundEarn-Out Period. In relation to the Merger, Westwood entered into employment agreements with certain Woodway employees, which, among other things, provided for specified compensation and benefits for the Westwood Dividend Growth Fund, which was completedrelated employees.
The Merger consideration of $39.7 million consisted of (i) closing date consideration of $25.3 million paid in
February 2011,cash and
expand the Westwood Trust platform.At closing, we paid a consideration totaling $12.0 million, comprisedissuance of 181,461109,712 shares of Westwood Holdings Group, Inc. common stock, valued at $5.3 million (discounted from $6.7 million due to certain required holding periods), and $5.0(ii) contingent consideration of $9.1 million, based on estimates and assumptions on the closing date of the acquisition, to be paid no later than 75 calendar days after the last day of the Earn-Out Period. The estimated fair value of the Earn-Out Amount was determined by using overall revenue growth projections combined with existing customer base lost revenue projections, both discounted and probability-weighted. The fair value measurement of the Earn-Out Amount was based primarily on significant inputs not observable in cash. Relatedthe market and thus represents a level 3 measurement as defined in ASC 820. See further discussion in Note 4 "Fair Value of Financial Instruments."
The acquisition of Woodway was accounted for using the acquisition method of accounting. Accordingly, the purchase price was allocated to this acquisition, we recorded goodwill of $7.4 million,the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of $4.2the acquisition date. As of December 31, 2015, consideration of $39.7 million and net working capital and property and equipmenthas been allocated using Woodway’s historical balance sheet at March 31, 2015 based on valuations of $0.4 million, which is detailed byacquired assets and assumed liabilities in a table below. connection with the acquisition.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The intangible assets purchased were primarily McCarthy’s customer accounts but also included allocations to trade-name and non-compete agreements, which together comprised approximately 7%allocation of the allocated purchase price. Pro forma resultsprice is as follows (in thousands):
|
| | | | |
| Cash and cash equivalents | | $ | 1,205 |
|
| Accounts receivable | | 936 |
|
| Other current assets | | 253 |
|
Goodwill(i) | | 15,889 |
|
Identifiable intangibles(ii) | | 21,334 |
|
| Property and equipment | | 197 |
|
| Accounts payable and accrued liabilities | | (61 | ) |
| Income tax payable | | (20 | ) |
| Purchase price | | $ | 39,733 |
|
| |
| (i) | The excess of the purchase price over the fair value amounts assigned to assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. |
| |
| (ii) | The fair value of the acquired identifiable intangibles consists of the following (in thousands, except useful lives): |
|
| | | | | | |
| Intangible Asset | | Fair Value | | Estimated Useful Lives |
| Client relationships | | $ | 20,391 |
| | 15 years |
| Non-compete agreements | | 257 |
| | 3 years |
| Trade name | | 686 |
| | 5 years |
At the time of operations have not been presented because the resultsacquisition, the Company believed that its enhanced market position and future growth potential were the primary factors that contributed to a total purchase price that resulted in the recognition of operationsgoodwill. As of December 31, 2015, $6.8 million of the goodwill arising from the acquisition is expected to be deductible for tax purposes.
We incurred transaction costs of $1.1 million related to the Woodway acquisition, of which $732,000 and $392,000 are included in “Professional services” on our consolidated statements of comprehensive income for the years ended December 31, 2010, 20092015 and 2008,2014, respectively.
Our consolidated results for the year ended December 31, 2015 included Total revenues and Net income attributable to Woodway of $7.7 million and $2.2 million, respectively.
Pro Forma Financial Information
The following unaudited pro forma results of operations for the twelve months ended December 31, 2015 and 2014 assume that the Woodway acquisition had occurred on January 1, 2014, after giving effect to acquisition accounting adjustments relating to amortization of the valued intangible assets and to record additional compensation costs related to employment contracts entered into as a result of the acquisition. These unaudited pro forma results exclude one-time, non-recurring costs related to the acquisition, including
McCarthy’s operations,$1.1 million of transaction costs. This unaudited pro forma information should not be relied upon as being necessarily indicative of the historical results that would
not have been
materially different from those reportedobtained if the Merger had actually occurred on that date, nor of the results that may be obtained in
our consolidated statements of comprehensive income.F-14
the future. |
| | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2015 | | 2014 |
| Total revenues | | $ | 133,628 |
| | $ | 123,729 |
|
| Net income | | $ | 28,080 |
| | $ | 29,429 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present
Goodwill
Goodwill represents the
assets and liabilities we acquired from McCarthy: | Amount
($ thousands) | |
Goodwill: | | | |
Other goodwill | $ | 6,875 | |
Assembled workforce | | 491 | |
Total goodwill | $ | 7,366 | |
Intangible assets: | | | |
Customer accounts | $ | 3,965 | |
Trade name | | 234 | |
Non-compete agreements | | 24 | |
Total Intangible assets | $ | 4,223 | |
Tangible assets
| Amount
($ thousands)
| |
Cash
| $
| 1,008
| |
Receivables
| | 370
| |
Property and equipment
| | 88
| |
Prepaid expenses
| | 76
| |
Bonuses payable
| | (753
| )
|
Unearned Income
| | (296
| )
|
Other liabilities
| | (101
| )
|
Net tangible assets
| $
| 392
| |
On November 16, 2009, we acquired the business and substantially all the related assets of Baxter Financial Corporation related to its managementexcess of the Philadelphia Fund. In connection with this acquisition,cost of acquired assets over the Philadelphia Fund was reorganized intofair value of the Westwood LargeCap Value Fund. On November 21, 2011, we paid cash forunderlying identifiable assets at the final deferred payment in the amountdate of $867,000.
The goodwill we acquired is not amortized for book purposes, but is deductible for income tax purposes.
The changesacquisition. Changes in goodwill for the last two years wereare as follows (in thousands):
| | 2013 | | | 2012 | |
Beginning balance | | $ | 11,255 | | | $ | 11,255 | |
Acquired goodwill | | | — | | | | — | |
Ending balance | | $ | 11,255 | | | $ | 11,255 | |
F-15
|
| | | | | | | | |
| | | As of December 31, |
| | | 2015 | | 2014 |
| Beginning balance | | $ | 11,255 |
| | $ | 11,255 |
|
Acquisition of Woodway (1) | | 15,889 |
| | — |
|
| Ending balance | | $ | 27,144 |
| | $ | 11,255 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1)The $15.9 million of goodwill acquired through the acquisition of Woodway is entirely attributable to the Trust segment.
Goodwill is not amortized but is tested for impairment at least annually. We completed our annual goodwill impairment assessment during the third quarter of 2015 and determined that no impairment loss was required. No impairments were recorded during the year ended December 31, 2015, 2014 or 2013.
Our intangible assets represent the acquisition date fair value of acquired client relationships, trade names, non-compete agreements and internally-developed software and are reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. The following is a summary of intangible assets at December 31,
20132015 and
20122014 (in thousands, except years):
| Weighted
Average
Amortization
Period
(years) | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net
Carrying
Amount | |
2013 | | | | | | | | | | | | | | | |
Client relationships | | 14.2 | | | $ | 5,005 | | | $ | (1,216) | | | $ | 3,789 | |
Trade names | | 2.0 | | | | 256 | | | | (256) | | | | — | |
Non-compete agreements | | 2.3 | | | | 26 | | | | (26) | | | | — | |
Total | | | | | $ | 5,287 | | | $ | (1,498) | | | $ | 3,789 | |
2012 | | | | | | | | | | | | | | | |
Client relationships | | 14.2 | | | $ | 5,005 | | | $ | (857 | ) | | $ | 4,148 | |
Trade names | | 2.0 | | | | 256 | | | | (256 | ) | | | — | |
Non-compete agreements | | 2.3 | | | | 26 | | | | (25 | ) | | | 1 | |
Total | | | | | $ | 5,287 | | | $ | (1,138 | ) | | $ | 4,149 | |
|
| | | | | | | | | | | | | | |
| | | Weighted Average Amortization Period (years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| 2015 | | | | |
| | |
| | |
|
| Client relationships | | 14.8 | | $ | 25,396 |
| | $ | (2,954 | ) | | $ | 22,442 |
|
| Trade names | | 4.2 | | 942 |
| | (358 | ) | | 584 |
|
| Non-compete agreements | | 2.9 | | 283 |
| | (91 | ) | | 192 |
|
| Internally developed software | | 7.0 | | 136 |
| | — |
| | 136 |
|
| | | | | $ | 26,757 |
| | $ | (3,403 | ) | | $ | 23,354 |
|
| 2014 | | | | |
| | |
| | |
|
| Client relationships | | 14.2 | | $ | 5,005 |
| | $ | (1,575 | ) | | $ | 3,430 |
|
| Trade names | | 2.0 | | 256 |
| | (256 | ) | | — |
|
| Non-compete agreements | | 2.3 | | 26 |
| | (26 | ) | | — |
|
| | | | | $ | 5,287 |
| | $ | (1,857 | ) | | $ | 3,430 |
|
Amortization expense, which is included in “General and administrative” expense on our consolidated statements of comprehensive income, was
$1.5 million, $359,000
$472,000 and
$498,000$359,000 for the years ended December 31,
2015, 2014 and 2013,
2012 and 2011, respectively.
Estimated amortization expense for
the intangible assets
forover the next five years is as follows (in thousands):
| Estimated
Amortization
Expense | |
For the Year ending December 31, | | | |
2014 | $ | 359 | |
2015 | | 359 | |
2016 | | 359 | |
2017 | | 359 | |
2018 | | 359 | |
7.
|
| | | |
| | Estimated Amortization Expense |
| For the year ending December 31, | |
|
| 2016 | $ | 1,960 |
|
| 2017 | 1,960 |
|
| 2018 | 1,896 |
|
| 2019 | 1,875 |
|
| 2020 | 1,760 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. BALANCE SHEET COMPONENTS:
The following table reflects information about our property and equipment as of December 31, 20132015 and 20122014 (in thousands): | As of December 31, | |
| 2013 | | | 2012 | |
Leasehold improvements cost | $ | 2,068 | | | $ | 1,321 | |
Furniture and fixtures cost | | 1,453 | | | | 1,450 | |
Computer hardware and office equipment cost | | 1,380 | | | | 1,121 | |
Accumulated depreciation | | (2,155 | ) | | | (1,747 | ) |
Net property and equipment | $ | 2,746 | | | $ | 2,145 | |
|
| | | | | | | | |
| | | As of December 31, |
| | | 2015 | | 2014 |
| Leasehold improvements | | $ | 1,728 |
| | $ | 2,274 |
|
| Furniture and fixtures | | 1,804 |
| | 1,516 |
|
| Computer hardware and office equipment | | 2,116 |
| | 1,563 |
|
| Construction in progress | | 231 |
| | — |
|
| Accumulated depreciation | | (3,687 | ) | | (2,720 | ) |
| Net property and equipment | | $ | 2,192 |
| | $ | 2,633 |
|
F-16
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Income
Loss
The components of accumulated other comprehensive incomeloss were as follows (in thousands): | As of December 31, | |
| 2013 | | | 2012 | |
Foreign currency translation adjustment | $ | (257 | ) | | $ | 30 | |
Accumulated other comprehensive income | $ | (257 | ) | | $ | 30 | |
8.
|
| | | | | | | | |
| | | As of December 31, |
| | | 2015 | | 2014 |
| Foreign currency translation adjustment, net of tax of $102 and $127 | | $ | (4,688 | ) | | $ | (1,231 | ) |
| Accumulated other comprehensive loss | | $ | (4,688 | ) | | $ | (1,231 | ) |
Income (loss) before income taxes by jurisdiction is as
follows:follows (in thousands): | Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
United States | $ | 30,883 | | | $ | 26,850 | | | $ | 23,109 | |
Canada | | (2,614 | ) | | | (6,824 | ) | | | — | |
Total | $ | 28,269 | | | $ | 20,026 | | | $ | 23,109 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| United States | | $ | 27,324 |
| | $ | 36,104 |
| | $ | 30,799 |
|
| Canada | | 14,896 |
| | 5,932 |
| | (2,614 | ) |
| Total | | $ | 42,220 |
| | $ | 42,036 |
| | $ | 28,185 |
|
Income tax expense differs from the amount that would otherwise have been calculated by applying the U.S. Federal corporate tax rate of 35% to income before income taxes.
The difference between the Federal corporate tax rate and the effective tax rate is comprised of the following (in thousands):
| Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Income tax provision computed at US federal statutory rate | $ | 9,894 | | | $ | 7,009 | | | $ | 8,088 | |
Canadian rate differential | | 222 | | | | 580 | | | | — | |
State and local income taxes, net of federal income taxes | | 386 | | | | 305 | | | | 353 | |
Other, net | | (124 | ) | | | 42 | | | | (18 | ) |
Total income tax expense | $ | 10,378 | | | $ | 7,936 | | | $ | 8,423 | |
Effective income tax rate | | 36.7 | % | | | 39.6 | % | | | 36.4 | % |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Income tax provision computed at US federal statutory rate | | $ | 14,777 |
| | 35.0 | % | | $ | 14,712 |
| | 35.0 | % | | $ | 9,864 |
| | 35.0 | % |
| Canadian rate differential | | (1,287 | ) | | (3.0 | ) | | (520 | ) | | (1.2 | ) | | 222 |
| | 0.7 |
|
| Change in uncertain tax positions, net of federal benefit | | 1,059 |
| | 2.5 |
| | — |
| | — |
| | — |
| | — |
|
| State and local income taxes, net of federal benefit | | 465 |
| | 1.1 |
| | 442 |
| | 1.1 |
| | 386 |
| | 1.4 |
|
| Other, net | | 101 |
| | 0.2 |
| | 153 |
| | 0.3 |
| | (124 | ) | | (0.4 | ) |
| Total income tax expense | | $ | 15,115 |
| | 35.8 | % | | $ | 14,787 |
| | 35.2 | % | | $ | 10,348 |
| | 36.7 | % |
| Effective income tax rate | | 35.8 | % | | |
| | 35.2 | % | | |
| | 36.7 | % | | |
|
We include penalties and interest on income-based taxes in the
“Provision for income taxes”“General and administrative” line on our consolidated statements of comprehensive income. We recorded
$119,000 and $16,000 of penalties and interest
of $0, $0in 2015 and
$1352014, respectively. There were no penalties and interest in
2013, 2012 and 2011, respectively.2013.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income tax provision (benefit) as set forth in the consolidated statements of comprehensive income consisted of the following components (in thousands):
| Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Current taxes: | | | | | | | | | | | |
US Federal | $ | 10,683 | | | $ | 9,280 | | | $ | 7,944 | |
State and local | | 602 | | | | 473 | | | | 546 | |
Total | | 11,285 | | | | 9,753 | | | | 8,490 | |
Deferred taxes: | | | | | | | | | | | |
State and local | | (5 | ) | | | (2 | ) | | | (2 | ) |
US Federal | | (210 | ) | | | (4 | ) | | | (65 | ) |
Non-US | | (692 | ) | | | (1,811 | ) | | | — | |
Total | | (907 | ) | | | (1,817 | ) | | | (67 | ) |
Total income tax expense | $ | 10,378 | | | $ | 7,936 | | | $ | 8,423 | |
F-17
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Current taxes: | | |
| | |
| | |
|
| US Federal | | $ | 12,015 |
| | $ | 16,230 |
| | $ | 10,683 |
|
| State and local | | 2,564 |
| | 690 |
| | 602 |
|
| Foreign | | 3,821 |
| | — |
| | — |
|
| Total | | 18,400 |
| | 16,920 |
| | 11,285 |
|
| Deferred taxes: | | |
| | |
| | |
|
| US Federal | | (3,331 | ) | | (3,590 | ) | | (240 | ) |
| State and local | | (156 | ) | | (40 | ) | | (5 | ) |
| Foreign | | 202 |
| | 1,497 |
| | (692 | ) |
| Total | | (3,285 | ) | | (2,133 | ) | | (937 | ) |
| Total income tax expense | | $ | 15,115 |
| | $ | 14,787 |
| | $ | 10,348 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below (in thousands):
| As of
December 31, | |
| 2013 | | | 2012 | |
Deferred tax assets: | | | | | | | |
Restricted stock amortization | $ | 4,196 | | | $ | 3,903 | |
Net operating loss | | 2,244 | | | | 1,818 | |
Deferred rent | | 204 | | | | 173 | |
Other | | 97 | | | | 19 | |
Total deferred tax assets | | 6,741 | | | | 5,913 | |
| 2013 | | | 2012 | | |
| | | | | As of December 31, |
| | | | 2015 | | 2014 |
| Deferred tax assets: | | | |
| | |
|
| Share-based compensation expense | | | $ | 6,258 |
| | $ | 5,210 |
|
| Net operating loss | | | — |
| | 166 |
|
| Deferred rent | | | 51 |
| | 186 |
|
| Compensation and benefits payable | | | 5,222 |
| | 3,280 |
|
| Federal unrecognized tax benefit | | | 607 |
| | — |
|
| Other | | | 166 |
| | 112 |
|
| Total deferred tax assets | | | 12,304 |
| | 8,954 |
|
Deferred tax liabilities: | | | | | | | |
| | |
|
Property and equipment | | (390 | ) | | | (391 | ) | | (233 | ) | | (334 | ) |
Intangibles | | (449 | ) | | | (253 | ) | | (959 | ) | | (645 | ) |
Unrealized gains on investments | | (79 | ) | | | (211 | ) | | (70 | ) | | (123 | ) |
Total deferred tax liabilities | | (918 | ) | | | (855 | ) | | (1,262 | ) | | (1,102 | ) |
Net deferred tax assets | $ | 5,823 | | | $ | 5,058 | | | $ | 11,042 |
| | $ | 7,852 |
|
Net deferred tax assets and liabilities are as follows (in thousands):
| As of December 31, | |
| 2013 | | | 2012 | |
Net current deferred tax asset | $ | 3,782 | | | $ | 3,362 | |
Net current deferred tax liabilities | | — | | | | — | |
Net current deferred tax assets reflected on the balance sheets | | 3,782 | | | | 3,362 | |
Net non-current deferred tax assets | | 2,275 | | | | 2,552 | |
Net non-current deferred tax liabilities | | (234 | ) | | | (856 | ) |
Net non-current deferred tax assets reflected on the balance sheets | | 2,041 | | | | 1,696 | |
Total net deferred tax assets | $ | 5,823 | | | $ | 5,058 | |
As
|
| | | | | | | | |
| | | As of December 31, |
| | | 2015 | | 2014 |
Net current deferred tax assets(1) | | $ | — |
| | $ | 6,268 |
|
Net current deferred tax liabilities(1) | | — |
| | (2,208 | ) |
Total net current deferred tax assets(1) | | — |
| | 4,060 |
|
| Net non-current deferred tax assets | | 12,304 |
| | 4,782 |
|
| Net non-current deferred tax liabilities | | (1,262 | ) | | (990 | ) |
| Net non-current deferred tax assets reflected on the balance sheets | | 11,042 |
| | 3,792 |
|
| Total net deferred tax assets | | $ | 11,042 |
| | $ | 7,852 |
|
________________
(1) We have elected to prospectively early adopt ASU 2015-17 in the current fiscal year. See further discussion in Note 2 "Summary of
December 31, 2013, we have Canadian net operating loss carry forwards of approximately $8.5 million that are subject to limitation and account for the deferred tax asset of $2.2 million. These net operating loss carryforwards begin to expire in 2032. We believe that it is more likely than not that we will realize the benefit of our deferred tax assets.Significant Accounting Policies."
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of December 31,
2013,2015, the Company’s
2012, 2013 and 2014 tax years
of 2010, 2011, and 2012 are open for examination by the
Internal Revenue Service, and various state and foreign jurisdiction tax
authorities. The 2009 tax year for Texas is alsoyears remain open
for examination; with this exception, as of December 31, 2013, the Company is no longer subject to
U.S. federal, state, local, or foreign examinations by tax authorities for years before 2010.examination. We are not currently under audit by any taxing jurisdiction.9.
We have not provided U.S. income taxes and foreign withholdings taxes on the undistributed earnings of our foreign subsidiary, Westwood International, because we intend to permanently reinvest such earnings outside the U.S.. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2015, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $8 million, and the unrecognized deferred tax liability related to these earnings is approximately $600,000.
As of December 31, 2015, the Company's gross liability related to uncertain tax positions was $1.6 million. A number of years may elapse before an uncertain tax position is finally resolved. To the extent that the Company has favorable tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the applicable statute of limitations or other changes in circumstances, such liabilities, as well as the related interest and penalties, would be reversed as a reduction of income tax expense, net of federal tax effects, in the period such determination is made. We had no liability for uncertain tax positions recorded during the years ended December 31, 2013 and 2014. A reconciliation of the change in recorded uncertain tax positions during the year ended December 31, 2015 is as follows (in thousands):
|
| | | | |
| Balance at January 1, 2015 | | $ | — |
|
| Additions for tax positions related to the current year | | 492 |
|
| Additions for tax positions related to prior years | | 1,137 |
|
| Balance at December 31, 2015 | | $ | 1,629 |
|
Within the next twelve months, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $1.6 million as a result of settlements with certain taxing authorities, which if recognized would decrease our provision for income taxes by $1.0 million.
8. REGULATORY CAPITAL REQUIREMENTS:
Westwood Trust is subject to the capital requirements of the Texas Department of Banking and has a minimum capital requirement of
$1.0$4.0 million. At December 31,
2013,2015, Westwood Trust had approximately
$12$8.9 million in excess of its minimum capital requirement.
Westwood Trust is limited under applicable Texas law in the payment of dividends
toof undivided profits, which is that part of equity capital equal to the balance of net profits, income, gains and losses since formation minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate Board resolutions. At the discretion of its
boardBoard of
directors,Directors, Westwood Trust
has made quarterly and special dividend payments to us out of its undivided profits.F-18
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Westwood International is subject to the working capital requirements of the Ontario Securities Commission, which requires that combined cash and receivables beexceed current liabilities by at least $200,000 CDN in excess of current liabilities.$100,000 CDN. At December 31, 20132015 Westwood International had combined cash and receivables that were $4.4$21.5 million CDN (or $4.2$15.5 million in U.S. Dollars using the exchange rate on December 31, 2013)2015) in excess of its current liabilities, which satisfies this requirement.
10.
Restricted Stock Awards
We have issued
stock options and restricted shares to our employees and non-employee
directors and offer 401(k) matching and profit sharing contributions to our employees.directors. The Plan reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the form of restricted stock and stock options. The total number of shares that may be issued under the Plan (including predecessor plans to the Plan) may not exceed
3,898,1004,398,100 shares. In the
eventevent of a change in control of Westwood, the Plan contains provisions providing for the acceleration of the vesting of restricted stock and stock options.stock. At December 31, 2013,2015, approximately 716,000678,900 shares remain available for issuance under the Plan.The Share Award
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Canadian Plan of Westwood Holdings Group, Inc. for Service provided
As discussed in
Canada to its Subsidiaries (the “Canada EB Plan”)Note 2, the Canadian Plan provides compensation in the form of common stock for services performed by
persons toemployees of Westwood International.
As described in Note 2, the trust formed pursuant to the Canada EB Plan holds 20,251 shares of Westwood common stock. Under the Canada EBCanadian Plan, no more than $10 million CDN (or $9.4$7.2 million in U. S.U.S. Dollars using the exchange rate on December 31, 2013)2015) may be funded to the Plan Trustee to fund purchases of common stock with respect to awards granted under the Canada EBCanadian Plan. At December 31, 2013,2015, approximately 147,000 shares remain$4.9 million remains available for issuance under the Canada EBCanadian Plan, or approximately 93,900 shares based on athe closing share price of $61.91, the closing priceour stock of our stock$52.09 as of the last business day of 2013.2015. During 2015, the trust formed pursuant to the Canadian Plan purchased in the open market 21,818 Westwood common shares for approximately $1.3 million. On December 15, 2015, 20,375 shares vested at a total fair value of $1.1 million. As of December 31, 2013, for2015, the trust holds 33,174 shares of Westwood common stock. As of December 31, 2015, unrecognized compensation cost related to restricted stock grants under the Canada EBCanadian Plan there was approximately $0.5 million of unrecognized compensation cost,totaled $854,000, which we expect to recognize over a weighted-average period of 21.8 years. The following table presents the total stock-based compensation expense recorded and the total income tax benefit recognized for stock-based compensation arrangements for the years indicated (in thousands):
| For the years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Service condition restricted stock expense | $ | 7,602 | | | $ | 7,546 | | | $ | 7,632 | |
Performance-based restricted stock expense | | 3,758 | | | | 2,969 | | | | 2,337 | |
Restricted stock expense under the Plan | | 11,360 | | | | 10,515 | | | | 9,969 | |
Canada EB Plan restricted stock expense | | 235 | | | | — | | | | — | |
Total stock based compensation expense | $ | 11,595 | | | $ | 10,515 | | | $ | 9,969 | |
Total income tax benefit recognized related to stock-based compensation | $ | 4,382 | | | $ | 4,230 | | | $ | 3,872 | |
|
| | | | | | | | | | | | |
| | | For the years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Service condition restricted stock expense | | $ | 9,439 |
| | $ | 7,580 |
| | $ | 7,602 |
|
| Performance-based restricted stock expense | | 7,403 |
| | 5,718 |
| | 3,842 |
|
| Restricted stock expense under the Plan | | 16,842 |
| | 13,298 |
| | 11,444 |
|
| Canadian Plan restricted stock expense | | 732 |
| | 387 |
| | 235 |
|
| Total stock based compensation expense | | $ | 17,574 |
| | $ | 13,685 |
| | $ | 11,679 |
|
| Total income tax benefit recognized related to stock-based compensation | | $ | 6,217 |
| | $ | 5,764 |
| | $ | 4,384 |
|
Under the Plan, we have granted to employees and non-employee directors restricted stock subject to service conditions, and to certain key employees restricted stock subject to both service and performance conditions. We
calculate compensation cost foraccrue dividends on unvested restricted stock,
grants by usingwhich are due and payable upon vesting of restricted stock. Accrued dividends coming due within the
fair market valuenext twelve months are included in "Dividends payable" on the consolidated balance sheet, with the remaining noncurrent portion of
our common stock ataccrued dividends included in "Accrued dividends" on the
date of grant, the number of shares issued, an adjustment for restrictions onconsolidated balance sheet. At December 31, 2015, we had recorded $5.7 million and $1.7 million in Dividends payable and Accrued dividends,
respectively. At December 31, 2014, we had recorded $4.9 million and
an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized on a straight-line basis over the applicable vesting period.$1.5 million in Dividends payable and Accrued dividends, respectively.
As of December 31,
2013,2015, there was approximately
$21.9$22.3 million of unrecognized compensation cost for restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 2.5 years. In order to satisfy tax liabilities that employees will owe on their shares that vest, we may withhold a sufficient number of vested shares from employees on the date vesting
occurs. Weoccurs to cover minimum tax withholding requirements. We withheld 86,39291,384 shares in 20132015 for this purpose. Our two types of restricted stock grants under the Plan are discussed below.F-19
Restricted Stock Subject Only to a Service ConditionWESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employee and non-employee director restricted share grants
For the years ended December 31,
2013, 20122015, 2014 and
2011,2013, we granted restricted stock to employees and non-employee directors.
The employees’Employee shares
generally vest over four years and
the directors’Director shares vest over one year.
We calculate compensation cost for restricted stock grants using the fair market value of our common stock at the date of grant, the number of shares issued, an adjustment for restrictions on dividends and an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized on a straight-line basis over the applicable vesting period.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the year ended December 31,
2013:2015: | Shares | | | Weighted Average
Grant Date Fair
Value | |
Restricted shares subject only to a service condition: | | | | | | | |
Non-vested, January 1, 2013 | | 560,025 | | | $ | 37.52 | |
Granted | | 205,624 | | | | 43.68 | |
Vested | | (210,980 | ) | | | 35.87 | |
Forfeited | | (43,609 | ) | | | 39.73 | |
Non-vested, December 31, 2013 | | 511,060 | | | | 40.49 | |
|
| | | | | | | |
| Restricted shares subject only to a service condition: | | Number of Shares | | Weighted Average Grant Date Fair Value |
| Non-vested, January 1, 2015 | | 496,457 |
| | $ | 48.14 |
|
| Granted | | 309,932 |
| | 61.42 |
|
| Vested | | (186,330 | ) | | 41.85 |
|
| Forfeited | | (39,590 | ) | | 55.38 |
|
| Non-vested, December 31, 2015 | | 580,469 |
| | $ | 56.76 |
|
The following table shows the weighted-average grant date fair value for shares granted and the total fair value of shares vested during the years indicated: | Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Restricted shares subject only to a service condition: | | | | | | | | | | | |
Weighted-average grant date fair value | $ | 43.68 | | | $ | 39.26 | | | $ | 36.64 | |
Fair value of shares vested (in thousands) | $ | 7,568 | | | $ | 8,115 | | | $ | 7,380 | |
Performance-based restricted share grants
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| Restricted shares subject only to a service condition: | | 2015 | | 2014 | | 2013 |
| Weighted-average grant date fair value | | $ | 61.42 |
| | $ | 58.70 |
| | $ | 43.68 |
|
| Fair value of shares vested (in thousands) | | $ | 7,797 |
| | $ | 7,236 |
| | $ | 7,568 |
|
Restricted Stock Subject to Service and Performance Conditions
Under the Plan,
we granted to certain key employees
were provided agreements for grants of restricted shares that vest over
five years, provided thata five-year period subject to achieving annual performance goals established by the Compensation Committee of Westwood’s
boardBoard of
directorsDirectors. Each year the Compensation Committee establishes a specific goal for that year’s vesting of the restricted shares, which historically has been based upon Westwood’s adjusted pre-tax income, as defined. The date that the Compensation Committee establishes the annual goal is considered to be the grant date and the fair value measurement date to determine expense on the shares that are
met. likely to vest. The vesting period ends when the Compensation Committee formally approves the performance-based restricted stock vesting based on the final calculation of adjusted pre-tax income as derived from the Company’s audited financial statements. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed. In February 2013,March 2015, the Compensation Committee established the 20132015 goal as adjusted pre-tax income of at least $27.0$46 million, representing a five-year compound annual growth rate in excess of 10% over annual adjusted pre-tax income recorded in 2008 (excluding a 2008 non-recurring performance fee of $8.7 million). Our adjusted2009. Adjusted pre-tax income is determined based on our audited financial statements and is equal to income before income taxes increased by expenses incurred for the year for (i) incentive compensation for all officers and employees, and (ii) performance-based restricted stock awards, and (iii) mutual fund share incentive awards, excluding start up,start-up, non-recurring, and similar expense items.items, at the Committee’s discretion. In the first quarter of 2013,2015, we concluded that it was probable that we would meet the performance goals required to vest the applicable percentage of the performance-based restricted shares this year and began recording expense related to those shares. Each year the Compensation Committee establishes a specific goal for that year’s vesting of the restricted shares, which historically is based upon Westwood’s adjusted pre-tax income, as defined. If the performance goal is not met in any year during the vesting period, the Compensation Committee may establish a goal for a subsequent vesting period, which, if achieved or exceeded, may result in full or partial vesting of the shares that did not otherwise become vested in a prior year. In no event, under the current grants, will the maximum number of shares which may become vested over the vesting period exceed 175,000 shares in the case of our Chief Executive Officer or 290,000 shares collectively in the case of certain other employees. If a portion of the performance-based restricted shares do not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest would be reversed. | Shares | | | Weighted Average
Grant Date Fair
Value | |
Restricted shares subject to service and performance conditions: | | | | | | | |
Non-vested, January 1, 2013 | | 230,000 | | | $ | 39.49 | |
Granted | | 90,000 | | | | 43.85 | |
Vested | | (93,000 | ) | | | 40.41 | |
Forfeited | | — | | | | — | |
Non-vested, December 31, 2013 | | 227,000 | | | $ | 40.84 | |
F-20
|
| | | | | | | |
| Restricted shares subject to service and performance conditions: | | Number of Shares | | Weighted Average Grant Date Fair Value |
| Non-vested, January 1, 2015 | | 101,313 |
| | $ | 58.59 |
|
| Granted | | 101,313 |
| | 61.29 |
|
| Vested | | (101,313 | ) | | 58.59 |
|
| Forfeited | | — |
| | — |
|
| Non-vested, December 31, 2015 | | 101,313 |
| | $ | 61.29 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the weighted-average grant date fair value for shares granted and the total fair value of shares vested during the years indicated:
| Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Restricted shares subject to a service and performance condition: | | | | | | | | | | | |
Weighted-average grant date fair value | $ | 43.85 | | | $ | 39.31 | | | $ | — | |
Fair value of shares vested (in thousands) | $ | 3,758 | | | $ | 3,068 | | | $ | 3,107 | |
Because the performance goal was met in 2013, the shares are vested in substance but require certification by our Compensation Committee, at which time a share price will be determined for tax purposes. As a result, we estimate that the total fair value of the shares that vested in 2013 was approximately $5,758,000 based on a share price of $61.91, the closing price of our stock as of the last business day of 2013.
Stock Options
Options granted under the Plan had a maximum ten-year term and vested over a period of four years. Options exercised represent newly issued shares. There are no options currently outstanding or exercisable
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| Restricted shares subject to service and performance conditions: | | 2015 | | 2014 | | 2013 |
| Weighted-average grant date fair value | | $ | 61.29 |
| | $ | 58.59 |
| | $ | 44.55 |
|
| Fair value of shares vested (in thousands) | | $ | 5,936 |
| | $ | 4,143 |
| | $ | 2,948 |
|
The above amounts as of December 31,
2013.There were options representing 16,2502015 do not include 118,939 non-vested restricted shares of Westwood’s common stock outstanding atthat potentially vest over performance years subsequent to 2015, as the beginning of 2012 at a weighted average exercise price of $12.90 per share that were exercised in 2012. These options had an intrinsic value of $384,000 as of December 31, 2011. The total intrinsic value of options exercised was $0, $364,000annual performance goals for those years have not been set by the Compensation Committee and $542,000 in 2013, 2012 and 2011, respectively. The cash received from the exercise of stock options was $0, $210,000 and $287,000 in 2013, 2012 and 2011, respectively.
therefore no grant date has been established.
We
establishedhave a deferred share unit (“DSU”) plan for employees
and directors of Westwood International. A DSU is an award linked to the value of Westwood’s common stock and is represented by a notional credit to a participant account. The value of a DSU is initially equal to
thethe value of a share of our common stock. DSUs vest 20%, 40%, 60%, and 80% after two, three, four and five years of service, respectively. DSUs become fully vested after six years of service by the participant and the liability for these units is settled in cash upon termination of the participant’s service. We record expense for DSUs based on the number of units vested on a straight line basis, which may increase or decrease based on changes in the price of our common shares, and will increase for additional units received from dividends declared on our shares. As of December 31, 2013,2015, we had an accrued liability of $71,000$174,000 for 4,1935,822 deferred share units related to the 2012, 2013 and 2014 awards issued in 2013, 2014 and 2015, respectively, which is based on the $52.09 per share closing price of our common stock on the last trading day of the year ended December 31, 2013 of $61.91 per share.2015.
Mutual Fund Share Incentive Awards
We
Each year we grant mutual fund incentive awards
annually to certain employees which are bonus awards based on our mutual funds achieving certain performance goals. Awards granted are notionally credited to a participant account maintained by the Company representingus that contains a number of mutual fund shares equal to the award amount divided by the net closing value of a fund share on the date the amount is credited to the account. These awards vest after approximately one year of service following the year
in which the
award is earned byparticipant earns the
participant.award. We begin accruing a liability for mutual fund incentive awards when we determine it is probable that the award will be earned and record expense for these awards over the service period of the award, which is approximately two years. During the year in which the amount of
thethe award is determined, we record expense based on the expected value of the award. After the award is earned, we record expense based on the value of the shares awarded and the percentage of the vesting period that has transpired. Our liability under these awards may increase or decrease based on changes in the value of the mutual fund shares awarded, including reinvested income from the mutual funds during the vesting period. Upon vesting, participants receive the value of the mutual fund share awards adjusted for earnings or losses attributable to the underlying mutual funds. For the yearyears ended December 31, 2015, 2014, and 2013, we recorded expense of $1.2 million, $863,000 and $1.8 million, respectively, related to mutual fund share incentive awards. As of December 31, 20132015 and 2012,2014, we had an accrued liability of $1.9$2.0 million and $0,$844,000, respectively, related to mutual fund incentive awards.F-21
Benefit PlansWESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Westwood Holdings Group, Inc. Savings Plan
Westwood has a defined contribution 401(k) and
profit sharingprofit-sharing plan that was adopted in July 2002 and covers substantially all of our U.S. employees. Discretionary employer
profit sharingprofit-sharing contributions become fully vested after six years of service by the participant. For the 401(k) portion of the plan, Westwood provides a match of up to 6% of eligible compensation. These 401(k)
matchingmatching contributions vest immediately.The following table displays our
profit sharingprofit-sharing and 401(k) contributions for the periods presented (in thousands):
| Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Profit sharing contributions | $ | 674 | | | $ | 648 | | | $ | 582 | |
401(k) matching contributions | | 871 | | | | 744 | | | | 707 | |
11.
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Profit-sharing contributions | | $ | 965 |
| | $ | 816 |
| | $ | 674 |
|
| 401(k) matching contributions | | 1,319 |
| | 928 |
| | 871 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. EARNINGS PER
SHARESHARE:
Basic earnings per common share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding. Diluted EPS is computed based on the weighted average shares of common stock outstanding
plus the effect of any dilutive shares of restricted stock and stock options granted to employees and non-employee directors. There were 323 and 5,993 anti-dilutive restricted shares as of December 31, 2015 and 2014, respectively. There were no anti-dilutive restricted shares or options as of December 31, 2013, 2012 or 2011.2013.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share amounts):
| Years ended December 31, | |
| 2013 | | | 2012 | | | 2011 | |
Net income | $ | 17,891 | | | $ | 12,090 | | | $ | 14,686 | |
Weighted average shares outstanding – basic | | 7,331,874 | | | | 7,145,701 | | | | 6,970,382 | |
Dilutive potential shares from unvested restricted shares | | 311,177 | | | | 189,269 | | | | 204,957 | |
Dilutive contingently issuable shares | | — | | | | — | | | | 17,607 | |
Dilutive potential shares from stock options | | — | | | | 3,134 | | | | 15,569 | |
Weighted average shares outstanding – diluted | | 7,643,051 | | | | 7,338,104 | | | | 7,208,515 | |
Earnings per share: | | | | | | | | | | | |
Basic | $ | 2.44 | | | $ | 1.69 | | | $ | 2.11 | |
Diluted | $ | 2.34 | | | $ | 1.65 | | | $ | 2.04 | |
12.
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Net income | | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
|
| Weighted average shares outstanding – basic | | 7,756,647 |
| | 7,512,348 |
| | 7,331,874 |
|
| Dilutive potential shares from unvested restricted shares | | 350,755 |
| | 394,197 |
| | 360,882 |
|
| Dilutive potential shares from contingent consideration | | 41,997 |
| | — |
| | — |
|
| Weighted average shares outstanding – diluted | | 8,149,399 |
| | 7,906,545 |
| | 7,692,756 |
|
| Earnings per share: | | |
| | |
| | |
|
| Basic | | $ | 3.49 |
| | $ | 3.63 |
| | $ | 2.43 |
|
| Diluted | | $ | 3.33 |
| | $ | 3.45 |
| | $ | 2.32 |
|
11. VARIABLE INTEREST
ENTITIESENTITIES:
Westwood Trust sponsors common trust funds (“CTFs”) for its clients. These funds allow clients to commingle assets to achieve economies of scale. Westwood Management provides investment advisory services to the Westwood
Funds ™,Funds®, a family of mutual funds, and
to two collective investment trusts (“CITs”). Some clients of Westwood Management
acquired in the McCarthy acquisition hold their investments in ten
limited liability companies (“LLCs”) that were formed and sponsored by McCarthy.. The CTFs, Westwood Funds ™,Funds®, CITs and LLCs (“Westwood VIEs”) are considered VIEs because our clients, who hold the equity at risk, do not have direct or indirect ability through voting or similar rights to make decisions about the funds that may have a significant effect on their economic performance. We receive fees for managing assets in these entities commensurate with market rates.We evaluate all of our advisory relationships and CTFs to determine whether or not we qualify as the primary beneficiary based on whether there is an obligation to absorb the majority of the expected losses or a right to receive the majority of the expected residual returns or both. Since all losses and returns are distributed to the shareholders of the Westwood VIEs, we are not the primary
beneficiarybeneficiary and consequently, the Westwood VIEs are not consolidated into our financial statements.In
June 2013,May 2015, the Company provided
€300,000 (orseed investments of $5.4 million for two new Westwood mutual funds. In both December 2015 and January 2014, the Company provided seed investments of $2.0 million to two common trust funds. In October 2014, the Company provided €1.6 million, or approximately
$405,750)$2.0 million, to the UCITS
FundFund. These seed investments were provided for the sole purpose of
meeting the minimum capital requirements (and showing economic
substance)substance needed
to complete the application process to establish the
fund. In August 2013, the UCITS Fund refunded this amountfunds or sub-funds. The corporate capital invested in
full.F-22
these funds is included in “Investments, at fair value” on our consolidated balance sheet at December 31, 2015.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Otherwise, we have not provided any financial support that we were not previously contractually obligated to provide and there are no arrangements that would require us to provide additional financial support to any of these variable interest entities. Our investments in the Westwood Funds ™Funds®, the UCITS Fund, and the CTFs are accounted for as investments in accordance with ourour other investments described in Note. 4.Note 3 "Investments". We recognized fee revenue from the Westwood VIEs of approximately $36.2$56.4 million, $30.3$48.2 million and $26.8$36.2 million for the twelve months ended December 31, 2015, 2014 and 2013, 2012 and 2011, respectively.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table displays the assets under management, amount of
corporate money invested that are included in “Investments, at fair value” on the consolidated balance sheets, and the risk of loss in each vehicle (in millions): | As of December 31, 2013 | |
| Assets
Under
Management | | | Corporate
Investment | | | Risk
of
Loss | |
Westwood Funds ™ | $ | 2,784 | | | $ | 13.4 | | | $ | 13.4 | |
Common Trust Funds | | 2,647 | | | | — | | | | — | |
Collective Investment Trusts | | 308 | | | | — | | | | — | |
LLCs | | 155 | | | | — | | | | — | |
UCITS Fund | | 1,386 | | | | — | | | | — | |
13.
|
| | | | | | | | | | | | |
| | | As of December 31, 2015 |
| | | Assets Under Management | | Corporate Investment | | Amount at Risk |
| VIEs: | | | | | | |
| Westwood Funds® | | $ | 3,617 |
| | $ | 6 |
| | $ | 6 |
|
| Common Trust Funds | | 2,885 |
| | 3 |
| | 3 |
|
| Collective Investment Trusts | | 284 |
| | — |
| | — |
|
| LLCs | | 133 |
| | — |
| | — |
|
| UCITS Fund | | 615 |
| | 2 |
| | 2 |
|
| All other assets: | | | | | | |
| Private Wealth | | 2,375 |
| | | | |
| Institutional | | 10,853 |
| | | | |
| Total AUM | | $ | 20,762 |
| | | | |
12. RELATED PARTY
TRANSACTIONSTRANSACTIONS:
Some of our directors, executive officers and their affiliates invest their personal funds directly in trust accounts that we manage. There were no amounts due from these accounts as of December 31, 2015 and 2014. For the years ended December 31, 2015, 2014 and 2013, we recorded trust fees from these accounts of $454,000, $264,000, and $278,000, respectively.
The Company engages in transactions with its affiliates in the ordinary course of business. Westwood International
providesand Westwood Management provide investment advisory services to the UCITS Fund. Certain members of the Company’s management and board of directors serve on the board of directors of the UCITS Fund, which began operations in August 2013. Under the terms of the investment advisory agreements, the Company earns quarterly fees
that are paid by
either clients of the UCITS
Fund or directly by the UCITS Fund.
The fees are based on negotiated fee schedules applied to AUM. These fees are commensurate with market rates and are negotiated and contracted at arm’s length. For the years ended December 31, 2015 and 2014, we recorded fees from the UCITS Fund of $1.3 million and $1.1 million, respectively, which are included in “Asset-based advisory fees” on our consolidated statement of comprehensive income. As of December 31, 2015 and 2014, $96,000 and $256,000 of these fees were unpaid and included in “Accounts receivable” on our consolidated balance sheet, respectively. For the year ended December 31, 2013, the Companywe did not earn or receive any fees from the UCITS Fund.14.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. COMMITMENTS AND CONTINGENCIES:
We lease our offices under non-cancelable operating lease agreements
which havewith expiration dates that run through
2021.2026. Rental expense for facilities and equipment leases for years ended December 31,
2013, 20122015, 2014 and
20112013 aggregated approximately
$1,640,000, $1,258,000$2.0 million, $1.5 million and
$979,000, $1.6 million, respectively, and is included in general and administrative and information technology expenses in the accompanying consolidated statements of comprehensive income.At December 31,
2013,2015, the future contractual rental payments for
non-cancelablenoncancelable operating leases for each of the following five years and thereafter
followare as follows (in thousands):
Year ending: | | | |
2014 | $ | 1,422 | |
2015 | | 1,321 | |
2016 | | 1,342 | |
2017 | | 1,157 | |
2018 | | 1,003 | |
Thereafter | | 2,924 | |
Total payments due | $ | 9,169 | |
|
| | | |
| Year ending: | |
|
| 2016 | $ | 2,275 |
|
| 2017 | 1,989 |
|
| 2018 | 1,812 |
|
| 2019 | 1,373 |
|
| 2020 | 1,310 |
|
| Thereafter | 6,800 |
|
| Total payments due | $ | 15,559 |
|
On August 3, 2012, AGF Management Limited and AGF Investments Inc.
(“AGF”(together “AGF”) filed a lawsuit in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and
Warren International, LLC, an executive recruiting
firm Warren International, LLC.firm. The action relates to the hiring of certain members of Westwood’s global and emerging markets investment team
who were previously employed by AGF. AGF is alleging that the former employees breached certain
obligationsobligations when they resigned from AGF and that Westwood and Warren induced such breaches. AGF is seeking an unspecified amount of damages and punitive damages of $10 million (CAD) in the lawsuit. On November 5, 2012, Westwood issued a response to AGF’s lawsuit with a counterclaim against AGF for defamation.F-23
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Westwood is seeking $1 million (CAD) in general damages, $10 million (CAD) in special damages, $1 million (CAD) in punitive damages, and costs. On November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a Westwood subsidiary, alleging that the employee made defamatory statements about AGF. In this second lawsuit, AGF is seeking $5 million (CAD) in general damages, $1 million (CAD) per defendant in punitive damages, unspecified special damages, interest and costs. The pleadings phase is completewas completed in 2013, and we are nowcurrently in the discovery phase, which we hope to complete in the first half of 2014.
phase.
While we intend to vigorously defend both actions and pursue our counterclaims, we are currently unable to estimate the ultimate aggregate amount of monetary gain, loss or financial impact of these actions and counterclaims. Defending these actions and pursuing these counterclaims may be expensive for us and time consuming for our
personnel.personnel. While we do not currently believe these proceedings will have a material impact, adverse resolution of these actions and counterclaims could have a material adverse effect on our business, financial condition or results of operations.Our policy is to not accrue legal fees and directly related costs as part of potential loss contingencies. We have agreed with our Directors & Officers insurance provider that 50% of the defense costs related to both AGF claims, excluding Westwood’s counterclaim
againstagainst AGF, will be covered by insurance. We expense legal fees and directly-related costs as they are incurred. We havereceived insurance proceeds of $714,000 and $379,000 during 2015 and 2014, respectively, and had recorded a receivable of $254,000$240,000 and $210,000 as of December 31, 20132015 and 2014, respectively, which isrepresented our current minimum estimate of therelated incurred expenses incurred related to this lawsuit that we expect to recover under our insurance policies. This receivable is part of “Other current assets” on our consolidated balance sheets.15.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We operate two segments: Advisory and Trust. These segments are managed separately based on the types of products and services offered and their related client bases.
We evaluateThe Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision-making purposes. Our Chief Operating Decision Maker evaluates the performance of our segments based primarily on
income before income taxes.fee revenues and economic earnings. Westwood Holdings
Group, Inc., the parent company of Advisory and Trust, does not have
revenues or employeesrevenues and is the entity in which we record stock-basedtypical holding company expenses including employee compensation expense.and benefits for holding company employees, directors’ fees and investor relations costs. All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.Our Advisory segment provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals and the Westwood
Funds™Funds®, as well as investment subadvisory services to mutual funds and our Trust segment. Westwood Management and Westwood International, which provide investment advisory services to clients of similar type, are included in our Advisory
segment.segment, along with Westwood Advisors, LLC.
Westwood Trust provides trust and custodial services to its clients and to our Advisory segment and
participates insponsors common trust funds
that it sponsors to institutions and high net worth individuals.
Westwood Trust is included in our Trust segment.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | Advisory | | | Trust | | | Westwood
Holdings | | | Eliminations | | | Consolidated | |
2013 | | | | | | | | | | | | | | | | | | | | |
Net fee revenues from external sources | | $ | 72,588 | | | $ | 18,367 | | | $ | — | | | $ | — | | | $ | 90,955 | |
Net intersegment revenues | | | 10,402 | | | | 14 | | | | — | | | | (10,416 | ) | | | — | |
Net interest and dividend revenue | | | 568 | | | | 1 | | | | — | | | | — | | | | 569 | |
Other revenue | | | 301 | | | | — | | | | — | | | | — | | | | 301 | |
Total revenues | | | 83,859 | | | | 18,382 | | | | — | | | | (10,416 | ) | | | 91,825 | |
Expenses: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 468 | | | | 301 | | | | — | | | | — | | | | 769 | |
Other operating expenses | | | 47,362 | | | | 15,140 | | | | 10,701 | | | | (10,416 | ) | | | 62,787 | |
Total expenses | | | 47,830 | | | | 15,441 | | | | 10,701 | | | | (10,416 | ) | | | 63,556 | |
Income (loss) before income taxes | | | 36,029 | | | | 2,941 | | | | (10,701 | ) | | | — | | | | 28,269 | |
Income tax expense (benefit) | | | 13,047 | | | | 1,117 | | | | (3,786 | ) | | | — | | | | 10,378 | |
Net income | | $ | 22,982 | | | $ | 1,824 | | | $ | (6,915 | ) | | $ | — | | | $ | 17,891 | |
Segment assets | | $ | 114,853 | | | $ | 14,190 | | | $ | — | | | $ | (13,023 | ) | | $ | 116,020 | |
Segment goodwill | | $ | 5,219 | | | $ | 6,036 | | | $ | — | | | $ | — | | | $ | 11,255 | |
Expenditures for long-lived assets | | $ | 962 | | | $ | 239 | | | $ | — | | | $ | — | | | $ | 1,201 | |
2012 | | | | | | | | | | | | | | | | | | | | |
Net fee revenues from external sources | | $ | 59,187 | | | $ | 14,969 | | | $ | — | | | $ | — | | | $ | 74,156 | |
Net intersegment revenues | | | 5,858 | | | | 16 | | | | — | | | | (5,874 | ) | | | — | |
Net interest and dividend revenue | | | 539 | | | | 2 | | | | — | | | | — | | | | 541 | |
Other revenue | | | 2,798 | | | | — | | | | — | | | | — | | | | 2,798 | |
Total revenues | | | 68,382 | | | | 14,987 | | | | — | | | | (5,874 | ) | | | 77,495 | |
Expenses: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 450 | | | | 372 | | | | — | | | | — | | | | 822 | |
Other operating expenses | | | 40,520 | | | | 11,984 | | | | 10,017 | | | | (5,874 | ) | | | 56,647 | |
Total expenses | | | 40,970 | | | | 12,356 | | | | 10,017 | | | | (5,874 | ) | | | 57,469 | |
Income (loss) before income taxes | | | 27,412 | | | | 2,631 | | | | (10,017 | ) | | | — | | | | 20,026 | |
Income tax expense (benefit) | | | 10,458 | | | | 992 | | | | (3,514 | ) | | | — | | | | 7,936 | |
Net income | | $ | 16,954 | | | $ | 1,639 | | | $ | (6,503 | ) | | $ | — | | | $ | 12,090 | |
Segment assets | | $ | 91,619 | | | $ | 13,657 | | | $ | — | | | $ | (8,661 | ) | | $ | 96,615 | |
Segment goodwill | | $ | 5,219 | | | $ | 6,036 | | | $ | — | | | $ | — | | | $ | 11,255 | |
Expenditures for long-lived assets | | $ | 228 | | | $ | 36 | | | $ | — | | | $ | — | | | $ | 264 | |
2011 | | | | | | | | | | | | | | | | | | | | |
Net fee revenues from external sources | | $ | 55,237 | | | $ | 13,453 | | | $ | — | | | $ | — | | | $ | 68,690 | |
Net intersegment revenues | | | 4,624 | | | | 17 | | | | — | | | | (4,641 | ) | | | — | |
Net interest and dividend revenue | | | 280 | | | | 2 | | | | — | | | | — | | | | 282 | |
Other revenue | | | (67 | ) | | | 4 | | | | — | | | | — | | | | (63 | ) |
Total revenues | | | 60,074 | | | | 13,476 | | | | — | | | | (4,641 | ) | | | 68,909 | |
Expenses: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 386 | | | | 376 | | | | — | | | | — | | | | 762 | |
Other operating expenses | | | 28,598 | | | | 11,112 | | | | 9,969 | | | | (4,641 | ) | | | 45,038 | |
Total expenses | | | 28,984 | | | | 11,488 | | | | 9,969 | | | | (4,641 | ) | | | 45,800 | |
Income (loss) before income taxes | | | 31,090 | | | | 1,988 | | | | (9,969 | ) | | | — | | | | 23,109 | |
Income tax expense (benefit) | | | 11,112 | | | | 765 | | | | (3,454 | ) | | | — | | | | 8,423 | |
Net income | | $ | 19,978 | | | $ | 1,223 | | | $ | (6,515 | ) | | $ | — | | | $ | 14,686 | |
Expenditures for long-lived assets | | $ | 1,069 | | | $ | 362 | | | $ | — | | | $ | — | | | $ | 1,431 | |
F-25
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
| Year Ended December 31, 2015 | | |
| | |
| | |
| | |
| | |
|
| Revenues: | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 101,973 |
| | $ | 28,795 |
| | $ | — |
| | $ | — |
| | $ | 130,768 |
|
| Net intersegment revenues | | 19,001 |
| | — |
| | — |
| | (19,001 | ) | | — |
|
| Net interest and dividend revenue | | 425 |
| | 1 |
| | — |
| | — |
| | 426 |
|
| Other revenue | | (341 | ) | | 83 |
| | — |
| | — |
| | (258 | ) |
| Total revenues | | 121,058 |
| | 28,879 |
| | — |
| | (19,001 | ) | | 130,936 |
|
| Expenses: | | |
| | |
| | |
| | |
| | |
|
| Depreciation and amortization | | 773 |
| | 1,724 |
| | 99 |
| | — |
| | 2,596 |
|
| Other operating expenses | | 63,658 |
| | 25,882 |
| | 15,581 |
| | (19,001 | ) | | 86,120 |
|
| Total expenses | | 64,431 |
| | 27,606 |
| | 15,680 |
| | (19,001 | ) | | 88,716 |
|
| Income (loss) before income taxes | | 56,627 |
| | 1,273 |
| | (15,680 | ) | | — |
| | 42,220 |
|
| Income tax expense (benefit) | | 19,330 |
| | 517 |
| | (4,732 | ) | | — |
| | 15,115 |
|
| Net income | | $ | 37,297 |
| | $ | 756 |
| | $ | (10,948 | ) | | $ | — |
| | $ | 27,105 |
|
| Add: | | |
| | |
| | |
| | |
| | |
|
| Restricted stock expense | | $ | 11,877 |
| | $ | 2,613 |
| | $ | 3,084 |
| | $ | — |
| | $ | 17,574 |
|
| Intangible amortization | | 161 |
| | 1,385 |
| | — |
| | — |
| | 1,546 |
|
| Deferred taxes on goodwill | | 38 |
| | 233 |
| |
|
| | — |
| | 271 |
|
| Economic Earnings | | $ | 49,373 |
| | $ | 4,987 |
| | $ | (7,864 | ) | | $ | — |
| | $ | 46,496 |
|
| | | | | | | | | | | |
| Segment assets | | $ | 183,004 |
| | $ | 60,459 |
| | $ | 8,816 |
| | $ | (70,943 | ) | | $ | 181,336 |
|
| Segment goodwill | | $ | 5,219 |
| | $ | 21,925 |
| | $ | — |
| | $ | — |
| | $ | 27,144 |
|
| Expenditures for long-lived assets | | $ | 369 |
| | $ | 180 |
| | $ | 267 |
| |
|
| | $ | 815 |
|
| | | | | | | | | | | |
| Year Ended December 31, 2014 | | |
| | |
| | |
| | |
| | |
|
| Revenues: | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 92,279 |
| | $ | 20,525 |
| | $ | — |
| | $ | — |
| | $ | 112,804 |
|
| Net intersegment revenues | | 13,527 |
| | — |
| | — |
| | (13,527 | ) | | — |
|
| Net interest and dividend revenue | | 261 |
| | 2 |
| | — |
| | — |
| | 263 |
|
| Other revenue | | 173 |
| | 1 |
| | — |
| | — |
| | 174 |
|
| Total revenues | | 106,240 |
| | 20,528 |
| | — |
| | (13,527 | ) | | 113,241 |
|
| Expenses: | | |
| | |
| | |
| | |
| | |
|
| Depreciation and amortization | | 603 |
| | 302 |
| | 33 |
| | — |
| | 938 |
|
| Other operating expenses | | 51,265 |
| | 19,867 |
| | 12,662 |
| | (13,527 | ) | | 70,267 |
|
| Total expenses | | 51,868 |
| | 20,169 |
| | 12,695 |
| | (13,527 | ) | | 71,205 |
|
| Income (loss) before income taxes | | 54,372 |
| | 359 |
| | (12,695 | ) | | — |
| | 42,036 |
|
| Income tax expense (benefit) | | 19,057 |
| | 132 |
| | (4,402 | ) | | — |
| | 14,787 |
|
| Net income | | $ | 35,315 |
| | $ | 227 |
| | $ | (8,293 | ) | | $ | — |
| | $ | 27,249 |
|
| Add: | | |
| | |
| | |
| | |
| | |
|
| Restricted stock expense | | $ | 9,074 |
| | $ | 1,847 |
| | $ | 2,764 |
| | $ | — |
| | $ | 13,685 |
|
| Intangible amortization | | 161 |
| | 198 |
| | — |
| | — |
| | 359 |
|
| Deferred taxes on goodwill | | 38 |
| | 114 |
| | — |
| | — |
| | 152 |
|
| Economic Earnings | | $ | 44,588 |
| | $ | 2,386 |
| | $ | (5,529 | ) | | $ | — |
| | $ | 41,445 |
|
| | | | | | | | | | | |
| Segment assets | | $ | 144,385 |
| | $ | 18,133 |
| | $ | 10,435 |
| | $ | (33,079 | ) | | $ | 139,874 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| Segment goodwill | | $ | 5,219 |
| | $ | 6,036 |
| | $ | — |
| | $ | — |
| | $ | 11,255 |
|
| Expenditures for long-lived assets | | $ | 226 |
| | $ | 29 |
| | $ | 223 |
| | $ | — |
| | $ | 478 |
|
| | | | | | | | | | | |
| Year Ended December 31, 2013 | | |
| | |
| | |
| | |
| | |
|
| Revenues: | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 72,588 |
| | $ | 18,367 |
| | $ | — |
| | $ | — |
| | $ | 90,955 |
|
| Net intersegment revenues | | 10,402 |
| | 14 |
| | — |
| | (10,416 | ) | | — |
|
| Net interest and dividend revenue | | 568 |
| | 1 |
| | — |
| | — |
| | 569 |
|
| Other revenue | | 301 |
| | — |
| | — |
| | — |
| | 301 |
|
| Total revenues | | 83,859 |
| | 18,382 |
| | — |
| | (10,416 | ) | | 91,825 |
|
| Expenses: | | |
| | |
| | |
| | |
| | |
|
| Depreciation and amortization | | 468 |
| | 301 |
| | — |
| | — |
| | 769 |
|
| Other operating expenses | | 46,545 |
| | 16,943 |
| | 9,799 |
| | (10,416 | ) | | 62,871 |
|
| Total expenses | | 47,013 |
| | 17,244 |
| | 9,799 |
| | (10,416 | ) | | 63,640 |
|
| Income (loss) before income taxes | | 36,846 |
| | 1,138 |
| | (9,799 | ) | | — |
| | 28,185 |
|
| Income tax expense (benefit) | | 13,738 |
| | 408 |
| | (3,798 | ) | | — |
| | 10,348 |
|
| Net income | | $ | 23,108 |
| | $ | 730 |
| | $ | (6,001 | ) | | $ | — |
| | $ | 17,837 |
|
| Add: | | |
| | |
| | |
| | |
| | |
|
| Restricted stock expense | | $ | 7,586 |
| | $ | 1,803 |
| | $ | 2,290 |
| | $ | — |
| | $ | 11,679 |
|
| Intangible amortization | | 161 |
| | 198 |
| | — |
| | — |
| | 359 |
|
| Deferred taxes on goodwill | | 38 |
| | 114 |
| | — |
| | — |
| | 152 |
|
| Economic Earnings | | $ | 30,893 |
| | $ | 2,845 |
| | $ | (3,711 | ) | | $ | — |
| | $ | 30,027 |
|
| | | | | | | | | | | |
| Segment assets | | $ | 114,871 |
| | $ | 14,190 |
| | $ | 6,354 |
| | $ | (19,365 | ) | | $ | 116,050 |
|
| Segment goodwill | | $ | 5,219 |
| | $ | 6,036 |
| | $ | — |
| | $ | — |
| | $ | 11,255 |
|
| Expenditures for long-lived assets | | $ | 962 |
| | $ | 239 |
| | $ | — |
| | $ | — |
| | $ | 1,201 |
|
We are providing a performance measure that we refer to as Economic Earnings. Both our management and Board of Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and review our dividend policy. We also believe that this performance measure is useful for management and investors when evaluating our underlying operating and financial performance and our available resources.
In calculating Economic Earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock, amortization of intangible assets and the deferred taxes related to the tax-basis amortization of goodwill. Although depreciation on property and equipment is a non-cash expense, we do not add it back when calculating Economic Earnings because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement.
The following table provides a reconciliation of net income to Economic Earnings (in thousands, except per share and share amounts):
|
| | | | | | | | | | | | |
| | | For the years ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Net Income | | $ | 27,105 |
| | $ | 27,249 |
| | $ | 17,837 |
|
| Add: Restricted stock expense | | 17,574 |
| | 13,685 |
| | 11,679 |
|
| Add: Intangible amortization | | 1,546 |
| | 359 |
| | 359 |
|
| Add: Tax benefit from goodwill amortization | | 271 |
| | 152 |
| | 152 |
|
| Economic Earnings | | $ | 46,496 |
| | $ | 41,445 |
| | $ | 30,027 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Years ended December 31, | |
(in thousands) | 2013 | | | 2012 | | | 2011 | |
Analysis of revenues by geographic location of client: | | | | | | | | | | | |
U.S. | $ | 83,622 | | | $ | 73,255 | | | $ | 65,409 | |
Canada | | 5,567 | | | | 2,542 | | | | 1,598 | |
Europe | | 1,843 | | | | 1,698 | | | | 1,902 | |
Australia | | 793 | | | | — | | | | — | |
Total | $ | 91,825 | | | $ | 77,495 | | | $ | 68,909 | |
| | | | As of
December 31, | | | Years ended December 31, |
(in thousands) | | 2013 | | | 2012 | | | 2015 | | 2014 | | 2013 |
Analysis of property and equipment, net by geographic area: | | | | | | | |
| Revenues by geographic location of client: | | | |
| | |
| | |
|
U.S. | | $ | 2,102 | | | $ | 2,077 | | | $ | 109,816 |
| | $ | 94,955 |
| | $ | 83,622 |
|
Canada | | | 644 | | | | 68 | | | 9,238 |
| | 8,635 |
| | 5,567 |
|
| Europe | | | 6,019 |
| | 8,146 |
| | 1,843 |
|
| Asia | | | 4,538 |
| | 21 |
| | — |
|
| Australia | | | 1,325 |
| | 1,484 |
| | 793 |
|
Total | | $ | 2,746 | | | $ | 2,145 | | | $ | 130,936 |
| | $ | 113,241 |
| | $ | 91,825 |
|
16.
|
| | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2015 | | 2014 |
| Property and equipment, net, by geographic area: | | |
| | |
|
| U.S. | | $ | 1,806 |
| | $ | 2,057 |
|
| Canada | | 386 |
| | 576 |
|
| Total | | $ | 2,192 |
| | $ | 2,633 |
|
For
each of the years ended December 31,
2015, 2014 and 2013,
2012 and 2011, our
fourten largest clients accounted for
13.7%, 12.6%, and 14.3%over 20% of our fee
revenue, respectively.revenue. No single customer accounted for 10% or more of our fee revenues in any of these years.
| Years ended December 31, | |
(in thousands) | 2013 | | | 2012 | | | 2011 | |
Advisory fees from Westwood Management’s largest client: | | | | | | | | | | | |
Asset-based fees | $ | 1,729 | | | $ | 1,452 | | | $ | 1,772 | |
Performance-based fees | | 2,561 | | | | 1,251 | | | | 991 | |
Percent of fee revenue | | 4.7 | % | | | 3.7 | % | | | 4.0 | % |
17.
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| (in thousands) | | 2015 | | 2014 | | 2013 |
| Advisory fees from Westwood Management’s largest client: | | |
| | |
| | |
|
| Asset-based fees | | $ | 2,109 |
| | $ | 2,183 |
| | $ | 1,729 |
|
| Performance-based fees | | 2,206 |
| | 3,806 |
| | 2,561 |
|
| Percent of fee revenue | | 3.3 | % | | 5.3 | % | | 4.7 | % |
Dividends Declared
On February
6, 2014, we3, 2016, the Board of Directors declared a quarterly cash dividend of
$0.44$0.57 per share on common stock payable on April 1,
20142016 to stockholders of record on March
14, 2014.11, 2016.
Restricted Stock Grants
On February
21, 2014,23, 2016, we issued
168,804248,436 shares of restricted stock to employees. On February 21, 2014,23, 2016, shares of our stock closed at a price of $58.88$47.52 per share. The shares are subject to vesting conditions described in Note 109 "Employee Benefits" of these consolidated financial statements.F-26
Share Repurchases
On July 20, 2012, our Board of Directors authorized management to repurchase up to $10 million of our outstanding common stock on the open market or in privately negotiated transactions. The share repurchase program has no expiration date and may be discontinued at any time by the Board of Directors. As of December 31, 2015, there had been no repurchases of our common stock under this plan, and $10 million remained available for repurchase.
Between January 1, 2016 and February 25, 2016, the Company repurchased 74,121 shares of our common stock at an average price of $46.93, including commissions, under our share repurchase program.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18.
17. QUARTERLY FINANCIAL DATA (Unaudited):
The following is a summary of unaudited quarterly results of operations for the years ended December 31,
20132015 and
20122014 (in thousands, except per share amounts):
| | Quarter | |
| | First | | | Second | | | Third | | | Fourth | |
2013 | | | | | | | | | | | | | | | | |
Revenues | | $ | 20,100 | | | $ | 23,475 | | | $ | 22,998 | | | $ | 25,252 | |
Income before income taxes | | | 4,719 | | | | 7,733 | | | | 6,766 | | | | 9,051 | |
Net income | | | 2,833 | | | | 4,879 | | | | 4,319 | | | | 5,860 | |
Basic earnings per common share | | | 0.39 | | | | 0.66 | | | | 0.59 | | | | 0.80 | |
Diluted earnings per common share | | | 0.38 | | | | 0.65 | | | | 0.57 | | | | 0.76 | |
| | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | | | | |
Revenues | | $ | 17,864 | | | $ | 20,066 | | | $ | 18,941 | | | $ | 20,624 | |
Income before income taxes | | | 6,084 | | | | 3,752 | | | | 4,331 | | | | 5,859 | |
Net income | | | 3,785 | | | | 2,198 | | | | 2,504 | | | | 3,603 | |
Basic earnings per common share | | | 0.53 | | | | 0.31 | | | | 0.35 | | | | 0.50 | |
Diluted earnings per common share | | | 0.52 | | | | 0.30 | | | | 0.34 | | | | 0.49 | |
F-27
|
| | | | | | | | | | | | | | | | |
| | | Quarter |
| | | First | | Second | | Third | | Fourth |
| 2015 | | |
| | |
| | |
| | |
|
| Revenues | | $ | 29,608 |
| | $ | 37,311 |
| | $ | 32,451 |
| | $ | 31,566 |
|
| Income before income taxes | | 8,378 |
| | 14,752 |
| | 10,502 |
| | 8,588 |
|
| Net income | | 5,610 |
| | 9,795 |
| | 7,013 |
| | 4,687 |
|
| Basic earnings per common share | | 0.74 |
| | 1.25 |
| | 0.90 |
| | 0.60 |
|
| Diluted earnings per common share | | 0.71 |
| | 1.23 |
| | 0.87 |
| | 0.58 |
|
| 2014 | | |
| | |
| | |
| | |
|
| Revenues | | $ | 25,949 |
| | $ | 30,905 |
| | $ | 28,122 |
| | $ | 28,265 |
|
| Income before income taxes | | 8,613 |
| | 13,356 |
| | 10,592 |
| | 9,475 |
|
| Net income | | 5,562 |
| | 8,591 |
| | 7,118 |
| | 5,978 |
|
| Basic earnings per common share | | 0.74 |
| | 1.14 |
| | 0.95 |
| | 0.79 |
|
| Diluted earnings per common share | | 0.72 |
| | 1.12 |
| | 0.92 |
| | 0.77 |
|
Exhibit
Number
|
| | |
Exhibit Number | | Description of Exhibits |
2.1 | | Securities Purchase Agreement by and among Westwood Holdings Group, Inc., McCarthy Group Advisors, LLC, MGA Holdings, LLC, and The Members of MGA Holdings, LLC (14)(incorporated by reference from the Form 10-K filed with the SEC on February 28, 2013) |
3.1
2.2 | | Reorganization Agreement and Agreement and Plan of Merger dated as of January 15, 2015 by and among Westwood Holdings Group, Inc., Westwood Trust, Woodway Financial Advisors, A Trust Company and the Shareholders of Woodway Financial Advisors, A Trust Company (incorporated by reference from the Form 8-K filed with the SEC on January 16, 2016) |
3.1 | | Amended and Restated Certificate of Incorporation of Westwood Holdings Group, Inc. (3)(incorporated by reference from Amendment No. 2 to Registration Statement on Form 10/A filed with the SEC on April 30, 2002) |
3.1.1 | | Amendment to Amended and Restated Certificate of Incorporation of Westwood Holdings Group, Inc. (10)(incorporated by reference from the Form 8-K filed with the SEC on May 7, 2008) |
3.2 | | Amended and Restated Bylaws of Westwood Holdings Group, Inc. (6)(incorporated by reference from the Form 8-K filed with the SEC on April 25, 2012) |
4.1 | | Form of Common Stock Certificate of Westwood Holdings Group, Inc. (3)(incorporated by reference from Amendment No. 2 to Registration Statement on Form 10/A filed with the SEC on April 30, 2002) |
10.1
10.1+ | | Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (including related forms of Stock Option Agreement and Restricted Stock Agreement) (7)+(incorporated by reference from the Form S-8 filed with the SEC on July 1, 2009) |
10.1.1
10.1.1+ | | Amendment to Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (including related form of Restricted Stock Agreement) (11)+(incorporated by reference from the Form 10-Q filed with the SEC on October 21, 2010) |
10.1.2
10.1.2+ | | Second Amendment to Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (15)+(incorporated by reference from the Registration Statement on Form S-8 filed with the SEC on April 18, 2012) |
10.2
10.1.3+ | | Third Amendment to Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (incorporated by reference from the Registration Statement on Form S-8 with the SEC on April 29, 2015) |
10.2 | | Tax Separation Agreement between SWS Group, Inc. and Westwood Holdings Group, Inc. (2)(incorporated by reference from Amendment No. 5 to Registration Statement on Form 10/A filed with the SEC on June 6, 2002) |
10.3 | | Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, L.P., dated as of April 4, 1990, and amendment thereto (4)(incorporated by reference from the Registration Statement on Form 10 filed with the SEC on February 8, 2002) |
10.3.1 | | Ninth Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of November 25, 2003 (5)(incorporated by reference from the Form 10-K filed with the SEC on February 27, 2004) |
10.3.2 | | Tenth Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of February 23, 2004 (5)(incorporated by reference from the Form 10-K filed with the SEC on February 27, 2004) |
10.3.3 | | Eleventh Modification of Office Lease between Westwood Management Corp. and Crescent Real Estate Funding I, dated as of December 9, 2010 (12)(incorporated by reference from the Form 10-K filed with the SEC on February 25, 2011) |
10.3.4 | | Twelfth Modification of Office Lease between Westwood Management Corp. and Crescent TC Investors LP, dated as of August 17, 2012 (14) (incorporated by reference from the Form 10-K filed with the SEC on February 28, 2013) |
10.4
10.3.5* | | Thirteenth Modification of Office Lease between Westwood Management Corp. and Crescent TC Investors LP, dated as of October 9, 2014 |
|
| | |
Exhibit Number | | Description of Exhibits |
| 10.3.6* | | Fourteenth Modification of Office Lease between Westwood Management Corp. and Crescent TC Investors LP, dated as of February 5, 2015 |
| 10.3.7* | | Fifteenth Modification of Office Lease between Westwood Management Corp. and Crescent TC Investors LP, dated as of July 30, 2015 |
10.4 | | Software License Agreement between Infovisa and Westwood Trust, dated as of December 1, 2001 (4)(incorporated by reference from the Registration Statement on Form 10 filed with the SEC on February 8, 2002) |
10.5 | | Software License and Support Agreement between Advent Software, Inc. and Westwood Management Corp., dated as of December 30, 1996 (4)(incorporated by reference from the Registration Statement on Form 10 filed with the SEC on February 8, 2002) |
10.6 | | Investment Sub-advisory Agreement between Teton Advisers, LLC and Westwood Management Corp., dated as of October 6, 1994 (14)(incorporated by reference from the Form 10-K filed with the SEC on February 28, 2013) |
10.7
10.7+ | | Form of Indemnification Agreement for Westwood Holdings Group, Inc. (5)+ (incorporated by reference from the Form 10-K filed with the SEC on February 27, 2004) |
10.8
10.8+ | | Form of Indemnification Agreement for Westwood Management Corp. (5)+ (incorporated by reference from the Form 10-K filed with the SEC on February 27, 2004) |
10.9
10.9+ | | Form of Indemnification Agreement for Westwood Trust (5)+(incorporated by reference from the Form 10-K filed with the SEC on February 27, 2004) |
10.10
10.10+ | |
Executive Employment Agreement between Westwood Holdings Group, Inc. and Susan M. Byrne (8)+
Mark Freeman (incorporated by reference from the Form 8-K filed with the SEC on March 12, 2014) |
10.11
10.11+ | | Executive Employment Agreement between Westwood Holdings Group, Inc. and Brian O. Casey (9)+(incorporated by reference from the Form 8-K filed with the SEC on April 23, 2010) |
10.12
10.11.1+ | | First Amendment to Executive Employment Agreement dated as of April 2, 2015 between the Company and Brain O. Casey (incorporated by reference from the Form 8-K filed with the SEC on April 2, 2015) |
10.12+ | | Executive Employment Agreement between Westwood Holdings Group, Inc. and Mark Freeman (13)+Brian O. Casey (incorporated by reference from the Form 8-K filed with the SEC on December 18, 2015) |
10.13
10.13+ | | Restricted Stock Agreement between Westwood Holdings Group, Inc. and Brian O. Casey (9)+(incorporated by reference from the Form 8-K filed with the SEC on April 23, 2010) |
10.14
10.14+ | |
Restricted Stock Agreement between Westwood Holdings Group, Inc. and Brian O. Casey (incorporated by reference from the Form 8-K filed with the SEC on April 2, 2015)
|
10.15+ | | Mutual Fund Share Incentive Agreement, by and between Mark Freeman and Westwood Holdings Group, Inc. dated as of February 7, 2012 (13)+March 19, 2013 (incorporated by reference from the Form 8-K filed with the SEC on March 12, 2014) |
10.15
10.16+ | | Mutual Fund Share Incentive Agreement Amendment, by and between Mark Freeman and Westwood Holdings Group, Inc. dated as of January 14, 2013 (14)+March 7, 2014 (incorporated by reference from the Form 8-K filed with the SEC on March 12, 2014) |
10.16
10.17+ | | Form of Mutual Fund Share Incentive Agreement, by and between Mark Freeman and Westwood Holdings Group, Inc. (incorporated by reference from the Form 10-K filed with the SEC on February 26, 2015) |
| 10.18+ | | Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (16)+(incorporated by reference from the Registration Statement on Form S-8 filed with the SEC on April 18, 2012) |
| 10.19+ | | Consulting Agreement, dated as of March 17, 2015, between Westwood Holdings Group, Inc. and Susan Byrne (incorporated by reference from the Form 10-Q filed with the SEC on July 29, 2015) |
| 16.1 | | Letter from Grant Thornton LLP, dated October 8, 2015 (incorporated by reference from the Form 8-K filed with the SEC on October 8, 2015) |
Exhibit
Number
|
| | |
Exhibit Number | | Description of Exhibits |
21.1
| |
Subsidiaries (14)
(incorporated by reference from the Form 10-K filed with the SEC on February 28, 2013) |
23.1
23.1* | |
Consent of Deloitte & Touche LLP
|
23.2* | |
Consent of Grant Thornton (1)LLP |
24.1
24.1* | |
Power of Attorney (included on first signature page) (1)
|
31.1
31.1* | |
Certification of the Chief Executive Officer of Westwood required by Section 302 of the Sarbanes-Oxley Act of 2002 (1)
|
31.2
31.2* | |
Certification of the Chief Financial Officer of Westwood required by Section 302 of the Sarbanes-Oxley Act of 2002 (1)
|
32.1
32.1# | |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)#
|
32.2
32.2# | |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)#
|
101.INS
101.INS* | |
XBRL Instance Document (1)
|
101.SCH
101.SCH* | | XBRL Taxonomy Extension Schema Document (1) |
101.CAL
101.CAL* | |
XBRL Taxonomy Extension Calculation Linkbase Document (1)
|
101.DEF
101.DEF* | |
XBRL Taxonomy Extension Definition Linkbase Document (1)
|
101.LAB
101.LAB* | |
XBRL Taxonomy Extension Label Linkbase Document (1)
|
101.PRE
101.PRE* | |
XBRL Taxonomy Extension Presentation Linkbase Document (1)
|
* Filed herewith.
(2)
| Incorporated by reference from Amendment No. 5 to Registration Statement on Form 10/A filed with the SEC on June 6, 2002.
|
(3)
+ | Incorporated by reference from Amendment No. 2 to Registration Statement on Form 10/A filed with the SEC on April 30, 2002.
|
(4)
| Incorporated by reference from the Registration Statement on Form 10 filed with the SEC on February 8, 2002.
|
(5)
| Incorporated by reference from the Form 10-K filed with the SEC on February 27, 2004.
|
(6)
| Incorporated by reference from the Form 8-K filed with the SEC on April 25, 2012.
|
(7)
| Incorporated by reference from the Form S-8 filed with the SEC on July 1, 2009.
|
(8)
| Incorporated by reference from the Form 8-K filed with the SEC on July 28, 2006.
|
(9)
| Incorporated by reference from the Form 8-K filed with the SEC on April 23, 2010.
|
(10)
| Incorporated by reference from the Form 8-K filed with the SEC on May 7, 2008.
|
(11)
| Incorporated by reference from the Form 10-Q filed with the SEC on October 21, 2010.
|
(12)
| Incorporated by reference from the Form 10-K filed with the SEC on February 25, 2011.
|
(13)
| Incorporated by reference from the Form 8-K filed with the SEC on February 10, 2012.
|
(14)
| Incorporated by reference from the Form 10-K filed with the SEC on February 28, 2013.
|
(15)
| Incorporated by reference from the Registration Statement on Form S-8 filed with the SEC on April 18, 2012.
|
(16)
| Incorporated by reference from the Registration Statement on Form S-8 filed with the SEC on April 18, 2012.
|
+
| Indicates management contract or compensation plan, contract or arrangement. |
#
| |
| # | Pursuant to Item 601(b)(32) of SEC Regulation S-K, these exhibits are furnished rather than filed with this Report. |