7. STOCKHOLDERS' EQUITYLONG-TERM INCENTIVE COMPENSATION
|
| | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
Foreign currency translation adjustment | | $ | (1,849 | ) | | $ | (4,287 | ) |
Accumulated other comprehensive loss | | $ | (1,849 | ) | | $ | (4,287 | ) |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
8. VARIABLE INTEREST ENTITIES
We have evaluated all of our advisory relationships with the UCITS Fund, the Westwood Funds®, limited liability companies (“LLCs”) and our relationship as sponsor of the Common Trust Funds (“CTFs”) to determine whether each of these entities is a variable interest entity (“VIE”) or voting ownership entity (“VOE”). Based on our analysis, we determined that the LLCs and CTFs were VIEs, as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entity’s economic performance, and the Company and its representatives have a majority control of the entities' respective boards of directors and can influence the respective entities' management and affairs. Although we have related parties on the UCITS Fund board of directors, the shareholders have rights to remove the current directors with a simple majority vote, so we determined the UCITS Fund is not a VIE. As the Company and its representatives do not have representation on the Westwood Funds® independent board of directors, which directs the activities that most significantly impact the entity's economic performance, we determined that the Westwood Funds® were not VIEs. Therefore, the UCITS Fund and the Westwood Funds® should be analyzed under the VOE consolidation method. Based on our analysis of our seed investments in these entities for the periods ending September 30, 2017 and December 31, 2016, we have not consolidated the LLCs or CTFs under the VIE method or the UCITS Fund or the Westwood Funds® under the VOE method, and therefore the financial results of these entities are not included in the Company’s consolidated financial results.
As of September 30, 2017 and December 31, 2016, the Company had seed investments in aggregate of approximately $10.6 million and $11.0 million, respectively, in the CTFs, the Westwood Funds, and the UCITS Fund. These seed investments were provided for the sole purpose of showing the economic substance needed to establish the funds or sub-funds. The Company's seed investments in these funds are included in “Investments, at fair value” on our Condensed Consolidated Balance Sheet at September 30, 2017.
Otherwise, we have not provided any financial support 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 entities. Our seed investments in the above-mentioned Westwood Funds®, the UCITS Fund and the CTFs are accounted for as investments in accordance with our other investments described in Note 4 “Investments.” We recognized fee revenue from the Westwood VIEs and Westwood VOEs of approximately $13.2 million and $13.5 million for the three months ended September 30, 2017 and 2016, respectively. We recognized fee revenue from the Westwood VIEs and Westwood VOEs of approximately $39.1 million and $39.5 million for the nine months ended September 30, 2017 and 2016, respectively.
The following table displays the assets under management, the amounts of our seed investments that are included in “Investments, at fair value” on our consolidated balance sheets, and the risk of loss in each vehicle (in millions):
|
| | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Assets Under Management | | Corporate Investment | | Amount at Risk |
VIEs/VOEs: | | | | | | |
Westwood Funds® | | $ | 4,144 |
| | $ | 6 |
| | $ | 6 |
|
Common Trust Funds | | 2,602 |
| | 2 |
| | 2 |
|
LLCs | | 113 |
| | — |
| | — |
|
UCITS Fund | | 595 |
| | 2 |
| | 2 |
|
All other assets: | | | | | | |
Private Wealth | | 3,107 |
| | | | |
Institutional | | 13,063 |
| | | | |
Total Assets Under Management | | $ | 23,624 |
| | | | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
9. LONG-TERM INCENTIVE COMPENSATION
Restricted Stock Awards
We have issued restricted shares to our employees and non-employee directors. The FourthSeventh Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan as amended (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.stock and stock options. In April 2017,2020, stockholders approved an additional 250,000350,000 shares to be authorized under the Plan, increasing the total number of shares issuable under the Plan (including predecessor plans to the Plan) to 4,648,1005,398,100 shares. In the event of a change in control of Westwood, the Plan contains provisions providing for the acceleration of the vesting of restricted stock. At September 30, 2017,2020, approximately 433,000642,000 shares remain available for issuance under the Plan.
The following table presents the total stock-based compensation expense recorded for stock-based compensation arrangements for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Service condition stock-based compensation expense | $ | 1,511 | | | $ | 1,578 | | | $ | 5,343 | | | $ | 5,526 | |
Performance condition stock-based compensation expense | 287 | | | 491 | | | 993 | | | 1,909 | |
Stock-based compensation expense under the Plan | 1,798 | | | 2,069 | | | 6,336 | | | 7,435 | |
Canadian Plan stock-based compensation expense | (1,310) | | | 180 | | | (927) | | | 497 | |
Total stock-based compensation expense | $ | 488 | | | $ | 2,249 | | | $ | 5,409 | | | $ | 7,932 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Service condition stock-based compensation expense | | $ | 2,591 |
| | $ | 2,679 |
| | $ | 7,828 |
| | $ | 7,978 |
|
Performance condition stock-based compensation expense | | 1,454 |
| | 1,234 | | 3,949 |
| | 3,705 |
Stock-based compensation expense under the Plan | | 4,045 |
| | 3,913 | | 11,777 |
| | 11,683 |
Canadian Plan stock-based compensation expense | | 188 |
| | 169 |
| | 521 |
| | 481 |
Total stock-based compensation expense | | $ | 4,233 |
| | $ | 4,082 |
| | $ | 12,298 |
| | $ | 12,164 |
|
Restricted Stock
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.
As of September 30, 2017,2020, there was approximately $26.3$13.2 million of unrecognized compensation cost for restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 2.22.5 years. Our two types of restricted stock grants under the Plan are discussed below.
Restricted Stock Subject Only to a Service Condition
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 and an adjustment for restrictions on dividends. This compensation cost is amortized on a straight-line basis over the applicable vesting period. As discussed in Note 2 “Summary of Significant Accounting Policies,” the Company made an accounting policy election to accountperiod, with adjustments for forfeitures recorded as they occur effective upon the adoption of ASU 2016-09 on January 1, 2017.occur.
The following table details the status and changes in our restricted stock grants subject only to a service condition for the nine months ended September 30, 2017:2020:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested, January 1, 2020 | | 396,598 | | | $ | 48.31 | |
Granted | | 262,373 | | | $ | 27.39 | |
Vested | | (140,974) | | | $ | 53.06 | |
Forfeited | | (26,372) | | | $ | 39.72 | |
Non-vested, September 30, 2020 | | 491,625 | | | $ | 36.25 | |
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested, January 1, 2017 | | 607,501 |
| | $ | 54.67 |
|
Granted | | 143,460 |
| | 61.20 |
|
Vested | | (182,085 | ) | | 57.43 |
|
Forfeited | | (36,579 | ) | | 55.11 |
|
Non-vested, September 30, 2017 | | 532,297 |
| | $ | 55.46 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Restricted Stock Subject to Service and Performance Conditions
Under the Plan, certain key employees were provided agreements for grants of restricted shares that vest over multiple year periods subject to achieving annual performance goals established by the Compensation Committee of Westwood’s Board of Directors. Each year the Compensation Committee establishes a specific goalgoals for that year’s vesting of the restricted shares. For 2017, the goal is based on Income before income tax from our audited consolidated statement of comprehensive income for fiscal 2017. The date that the Compensation Committee establishes the annual goalgoals is considered to be the grant date and the fair value measurement date to determine expense on the shares that are likely to vest. The vesting period ends when the Compensation Committee formally approves the performance-based restricted stock vesting based on the Income before income taxspecific performance goals from the Company’s audited consolidated 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 March 2017, the Compensation Committee established the fiscal 2017 goal for our Chief Executive Officer and Chief Investment Officer as Income before income taxes of $24.0 million for 50% of their respective awards, and an Income before income taxes target of $34.0 million (ranging from 25% of target for threshold performance of $30.3 million to 185% of target for maximum performance of $42.5 million) for the remaining 50% of their respective awards. For all other restricted stock grants subject to performance conditions, the Compensation Committee established the fiscal 2017 goal as Income before income taxes of at least $24.0 million. These performance grants allow the Compensation Committee to exclude certain items, including legal settlements, from the Income before income taxes target. At the Committee's discretion, we excluded the $4.0 million legal settlement expense recorded during the third quarter of 2017 from our forecasted Income before income taxes target and concluded that it was probable that we would exceed the target performance goals required to vest the applicable percentage of the performance-based restricted shares this year and continued recording expense related to the shares expected to vest.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The following table details the status and changes in our restricted stock grants subject to service and performance conditions for the nine months ended September 30, 2017:2020:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested, January 1, 2020 | | 80,975 | | | $ | 49.73 | |
| | | | |
Vested | | (35,275) | | | $ | 55.11 | |
Non-vested, September 30, 2020 | | 45,700 | | | $ | 45.58 | |
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested, January 1, 2017 | | 153,620 |
| | $ | 55.90 |
|
Granted | | 157,877 |
| | 54.86 |
|
Vested | | (102,367 | ) | | 56.58 |
|
Forfeited | | (45,675 | ) | | 55.86 |
|
Non-vested, September 30, 2017 | | 163,455 |
| | $ | 55.87 |
|
The above amounts as of September 30, 2017 do not include 16,313 non-vested restricted shares that potentially vest over performance years subsequent to 2017 inasmuch as the Compensation Committee has not set annual performance goals for later years and therefore no grant date has been established.
Canadian Plan
The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”) providesprovided compensation in the form of common stock for services performed by employees of Westwood International. UnderInternational Advisors. On July 27, 2020, Westwood’s Board of Directors approved the Canadian Plan, no more than $10 million CDN ($8.0 million in U.S. Dollars using the exchange rate onclosure of Westwood International Advisors, effective September 30, 2017) may be funded to the plan trustee for purchases of common stock with respect to awards granted under the Canadian Plan. At September 30, 2017, approximately $4.3 million CDN ($3.4 million in U.S. Dollars using the exchange rate on September 30, 2017) remains available for issuance under the Canadian Plan, or approximately 51,200 shares based on the closing share price of our stock of $67.27 as of September 30, 2017. 2020.
During the first nine monthsquarter of 2017,2020, the trust formed pursuant to the Canadian Plan purchased 27,474 Westwood common shares in the open market 23,822 Westwood common shares for approximately $0.7 million. The subsequent closure of the Westwood International Advisors office resulted in forfeitures of 56,625 shares, which reduced the Company's expenses by $1.3 million.million in the three and nine months ended September 30, 2020. As of September 30, 2017, the trust holds 55,418 shares of Westwood common stock. As of September 30, 2017,2020, there is no unrecognized compensation cost related to restricted stock grants under the Canadian Plan totaled $864,000, which we expect to recognize over a weighted-average period of 1.8 years.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Plan.
Mutual Fund Share Incentive Awards
We may grant annually to certain employees mutual fund incentive awards, which are bonus awards based on our mutual funds achieving specific performance goals.goals, annually to certain employees. Awards granted are notionally credited to a participant account maintained by us that contains a number of mutual fund shares equal to the award amount divided by the net closingasset value of a fund share on the date the amount is credited to the account.
For awards earned prior to 2017, We maintain the award vested after approximately one yearin a corporate investment account until vesting. The investment may increase or decrease based on changes in the value of service following the year in whichmutual fund shares awarded, including reinvested income from the participant earnedmutual funds during the award. Beginning in 2017, the award vests aftervesting period. Unvested mutual fund awards are included under “Investments, at fair value” on our Condensed Consolidated Balance Sheets.
Awards vest over approximately two years of service following the year in which the participant earned the award. We begin accruing a liability for mutual fund incentive awards when we believe it is probable that the award will be earned and record expense for these awards over the service period of the award, which is either two or three years. During the year in which the amount of the 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 elapsed. 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.funds. For the three months ended September 30, 20172020 and 2016,2019, we recorded expense of approximately $281,000$9,000 and $313,000,$12,000, respectively, related to mutual fund share incentive awards. For the nine months ended September 30, 2017 and 2016,2020 we recorded expense of $27,000, and for the nine months ended September 30, 2019, a net $100,000 credit to mutual fund expense, primarily related to the forfeiture of a mutual fund award during the first quarter of 2019. As of September 30, 2020 and December 31, 2019, we had an accrued liability of approximately $819,000$50,000 and $933,000,$79,000, respectively, related to mutual fund share incentive awards. As
8. INCOME TAXES
Our effective income tax rate differed from the 21% statutory rate for the third quarter of September 30, 20172020 primarily due to the 5% incremental Canadian withholding tax (net of U.S. tax federal deduction) on repatriated funds due to the closure of our Westwood International Advisors office and December 31, 2016, we had an accrued liabilitythe impact of approximately $1.5 million and $1.7 million, respectively,certain deferred tax assets that offset the discrete benefit adjustment related to mutual fund share incentive awards.
10. INCOME TAXES
the remeasurement of certain deferred taxes following the enactment of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") recorded in the first quarter of 2020. Our effective income tax rate was 28.2% for the third quarter of 2017, compared with 35.0% for the third quarter of 2016. The decrease is primarily related to the tax impact of our legal settlement with AGF (see further discussion in Note 12 “Commitments and Contingencies”) in the third quarter of 2017 and adjustments to uncertain tax positions (net of federal tax benefit) recorded in the third quarter of 2016. Our effective income tax rate was 29.1%(16.0)% for the first nine months of 2017,2020, compared with 35.1%41.0% for the first nine months of 2016.2019. The decrease is primarily2019 year-to-date rate was negatively impacted by a $0.6 million discrete tax expense related to the adoption of ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires recognition of excessa permanent difference between book and tax benefits related to employees' restricted stock expense based on a decrease in our stock price between the grant and vesting to be recorded within income tax expense. Prior to adoption of ASU 2016-09, excess tax benefits were recorded through Additional paid-in capital, with no impact to the effective tax rate or our consolidated statement of comprehensive income. See further discussion in Note 2 “Summary of Significant Accounting Policies.” The remaining decrease is related to the tax impact of our legal settlement with AGF (see further discussion in Note 12 “Commitments and Contingencies”) in the third quarter of 2017 and adjustments to uncertain tax positions (net of federal tax benefit) recorded in the first and third quarters of 2016.dates.
As of September 30, 2017 and December 31, 2016, the Company's gross liability related to uncertain tax positions was $196,000 and $2.5 million, respectively. 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 any 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. A reconciliation of the change in recorded uncertain tax positions during the nine months ended September 30, 2017 is as follows (in thousands):Tax Audit
|
| | | | |
Balance at January 1, 2017 | | $ | 2,462 |
|
Additions for tax positions related to the current year | | 68 |
|
Additions for tax positions related to prior years | | — |
|
Reductions for tax positions related to prior years | | (768 | ) |
Payments for tax positions related to prior years | | (1,566 | ) |
Balance at September 30, 2017 | | $ | 196 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Westwood Holdings Group has an audit underway in reaction to a refund claim submitted to the state of Texas for the reporting years 2014 to 2019. We do not expect the results of the audit to have a material impact on our Condensed Consolidated Financial Statements.
Within
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the next twelveweighted average number of shares outstanding for the applicable period. Diluted earnings (loss) per share is computed based on the weighted average number of shares outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee directors. There were approximately 623,000 and 81,000 anti-dilutive restricted shares outstanding for the three months itended September 30, 2020 and September 30, 2019, respectively. There were approximately 360,000 and 87,000 anti-dilutive restricted shares outstanding for the nine months ended September 30, 2020 and September 30, 2019, respectively.
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share and share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | $ | (10,289) | | | $ | 1,117 | | | $ | (11,762) | | | $ | 3,370 | |
| | | | | | | |
Weighted average shares outstanding - basic | 7,829,478 | | | 8,432,598 | | | 8,040,417 | | | 8,414,317 | |
Dilutive potential shares from unvested restricted shares | 0 | | | 38,075 | | | 0 | | | 53,506 | |
| | | | | | | |
Weighted average shares outstanding - diluted | 7,829,478 | | | 8,470,673 | | | 8,040,417 | | | 8,467,823 | |
| | | | | | | |
Earnings (loss) per share: | | | | | | | |
Basic | $ | (1.31) | | | $ | 0.13 | | | $ | (1.46) | | | $ | 0.40 | |
Diluted | $ | (1.31) | | | $ | 0.13 | | | $ | (1.46) | | | $ | 0.40 | |
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
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 reasonably possiblenot amortized but is tested for impairment at least annually. We completed our most recent annual goodwill impairment assessment during the third quarter of 2020.
Following a sustained decline in the Company's market capitalization, we determined that goodwill related to our Advisory segment was impaired, and we recorded impairment charges of $3.4 million during the three and nine months ended September 30, 2020 to "Impairment expense" on the Condensed Consolidated Statements of Comprehensive Income (Loss).
We determined the fair value of each of our reporting units using a weighted average approach of the market and income approaches. As part of this current assessment, we determined that an increase in the discount rate (from the prior assessment) applied in the valuation was required to align with market-based assumptions. The higher discount rate, in conjunction with revised long-term projections resulted in a lower fair value of the Advisory segment.
There was no goodwill impairment in the Trust segment, nor were there goodwill impairments recorded during the three and nine months ended September 30, 2019.
Other Intangible Assets
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. We periodically review intangible assets
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
for events or circumstances that would indicate impairment. NaN intangible asset impairments were recorded during the three and nine months ended September 30, 2020 or 2019.
11. LEASES
As of September 30, 2020, aside from the Toronto office lease impairment discussed in Note 1 "Description of the Business," there have been no material changes outside the ordinary course of business to our leases since December 31, 2019. For information regarding our leases, refer to Note 15 “Leases” in Part IV, Item 15. “Exhibits, Financial Statement Schedules” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
12. STOCKHOLDERS' EQUITY
Share Repurchase Program
In February 2020, our Board of Directors authorized management to repurchase up to an additional $10.0 million of our outstanding common stock on the open market or in privately negotiated transactions. In April 2020, our Board of Directors authorized management to repurchase up to an additional $10.0 million of share repurchases under our share repurchase program, which is still outstanding as of September 30, 2020.
The Company did not repurchase any shares of our common stock during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company repurchased 679,756 shares of our common stock at an average price of $19.05 per share, including commissions, for an aggregate purchase price of $13.0 million under our share repurchase plan.
Currency Translation and Re-measurement
Assets and liabilities of Westwood International Advisors, our only non-U.S. dollar functional currency subsidiary, are translated at exchange rates as of applicable reporting dates. The gains and losses resulting from translating non-U.S. dollar functional currency into U.S. dollars are recorded through other comprehensive income.
Following the closure and substantially complete liquidation of Westwood International Advisors, we reclassified foreign currency translation adjustments of $4.2 million from accumulated other comprehensive income (loss) to net income (loss) in the three and nine months ended September 30, 2020.
13. VARIABLE INTEREST ENTITIES
We evaluated (i) our relationship as sponsor of the Common Trust Funds (“CTFs”) and managing member of the private equity funds Westwood Hospitality Fund I, LLC and Westwood Technology Opportunities Fund I, LP (collectively, the “Private Funds”), (ii) our advisory relationships with the Westwood Funds® and (iii) our investments in InvestCloud and Charis discussed in Note 5 “Investments” (“Private Equity”) to determine whether each of these entities is a variable interest entity (“VIE”) or voting ownership entity (“VOE”).
Based on our analyses, we determined that the liabilityCTFs and Private Funds were VIEs, as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entities' economic performance, and the Company and its representatives have a majority control of the entities' respective boards of directors and can influence the respective entities' management and affairs.
Based on our analyses, we determined the Westwood Funds®, and Private Equity (i) have sufficient equity at risk to finance the entities' activities independently, (ii) have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entities that most significantly impact the entities' economic performance and (iii) are not structured with disproportionate voting rights.
Based on our analyses of our investments in these entities for uncertain tax positions could decrease bythe periods ended September 30, 2020 and December 31, 2019, we have not consolidated the CTFs or Private Funds under the VIE method or the Westwood Funds® or Private Equity under the VOE method.
We had no seed investments in the Westwood Funds as muchof September 30, 2020, and we had $6.4 million as $196,000of December 31, 2019. The seed investments were provided for the sole purpose of showing the economic substance needed to establish the funds and are included in “Investments, at fair value” on our Condensed Consolidated Balance Sheets.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
We have not otherwise 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 entities. Our seed investments in the above-mentioned Westwood Funds® are accounted for as a resultinvestments consistent with our other investments described in Note 5 “Investments.” We recognized fee revenue from the Westwood VIEs and Westwood VOEs as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Fee Revenues | $ | 4.2 | | | $ | 7.2 | | | $ | 14.4 | | | $ | 24.3 | |
The following table displays the AUM and the risk of settlements with certain taxing authorities, which, if recognized, would decrease our provision for income taxes by $130,000.loss in each vehicle (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 |
| | Assets Under Management | | Corporate Investment | | Amount at Risk |
VIEs/VOEs: | | | | | | |
Westwood Funds® | | $ | 1,824 | | | $ | 0 | | | $ | 0 | |
Common Trust Funds | | 1,107 | | | 0 | | | 0 | |
| | | | | | |
Private Funds | | 9 | | | 0.1 | | | 0.1 | |
Private Equity | | 0 | | | 11.4 | | | 11.4 | |
All other assets: | | | | | | |
Wealth Management | | 2,977 | | | | | |
Institutional | | 6,045 | | | | | |
Total Assets Under Management | | $ | 11,962 | | | | | |
11.
14. RELATED PARTY TRANSACTIONS
Some of our directors, executive officers and their affiliates invest their personal funds directly in trust accounts that we manage. For both the three months ended September 30, 20172020 and 2016,2019, we recorded trust fees from these accounts of $92,000 and $108,000, respectively.$0.1 million. For both the nine months ended September 30, 20172020 and 2016,2019, we recorded trust fees from these accounts of $277,000 and $305,000, respectively.$0.3 million. There was $92,000 and $97,000$0.1 million due from these accounts as of both September 30, 20172020 and December 31, 2016, respectively.2019.
The Company engages in transactions with its affiliates in the ordinary course of business. Westwood International Advisors (prior to its closure, effective September 30, 2020) and Westwood Management provide investment advisory services to the UCITS Fund and the Westwood Funds®. Certain members of our management serveserved on the board of directors of the UCITS Fund and we have capital invested in three(liquidated as of the Westwood Funds®June 2020). Under the terms of the investment advisory agreements, the Company earns quarterly fees paid by clients of the fund or by the funds directly. The fees are based on negotiated fee schedules applied to assets under management. TheseAUM. The Company earned no fees are commensurate with market rates. Forfrom the affiliated funds for the three months ended September 30, 20172020, and 2016,earned $0.7 million for the Company earned approximately $1.1 million and $370,000, respectively, in fees from the affiliated funds.three months ended September 30, 2019. For the nine months ended September 30, 20172020 and 2016,2019, the Company earned approximately $2.8$0.6 million and $1.0$2.3 million, respectively, in fees from the affiliated funds. These fees do not include fees paid directly to Westwood International by certain clients invested in the UCITS Fund that have an investment management agreement with Westwood International. As of September 30, 2017 and2020, all of these fees had been collected. As of December 31, 2016, $398,000 and $270,000, respectively,2019, $0.2 million, of these fees were unpaidoutstanding and included in “Accounts receivable” on our Condensed Consolidated Balance Sheets.
12. COMMITMENTS AND CONTINGENCIES
On August 3, 2012, AGF Management Limited and AGF Investments Inc. (collectively, “AGF”) filed a lawsuit in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and the executive recruiting firm of Warren International, LLC (“Warren”). The action related to the hiring of certain members of Westwood’s global and emerging markets investment team previously employed by AGF. AGF alleged that the former employees breached certain obligations when they resigned from AGF and that Westwood and Warren induced such breaches. AGF was seeking an unspecified amount of damages and punitive damages of $10 million CDN in the lawsuit. On November 5, 2012, Westwood responded to AGF’s lawsuit with a counterclaim against AGF for defamation. Westwood was seeking $1 million CDN in general damages, $10 million CDN in special damages, $1 million CDN 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 was seeking $5 million CDN in general damages, $1 million CDN per defendant in punitive damages, unspecified special damages, interest and costs.
On October 13, 2017, we reached a settlement with AGF that provides for the dismissal of all claims, with prejudice and without any admission of liability. We have agreed to pay AGF a one-time payment of $10 million CDN, half of which is expected to be covered by our insurance. During the third quarter of 2017, we recorded a net $4.0 million ($5 million CDN) charge related to the settlement and associated insurance coverage, with an $8.0 million ($10 million CDN) settlement liability recorded in “Accrued lawsuit settlement” and a $4.0 million ($5 million CDN) receivable from our insurance provider included in “Other current assets” on our Condensed Consolidated Balance Sheets at September 30, 2017.
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 against AGF, are covered by insurance. We expense legal fees and directly related costs as incurred. We received insurance proceeds of approximately $276,000 and $928,000 during the nine months ended September 30, 2017 and 2016, respectively. We had a receivable of approximately $113,000 and $186,000 as of September 30, 2017 and December 31, 2016, respectively, which represents our current minimum estimate of expenses that we expect to recover under our insurance policy. This receivable is part of “Other current assets” on our Condensed Consolidated Balance Sheets.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
13. SEGMENT REPORTING
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. The Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision-making purposes. The Company’s chief operating decision maker, our Chief Executive Officer, evaluates the performance of our segments based primarily on fee revenues and Economic Earnings. Westwood Holdings Group, Inc., the parent company of Advisory and Trust, does not have revenues and is the entity in which we record typical holding company expenses including employee compensation 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.
Advisory
Our Advisory segment provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals, the Westwood Funds®, and the UCITS Fund, as well as investment subadvisory services to mutual funds and our Trust segment. Westwood Management Corp. and Westwood International, which provide investment advisory services to clients of similar type, are included in our Advisory segment along with Westwood Advisors, L.L.C.
Trust
Trust provides trust and custodial services and participation in 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
Three Months Ended September 30, 2017 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 25,334 |
| | $ | 7,858 |
| | $ | — |
| | $ | — |
| | $ | 33,192 |
|
Net intersegment revenues | | 2,026 |
| | 57 |
| | — |
| | (2,083 | ) | | — |
|
Net interest and dividend revenue | | 111 |
| | 43 |
| | — |
| | — |
| | 154 |
|
Other, net | | 157 |
| | (11 | ) | | — |
| | — |
| | 146 |
|
Total revenues | | $ | 27,628 |
| | $ | 7,947 |
| | $ | — |
| | $ | (2,083 | ) | | $ | 33,492 |
|
Economic Earnings | | $ | 8,786 |
| | $ | 1,560 |
| | $ | (1,356 | ) | | $ | — |
| | $ | 8,990 |
|
Less: Restricted stock expense | | | | | | | | | | 4,233 |
|
Intangible amortization | | | | | | | | | | 469 |
|
Deferred taxes on goodwill | | | | | | | | | | 156 |
|
Net income | | | | | | | | | | $ | 4,132 |
|
| | | | | | | | | | |
Segment assets | | $ | 208,444 |
| | $ | 73,170 |
| | $ | 18,388 |
| | $ | (108,640 | ) | | $ | 191,362 |
|
Segment goodwill | | $ | 5,219 |
| | $ | 21,925 |
| | $ | — |
| | $ | — |
| | $ | 27,144 |
|
| | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 23,673 |
| | $ | 7,690 |
| | $ | — |
| | $ | — |
| | $ | 31,363 |
|
Net intersegment revenues | | 5,275 |
| | 41 |
| | — |
| | (5,316 | ) | | — |
|
Net interest and dividend revenue | | 128 |
| | 5 |
| | — |
| | — |
| | 133 |
|
Other, net | | 279 |
| | 2 |
| | — |
| | — |
| | 281 |
|
Total revenues | | $ | 29,355 |
| | $ | 7,738 |
| | $ | — |
| | $ | (5,316 | ) | | $ | 31,777 |
|
Economic Earnings | | $ | 10,270 |
| | $ | 1,690 |
| | $ | (1,345 | ) | | $ | — |
| | $ | 10,615 |
|
Less: Restricted stock expense | | | | | | | | | | 4,082 |
|
Intangible amortization | | | | | | | | | | 490 |
|
Deferred taxes on goodwill | | | | | | | | | | 156 |
|
Net income | | | | | | | | | | $ | 5,887 |
|
| | | | | | | | | | |
Segment assets | | $ | 163,826 |
| | $ | 65,986 |
| | $ | 13,046 |
| | $ | (73,160 | ) | | $ | 169,698 |
|
Segment goodwill | | $ | 5,219 |
| | $ | 21,925 |
| | $ | — |
| | $ | — |
| | $ | 27,144 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
Nine Months Ended September 30, 2017 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 75,036 |
| | $ | 23,570 |
| | $ | — |
| | $ | — |
| | $ | 98,606 |
|
Net intersegment revenues | | 6,050 |
| | 160 |
| | — |
| | (6,210 | ) | | — |
|
Net interest and dividend revenue | | 391 |
| | 67 |
| | — |
| | — |
| | 458 |
|
Other, net | | 811 |
| | (4 | ) | | — |
| | — |
| | 807 |
|
Total revenues | | $ | 82,288 |
| | $ | 23,793 |
| | $ | — |
| | $ | (6,210 | ) | | $ | 99,871 |
|
Economic Earnings | | $ | 31,372 |
| | $ | 4,528 |
| | $ | (4,592 | ) | | $ | — |
| | $ | 31,308 |
|
Less: Restricted stock expense | | | | | | | | | | 12,298 |
|
Intangible amortization | | | | | | | | | | 1,449 |
|
Deferred taxes on goodwill | | | | | | | | | | 469 |
|
Net income | | | | | | | | | | $ | 17,092 |
|
| | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 68,563 |
| | $ | 22,798 |
| | $ | — |
| | $ | — |
| | $ | 91,361 |
|
Net intersegment revenues | | 14,455 |
| | 82 |
| | — |
| | (14,537 | ) | | — |
|
Net interest and dividend revenue | | 360 |
| | 9 |
| | — |
| | — |
| | 369 |
|
Other, net | | 462 |
| | (263 | ) | | — |
| | — |
| | 199 |
|
Total revenues | | $ | 83,840 |
| | $ | 22,626 |
| | $ | — |
| | $ | (14,537 | ) | | $ | 91,929 |
|
Economic Earnings | | $ | 30,493 |
| | $ | 4,160 |
| | $ | (5,559 | ) | | $ | — |
| | $ | 29,094 |
|
Less: Restricted stock expense | | | | | | | | | | 12,164 |
|
Intangible amortization | | | | | | | | | | 1,470 |
|
Deferred taxes on goodwill | | | | | | | | | | 390 |
|
Net income | | | | | | | | | | $ | 15,070 |
|
We are providing a performance measure that we refer to as Economic Earnings. Our management and the Board of Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and determine 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 tables provide a reconciliation of Net income to Economic Earnings (in thousands):
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
Net income | | $ | 4,132 |
| | $ | 5,887 |
|
Add: Stock-based compensation expense | | 4,233 |
| | 4,082 |
|
Add: Intangible amortization | | 469 |
| | 490 |
|
Add: Tax benefit from goodwill amortization | | 156 |
| | 156 |
|
Economic Earnings | | $ | 8,990 |
| | $ | 10,615 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Net Income | | $ | 17,092 |
| | $ | 15,070 |
|
Add: Stock-based compensation expense | | 12,298 |
| | 12,164 |
|
Add: Intangible amortization | | 1,449 |
| | 1,470 |
|
Add: Tax benefit from goodwill amortization | | 469 |
| | 390 |
|
Economic Earnings | | $ | 31,308 |
| | $ | 29,094 |
|
14. SUBSEQUENT EVENTS
Dividend Declared
In October 2017, Westwood’s Board of Directors declared a quarterly cash dividend of $0.68 per common share, an increase of 10% from the previous quarterly dividend rate, payable on January 2, 2018 to stockholders of record on December 8, 2017.
AGF Lawsuits
On October 13, 2017, we reached a settlement with AGF regarding their lawsuits and our related counterclaim. See Note 12 “Commitments and Contingencies” for additional discussion of the settlement.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “potentially,” “may,” “target,” “designed,” “on track,” “comfortable with,” “optimistic”“designed” and other similar expressions, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, filed with the SEC, and those risks set forth below:
• the composition and market value of our assets under management;AUM;
regulations adversely affecting the financial services industry;
competition in the investment management industry;
our assets under management includes investments in foreign companies;
our ability to develop and market new investment strategies successfully;
our relationships with current and potential customers;
our ability to retain qualified personnel;
our ability to maintain effective cyber security;
our ability to maintain effective information systems;
our ability to pursue and properly integrate acquired businesses;
litigation risks;
our ability to properly address conflicts of interest;
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 impact of the COVID-19 pandemic;
• the significant concentration of our revenues in a small number of customers.customers;
• our ability to avoid termination of client agreements and the related investment redemptions;
• regulations adversely affecting the financial services industry;
• competition in the investment management industry;
• our ability to develop and market new investment strategies successfully;
• our AUM include investments in foreign companies;
• our reputation and our relationships with current and potential customers;
• our ability to attract and retain qualified personnel;
• our ability to maintain effective cyber security;
• our ability to perform operational tasks;
• our ability to identify and execute on our strategic initiatives;
• our ability to maintain effective information systems;
• our ability to select and oversee third-party vendors;
• litigation risks;
• our ability to declare and pay dividends;
• our ability to fund future capital requirements on favorable terms;
• our ability to properly address conflicts of interest;
• our ability to maintain adequate insurance coverage;
• our ability to maintain an effective system of internal controls;
• our stock is thinly traded and may be subject to volatility;
• our organizational documents contain provisions that may prevent or deter another group from paying a premium over the market price to our stockholders to acquire our stock;
• we are a holding company dependent on the operations and funds of our subsidiaries; and
• our relationships with investment consulting firms.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We are not obligated and do not undertake an obligation to publicly release any revisions to these forward-looking statements to
reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events or otherwise.
Overview
We manage investment assets and provide services for our clients through our subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (each of which is an SEC-registered investment advisor and referred to hereinafter together as “Westwood Management”), Westwood International Advisors Inc. (“Westwood International”International Advisors”) and Westwood Trust. Westwood Management provides investment advisory services to institutional investors, 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 (the “UCITS Fund”), individual investorsindividuals and clients of Westwood Trust.
On July 27, 2020, Westwood’s Board of Directors approved the closure of Westwood International provides investment advisory servicesAdvisors and Westwood’s office in Toronto, Canada. As a result of this closure, we incurred $0.5 million of severance expense, $0.3 million of lease impairment expense and $0.1 million of vendor contract related costs, offset by $1.3 million of restricted stock forfeitures. The severance expense and restricted stock forfeitures were recognized within "Employee compensation and benefits," the lease impairment expense was recognized in "General and administrative," and the vendor contract costs were recognized within "Information technology" on the Condensed Consolidated Statements of Comprehensive Income (Loss).
Additionally, we repatriated previously undistributed income to institutional clients, the Westwood Funds®, other mutual funds,United States from Canada and incurred $1.1 million of withholding taxes (net of U.S. federal tax deduction). The withholding taxes were recognized in "Income tax expense" on the UCITS Fund and clientsCondensed Consolidated Statements of Westwood Trust. Comprehensive Income (Loss).
Westwood Trust provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management.AUM. Westwood International Advisors provided investment advisory services to an Irish investment company authorized pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulation 2011 (as amended) (the “UCITS Fund”), which was liquidated in June 2020.
DivestitureWe continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our Omaha Operations
On September 6, 2017,business, particularly the impact on global stock markets. In 2020 we entered into an agreementhave taken a number of precautionary measures designed to sellhelp minimize the Omaha-based componentrisk of our Private Wealth business. The sale is expected to close on December 31, 2017, subject to usual and customary closing conditions and the receiptspread of regulatory approval from the Nebraska Department of Banking. We expect to receive proceeds of $7 million to $10.5 million, subject to client consents and net working capital requirements; however, we do not expect to record a material gain or loss on the sale within our Consolidated Statement of Comprehensive Income. The sale will reduce our goodwill and intangible assets but is not expected to have a material impactvirus to our Consolidated Balance Sheet.employees, including suspending all non-essential travel for our employees and encouraging our employees to work remotely. The component is reported within bothinvestments we have made in technology over the past several years, particularly our Advisorysignificant investments in cloud-based systems and Trust segments. The sale does not represent a major strategic shift inbusiness continuity planning, have allowed our business and does not qualify for discontinued operations reporting.entire team to serve our clients seamlessly from their homes.
Revenues
We derive our revenues from investment advisory fees, trust fees and other revenues. Our advisory fees are generated by Westwood Management and Westwood International Advisors (prior to its closure, effective September 30, 2020), which manage client accounts under investment advisory and subadvisory agreements. Advisory fees are typically calculated based on a percentage of assets under managementAUM and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on assets under managementAUM on the last day of the preceding quarter, quarterly in arrears based on assets under managementAUM on the last day of the quarter just ended or are based on a daily or monthly analysis of assets under managementAUM for the stated period. We recognize advisory fee revenues as services are rendered. A limited numberCertain of our clients have a contractual performance-based fee component in their contracts, which generates additional revenues if we outperform a specified index over a specific period of time. We record revenues fromrevenue for performance-based fees at the end of the measurement period. Since our advance paying clients'clients’ billing periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter, and our Condensed Consolidated Financial Statements contain no deferred advisory fee revenues.
Our trust fees are generated by Westwood 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.AUM. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. During the first quarter of 2016, Westwood Trust changed the billing terms for most of our trust clients from quarterly in advance, based on assets under management on the last day of the preceding quarter, tofees are primarily calculated quarterly in arrears based on a daily average of assets under managementAUM for the quarter. Since billing periods for most of Westwood Trust’sTrust's clients coincide with the calendar quarter, revenue is fully recognized within the quarter, and our Condensed Consolidated Financial Statements do not contain a significant amount ofno deferred trustadvisory fee revenues.
Our other revenues generallyprimarily consist of interest and investment income. Although we generally invest most ofincome from our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds, including seed money forinvestments into new investment strategies.
Employee Compensation and Benefits
Employee compensation and benefits costsexpenses generally consist of salaries, incentive compensation, equity-based compensation expense and benefits.
Sales and Marketing
Sales and marketing costsexpenses 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 of the Westwood Funds®.
Information Technology
Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs.
Professional Services
Professional services expenses generally consist of costs associated with subadvisory fees, audit, tax, legal and other professional services.
Legal Settlement
Legal settlement expenses consist of settlements related to litigation claims, net of any portions covered by our insurance policies.
General and Administrative
General and administrative expenses generally consist of costs associated with the lease of our office space, amortization, depreciation, insurance, custody expense, Board of Directors fees, investor relations, licenses and fees, office supplies and other miscellaneous expenses.
Impairment expense
Impairment expense consists of long-lived asset impairments, generally goodwill or intangible assets.
Gain (Loss) on Foreign Currency Transactions
Gain (loss) on foreign currency transactions consists of foreign currency transactions primarily related to Westwood International Advisors.
Unrealized Gains (Losses) on Private Investments
Unrealized gains (losses) in private investments includes changes in the value of our private equity investments.
Investment Income
Investment income primarily includes interest and dividend income on fixed income securities and money market funds.
Other Income
Other income consists of income from the sublease of a portion of our corporate headquarters office.
Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary
Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary includes a cumulative adjustment following the substantially completed liquidation of a foreign subsidiary, Westwood International Advisors.
Assets Under Management
Assets under management (“AUM”) increased $2.3AUM decreased $3.0 billion to $23.6$12.0 billion at September 30, 20172020 compared with $21.3$15.0 billion at September 30, 2016 as a result of market appreciation, partially offset by net outflows over the last twelve months.2019. The average of beginning and ending assets under managementAUM for the third quarter of 20172020 was $23.1$11.9 billion compared to $21.1$15.2 billion for the third quarter of 2016. The increase in average assets under management is2019. These decreases are due to market appreciation over the last twelve months and $713 millionnet outflows primarily in a long-only convertibles fund that transitioned from assets under advisement (“AUA”) to AUM duringour Emerging Markets (closed in the third quarter of 2017.2020), LargeCap Value, and Income Opportunity strategies and market depreciation in the first quarter of 2020.
The following tabletable displays assets under managementAUM as of September 30, 20172020 and 2016:2019 (in millions):
|
| | | | | | | | | | | |
| | | | | | % Change |
| | | | September 30, 2017 |
| | As of September 30, | | vs. |
| | 2017 | | 2016 | | September 30, 2016 |
| | (in millions) | | |
Institutional | | $ | 13,658 |
| | $ | 12,192 |
| | 12 | % |
Private Wealth | | 5,822 |
| | 5,327 |
| | 9 |
|
Mutual Funds | | 4,144 |
| | 3,753 |
| | 10 |
|
Total Assets Under Management(1) | | $ | 23,624 |
| | $ | 21,272 |
| | 11 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | |
| | As of September 30, | | |
| | 2020 | | 2019 | | Change |
Institutional(1) | | $ | 6,044 | | | $ | 8,347 | | | (28) | % |
Wealth Management(2) | | 4,094 | | | 4,301 | | | (5) | |
Mutual Funds(3) | | 1,824 | | | 2,338 | | | (22) | |
Total AUM(4) | | $ | 11,962 | | | $ | 14,986 | | | (20) | % |
________________
| |
(1) | AUM excludes $362 million of AUA as of September 30, 2017 related to our model portfolios, for which we provided consulting advice but for which we did not have direct discretionary investment authority. During the third quarter of 2017, approximately $713 million related to a long-only convertibles fund transitioned from AUA to AUM. AUM excluded approximately $1.1 billion of AUA as of September 30, 2016 related to model portfolios, including the long-only convertibles fund, for which we provided consulting advice but for which we did not have direct discretionary investment authority. |
(1)Institutional includes (i) separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft HartleyTaft-Hartley plans, endowments, foundations and individuals; (ii) subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including the UCITS Fund and collective investment trusts; and (iv) managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers.
The UCITS Fund was liquidated in June 2020.Private (2)Wealth Management 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 Advisors, L.L.C. 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 Advisors (prior to its closure, effective September 30, 2020) and external unaffiliated subadvisors. For certain assets in this category Westwood Trust currently provides limited custody services for a minimal or no fee, viewing 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 upon an inter-generational transfer of wealth.
(3)Mutual Funds include the Westwood Funds®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 management accounts.
(4)AUM excludes $240 million and $266 million of assets under advisement (“AUA”) as of September 30, 2020 and 2019, respectively, related to our model portfolios for which we provided consulting advice but for which we did not have direct discretionary investment authority.
Roll-Forward of Assets Under Management
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | (in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Institutional | | | | | | | | | Institutional | | | | | | | |
Beginning of period assets | | $ | 12,773 |
| | $ | 11,921 |
| | $ | 11,911 |
| | $ | 11,752 |
| Beginning of period assets | $ | 6,183 | | | $ | 8,377 | | | $ | 8,739 | | | $ | 9,327 | |
Inflows(1) | | 1,113 |
| | 420 |
| | 2,173 |
| | 1,133 |
| |
Inflows | | Inflows | 117 | | | 158 | | | 592 | | | 535 | |
Outflows | | (659 | ) | | (606 | ) | | (1,954 | ) | | (1,902 | ) | Outflows | (655) | | | (286) | | | (2,554) | | | (2,790) | |
Net flows | | 454 |
| | (186 | ) | | 219 |
| | (769 | ) | |
Market appreciation | | 431 |
| | 457 |
| | 1,528 |
| | 1,209 |
| |
Net client flows | | Net client flows | (538) | | | (128) | | | (1,962) | | | (2,255) | |
Market appreciation (depreciation) | | Market appreciation (depreciation) | 399 | | | 98 | | | (733) | | | 1,275 | |
Net change | | 885 |
| | 271 |
| | 1,747 |
| | 440 |
| Net change | (139) | | | (30) | | | (2,695) | | | (980) | |
End of period assets | | $ | 13,658 |
| | $ | 12,192 |
| | $ | 13,658 |
| | $ | 12,192 |
| End of period assets | $ | 6,044 | | | $ | 8,347 | | | $ | 6,044 | | | $ | 8,347 | |
| | | | | | | | | | | | | | | | |
Private Wealth | | | | | | | | | |
Wealth Management | | Wealth Management | |
Beginning of period assets | | $ | 5,685 |
| | $ | 5,361 |
| | $ | 5,520 |
| | $ | 5,393 |
| Beginning of period assets | $ | 3,985 | | | $ | 4,399 | | | $ | 4,438 | | | $ | 4,043 | |
Inflows | | 194 |
| | 104 |
| | 509 |
| | 274 |
| Inflows | 99 | | | 87 | | | 228 | | | 326 | |
Outflows | | (216 | ) | | (245 | ) | | (710 | ) | | (626 | ) | Outflows | (187) | | | (237) | | | (535) | | | (576) | |
Net flows | | (22 | ) | | (141 | ) | | (201 | ) | | (352 | ) | |
Market appreciation | | 159 |
| | 107 |
| | 503 |
| | 286 |
| |
Net client flows | | Net client flows | (88) | | | (150) | | | (307) | | | (250) | |
Market appreciation (depreciation) | | Market appreciation (depreciation) | 197 | | | 52 | | | (37) | | | 508 | |
Net change | | 137 |
| | (34 | ) | | 302 |
| | (66 | ) | Net change | 109 | | | (98) | | | (344) | | | 258 | |
End of period assets | | $ | 5,822 |
| | $ | 5,327 |
| | $ | 5,822 |
| | $ | 5,327 |
| End of period assets | $ | 4,094 | | | $ | 4,301 | | | $ | 4,094 | | | $ | 4,301 | |
| | | | | | | | | | | | | | | | |
Mutual Funds | | | | | | | | | Mutual Funds | |
Beginning of period assets | | $ | 4,092 |
| | $ | 3,690 |
| | $ | 3,810 |
| | $ | 3,617 |
| Beginning of period assets | $ | 1,740 | | | $ | 2,612 | | | $ | 2,058 | | | $ | 3,236 | |
Inflows | | 293 |
| | 214 |
| | 792 |
| | 674 |
| Inflows | 208 | | | 98 | | | 650 | | | 351 | |
Outflows | | (334 | ) | | (224 | ) | | (803 | ) | | (798 | ) | Outflows | (192) | | | (411) | | | (754) | | | (1,687) | |
Net flows | | (41 | ) | | (10 | ) | | (11 | ) | | (124 | ) | |
Market appreciation | | 93 |
| | 73 |
| | 345 |
| | 260 |
| |
Net client flows | | Net client flows | 16 | | | (313) | | | (104) | | | (1,336) | |
Market appreciation (depreciation) | | Market appreciation (depreciation) | 68 | | | 39 | | | (130) | | | 438 | |
Net change | | 52 |
| | 63 |
| | 334 |
| | 136 |
| Net change | 84 | | | (274) | | | (234) | | | (898) | |
End of period assets | | $ | 4,144 |
| | $ | 3,753 |
| | $ | 4,144 |
| | $ | 3,753 |
| End of period assets | $ | 1,824 | | | $ | 2,338 | | | $ | 1,824 | | | $ | 2,338 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | |
Total AUM | | Total AUM | |
Beginning of period assets | | $ | 22,550 |
| | $ | 20,972 |
| | $ | 21,241 |
| | $ | 20,762 |
| Beginning of period assets | $ | 11,908 | | | $ | 15,388 | | | $ | 15,235 | | | $ | 16,606 | |
Inflows | | 1,600 |
| | 738 |
| | 3,474 |
| | 2,081 |
| Inflows | 424 | | | 343 | | | 1,470 | | | 1,212 | |
Outflows | | (1,209 | ) | | (1,075 | ) | | (3,467 | ) | | (3,326 | ) | Outflows | (1,034) | | | (934) | | | (3,843) | | | (5,053) | |
Net flows | | 391 |
| | (337 | ) | | 7 |
| | (1,245 | ) | |
Market appreciation | | 683 |
| | 637 |
| | 2,376 |
| | 1,755 |
| |
Net client flows | | Net client flows | (610) | | | (591) | | | (2,373) | | | (3,841) | |
Market appreciation (depreciation) | | Market appreciation (depreciation) | 664 | | | 189 | | | (900) | | | 2,221 | |
Net change | | 1,074 |
| | 300 |
| | 2,383 |
| | 510 |
| Net change | 54 | | | (402) | | | (3,273) | | | (1,620) | |
End of period assets | | $ | 23,624 |
| | $ | 21,272 |
| | $ | 23,624 |
| | $ | 21,272 |
| End of period assets | $ | 11,962 | | | $ | 14,986 | | | $ | 11,962 | | | $ | 14,986 | |
________________
| |
(1) | Institutional inflows include approximately $713 million of assets related to a long-only convertibles fund, which transitioned from AUA to AUM during the third quarter of 2017. |
Three months ended September 30, 20172020 and 20162019
The $1.1$0.1 billion increase in assets under managementAUM for the three months ended September 30, 20172020 was due to market appreciation of $683 million and$0.7 billion offset by net inflowsoutflows of $391 million. $0.6 billion. Net inflowsoutflows were primarily related to approximately $713 million in our Strategic Global Convertibles strategy that transitioned from AUA to AUM in the third quarter of 2017, as well as net inflows to our Market Neutral Income and Emerging Markets strategies. Inflows were partially offset by net outflows to our SMidCap strategies, Income Opportunity strategy and LargeCap Value strategy.
The $300 million increase$0.4 billion decrease in assets under managementAUM for the three months ended September 30, 20162019 was due to net outflows of $337 million$0.6 billion partially offset by market appreciation of $637 million.$0.2 billion. Net outflows were primarily related to our Income Opportunity, LargeCap Value, and SMidCap strategiesstrategies.
Nine months ended September 30, 2020 and 2019
The $3.3 billion decrease in AUM for the nine months ended September 30, 2020 was due to net outflows of $2.4 billion and market depreciation of $0.9 billion. Net outflows were primarily related to our Emerging Markets and LargeCap Value strategy,strategies.
The $1.6 billion decrease in AUM for the nine months ended September 30, 2019 was due to net outflows of $3.8 billion partially offset by market appreciation of $2.2 billion. Net outflows were primarily related to our Income Opportunity, Emerging Markets, LargeCap Value and SMidCap strategies, partially offset by net inflows to our SmallCap Value Market Neutral Income, and Emerging Markets strategies.
Nine months ended September 30, 2017 and 2016
The $2.4 billion increase in assets under management for the nine months ended September 30, 2017 was due to market appreciation of $2.4 billion and net inflows of of $7 million. Net inflows were primarily related to approximately $713 million in our Strategic Global Convertibles strategy that transitioned from AUA to AUM in the third quarter of 2017 and net inflows to our SmallCap Value, Market Neutral Income, and Emerging Markets strategies, partially offset by net outflows to our SMidCap strategies and LargeCap Value strategy.
The $510 million increase in assets under management for the nine months ended September 30, 2016 was due to market appreciation of $1.8 billion, offset by net outflows of $1.2 billion. Net outflows were primarily related to our SMidCap, SmidCap Plus, LargeCap Value, AllCap Value and Income Opportunity strategies.
Results of Operations
The following table (dollars in thousands) and discussion of our results of operations isare based upon data derived from the condensed consolidated statementsCondensed Consolidated Statements of comprehensive incomeComprehensive Income (Loss) contained in our condensed consolidated financial statementsCondensed Consolidated Financial Statements and should be read in conjunction with those statements included elsewhere in this report.
| | | | | | | | | | | | % Change | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three Months Ended | | Nine Months Ended | |
| | Three Months Ended | | Nine Months Ended | | September 30, 2017 | | September 30, 2017 | | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | | vs. | | vs. | | September 30, | | September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | September 30, 2016 | | September 30, 2016 | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Revenues: | | | | | | | | | | | | | Revenues: | | | | | | | | | | | |
Advisory fees: asset-based | | $ | 25,334 |
| | $ | 23,447 |
| | $ | 73,619 |
| | $ | 67,928 |
| | 8 | % | | 8 | % | Advisory fees: asset-based | $ | 8,847 | | | $ | 13,164 | | | (33) | % | | $ | 29,277 | | | $ | 44,265 | | | (34) | % |
Advisory fees: performance-based | | — |
| | 226 |
| | 1,417 |
| | 635 |
| | (100 | ) | | 123 |
| Advisory fees: performance-based | 713 | | | 154 | | | 363 | | | 1,408 | | | 454 | | | 210 | |
Trust fees | | 7,858 |
| | 7,690 |
| | 23,570 |
| | 22,798 |
| | 2 |
| | 3 |
| |
Other revenues | | 300 |
| | 414 |
| | 1,265 |
| | 568 |
| | NM | | NM | |
Trust fees: asset-based | | Trust fees: asset-based | 5,787 | | | 6,281 | | | (8) | | | 17,395 | | | 19,264 | | | (10) | |
Trust fees: performance-based | | Trust fees: performance-based | 37 | | | — | | | NM | | 77 | | | — | | | NM |
Other, net | | Other, net | 70 | | | 293 | | | (76) | | | (159) | | | 1,480 | | | (111) | |
Total revenues | | 33,492 |
| | 31,777 |
| | 99,871 |
| | 91,929 |
| | 5 |
| | 9 |
| Total revenues | 15,454 | | | 19,892 | | | (22) | | | 47,998 | | | 65,463 | | | (27) | |
Expenses: | | | | | | | | | | | | | Expenses: | |
Employee compensation and benefits | | 15,601 |
| | 15,637 |
| | 48,875 |
| | 47,239 |
| | — |
| | 3 |
| Employee compensation and benefits | 9,515 | | | 12,072 | | | (21) | | | 32,970 | | | 38,060 | | | (13) | |
Sales and marketing | | 457 |
| | 408 |
| | 1,447 |
| | 1,423 |
| | 12 |
| | 2 |
| Sales and marketing | 215 | | | 506 | | | (58) | | | 946 | | | 1,550 | | | (39) | |
Westwood mutual funds | | 977 |
| | 755 |
| | 2,749 |
| | 2,282 |
| | 29 |
| | 20 |
| Westwood mutual funds | 421 | | | 916 | | | (54) | | | 1,370 | | | 2,423 | | | (43) | |
Information technology | | 1,855 |
| | 1,874 |
| | 5,494 |
| | 6,039 |
| | (1 | ) | | (9 | ) | Information technology | 2,158 | | | 2,017 | | | 7 | | | 6,219 | | | 6,276 | | | (1) | |
Professional services | | 1,681 |
| | 1,903 |
| | 4,495 |
| | 4,707 |
| | (12 | ) | | (5 | ) | Professional services | 1,033 | | | 940 | | | 10 | | | 3,217 | | | 3,258 | | | (1) | |
Legal settlement | | 4,009 |
| | — |
| | 4,009 |
| | — |
| | 100 |
| | 100 |
| |
General and administrative | | 3,160 |
| | 2,147 |
| | 8,697 |
| | 7,028 |
| | 47 |
| | 24 |
| General and administrative | 2,333 | | | 2,317 | | | 1 | | | 6,830 | | | 7,153 | | | (5) | |
Impairment expense | | Impairment expense | 3,403 | | | — | | | NM | | 3,403 | | | — | | | NM |
(Gain) loss on foreign currency transactions | | (Gain) loss on foreign currency transactions | 419 | | | (402) | | | (204) | | | (1,196) | | | 1,142 | | | (205) | |
Total expenses | | 27,740 |
| | 22,724 |
| | 75,766 |
| | 68,718 |
| | 22 |
| | 10 |
| Total expenses | 19,497 | | | 18,366 | | | 6 | | | 53,759 | | | 59,862 | | | (10) | |
Income before income taxes | | 5,752 |
| | 9,053 |
| | 24,105 |
| | 23,211 |
| | (36 | ) | | 4 |
| |
Provision for income taxes | | 1,620 |
| | 3,166 |
| | 7,013 |
| | 8,141 |
| | (49 | ) | | (14 | ) | |
Net income | | $ | 4,132 |
| | $ | 5,887 |
| | $ | 17,092 |
| | $ | 15,070 |
| | (30 | )% | | 13 | % | |
Net operating income (loss) | | Net operating income (loss) | (4,043) | | | 1,526 | | | (5,761) | | | 5,601 | | |
Unrealized losses on private investments | | Unrealized losses on private investments | (73) | | | — | | | NM | | (909) | | | — | | | NM |
Investment income | | Investment income | (43) | | | — | | | NM | | 625 | | | — | | | NM |
Other income | | Other income | 34 | | | 33 | | | 3 | | | 102 | | | 110 | | | (7) | |
Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary | | Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary | (4,193) | | | — | | | NM | | (4,193) | | | — | | | NM |
Income (loss) before income taxes | | Income (loss) before income taxes | (8,318) | | | 1,559 | | | (10,136) | | | 5,711 | | |
Income tax expense | | Income tax expense | 1,971 | | | 442 | | | 346 | | | 1,626 | | | 2,341 | | | (31) | |
Net income (loss) | | Net income (loss) | $ | (10,289) | | | $ | 1,117 | | | (1,021) | % | | $ | (11,762) | | | $ | 3,370 | | | (449) | % |
_________________________
NM Not meaningful
Three months ended September 30, 20172020 compared to three months ended September 30, 20162019
Total Revenues. Our Total revenues increased $1.7decreased $4.4 million, or 5%22%, to $33.5$15.5 million for the three months ended September 30, 20172020 compared with $31.8$19.9 million for the three months ended September 30, 2016.2019. Asset-based advisory fees increased $1.9decreased $4.4 million, or 8%33%, and Trust fees increased $0.2decreased $0.5 million, or 2%8%, both primarily due to lower average AUM. Performance-based advisory fees increased $0.5 million, or 363%, primarily due to higher average assets under management due to asset appreciation.realization of performance fees in the three months ended September 30, 2020.
Legal Settlement. We recorded a net $4.0 million charge related to a legal settlement
Employee Compensation and associated insurance coverage recorded during the third quarter of 2017. See further discussion of the settlement in Note 12 “CommitmentsBenefits. Employee compensation and Contingencies” to our Condensed Consolidated Financial Statements included in Part I. Financial Information.
General and Administrative. General and administrative costs increased $1.1benefits decreased $2.6 million, or 47.2%21%, to $3.2$9.5 million for the three months ended September 30, 20172020 compared with $2.1$12.1 million for the three months ended September 30, 2016,2019. The decrease was primarily due to a $0.9 million foreign currency transaction loss recordedreductions in the third quarter of 2017compensation relating to short- and long-term incentive compensation as a result of a 4% decrease inlower asset-based revenues from the Canadian dollar exchange rate.prior year, stock forfeitures related to the closure of Westwood International Advisors, and lower headcount, partially offset by severance costs following the closure of Westwood International Advisors.
Provision for Income Taxes. The effective tax rateSales and marketing. Sales and marketing expenses decreased $0.3 million, or 58%, to 28.2%$0.2 for the three months ended September 30, 2017 from 35.0%2020 compared with $0.5 million for the three months ended September 30, 2016.2019. The decrease iswas primarily due to lower travel costs as a result of COVID-19.
Westwood Mutual Funds. Westwood mutual funds expenses decreased $0.5 million, or 54%, to $0.4 million for the three months ended September 30, 2020 compared with $0.9 million for the three months ended September 30, 2019. The decrease was primarily due to lower service fees following declines in market values for the Westwood funds.
Impairment expense. We recorded $3.4 million of impairment expense related to our Advisory segment goodwill in the three months ended September 30, 2020. No impairment expense was recorded in the three months ended September 30, 2019.
(Gain) loss on foreign currency transactions. We recorded $0.4 million in foreign currency losses in the current quarter as a result of fluctuations in the Canadian dollar exchange rate.
Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary. We recorded a cumulative foreign currency translation adjustment of $4.2 million following the substantially completed liquidation of Westwood International Advisors in the three months ended September 30, 2020.
Income Tax Expense (Benefit).Our effective tax impactrate of our legal settlement with AGF in(23.7)% differed from the 21% statutory rate for the third quarter of 2017 and adjustments2020 primarily due to uncertainthe 5% incremental Canadian withholding tax positions (net of U.S. federal tax benefit)deduction) paid on repatriated funds due to the closure of Westwood International Advisors, effective September 30, 2020, and the impact of certain deferred tax assets that offset the discrete benefit adjustment related to the remeasurement of certain deferred taxes following the enactment of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") recorded in the thirdfirst quarter of 2016.2020. The effective tax rate was 28.4% for the three months ended September 30, 2019. The 2019 quarterly tax rate was negatively impacted by increased permanent differences between book and tax compensation expense as a result of additional compensation limitations under the Tax Cuts and Jobs Act.
Nine months ended September 30, 20172020 compared to nine months ended September 30, 20162019
Total Revenues. Our Total revenues increased $8.0decreased $17.5 million, or 9%27%, to $99.9$48.0 million for the nine months ended September 30, 20172020 compared with $91.9$65.5 million for the nine months ended September 30, 2016. This increase was primarily related to a $5.7 million, or 8%, increase in2019. Asset-based advisory fees and a $0.8decreased $15.0 million, or 3%34%, increase inand Trust fees related to higher average assets under managementdecreased $1.9 million, or 10%, both primarily due to market appreciation.lower average AUM. Performance-based advisory fees increased by $0.8 million.$0.9 million, or 210%, primarily due to higher realization of performance fees in the nine months ended September 30, 2020.
Employee Compensation and Benefits. Employee compensation and benefits costs increaseddecreased $5.1 million, or 13%, to $48.9$33.0 million for the nine months ended September 30, 20172020 compared with $47.2$38.1 million for the nine months ended September 30, 2016.2019. The increase isdecrease was primarily due to higherreductions in compensation relating to short- and long-term incentive compensation and performance-based restricted stock expense as a result of improved pre-tax incomelower asset-based revenues as compared to the prior year as well as merit increases.and lower headcount.
Legal Settlement. We recorded a net $4.0 million charge related to a legal settlementSales and associated insurance coverage recorded during the third quarter of 2017. See further discussion of the settlement in Note 12 “Commitmentsmarketing. Sales and Contingencies” to our Condensed Consolidated Financial Statements included in Part I. Financial Information.
General & Administrative. General and administrativemarketing expenses increased $1.7decreased $0.7 million, or 24%39.0%, to $8.7 million
for the nine months ended September 30, 2017 compared to $7.0$0.9 million for the nine months ended September 30, 2016,
primarily due to a2020 compared with $1.6 million foreign currency transaction loss recorded in the first nine months of 2017 as a result of an 8% decrease in the Canadian dollar exchange rate.
Provision for Income Taxes. The effective tax rate decreased to 29.1% for the nine months ended September 30, 2017 from 35.1%2019. The decrease was primarily due to lower travel costs as a result of COVID-19.
Westwood Mutual Funds. Westwood mutual funds expenses decreased $1.0 million or 43% to $1.4 million for the nine months ended September 30, 2016. During the first quarter of 2017, we recorded a $1.02020 compared to $2.4 million adjustment to income tax expense related to excess tax benefits as a result of the adoption of ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which decreased our effective tax rate to 29.1%. Without the adjustment, our effective tax rate for the nine months ended September 30, 2016 would have been 33.0%2019. The decrease was primarily due to lower service fees following declines in market values for the Westwood funds.
Impairment expense. We recorded $3.4 million of impairment expense related to our Advisory segment goodwill in the nine months ended September 30, 2020. No impairment expense was recorded in the nine months ended September 30, 2019.
(Gain) loss on foreign currency transactions. We recorded $1.2 million in foreign currency gains for the nine months ended September 30, 2020 as a result of fluctuations in the Canadian dollar exchange rate.
Unrealized losses on private investments. PriorWe recorded a net unrealized loss of $0.9 million, primarily related to adoptionour investment in Charis, a private bank, as a result of ASU 2016-09, excessthe global macroeconomic effects of COVID-19.
Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary. We recorded a cumulative foreign currency translation adjustment of $4.2 million following the substantially completed liquidation of Westwood International Advisors in the nine months ended September 30, 2020.
Provision for Income Taxes. The effective tax benefits were recorded through Additional paid-in capital, with no impactrate was (16.0)% for the nine months ended September 30, 2020, compared to 41.0% for the nine months ended September 30, 2019. Our income tax rate differed from the 21% statutory rate for 2020 primarily due to the effective5% incremental Canadian withholding tax rate. The remaining decrease is related to the tax impact of our legal settlement with AGF in the third quarter of 2017 and adjustments to uncertain tax positions (net of federal deduction) paid on repatriated funds due to the closure of Westwood International Advisors office, effective September 30, 2020, and permanent differences between book and tax benefit) recordedrestricted stock expense based on a decrease in our stock price between the firstgrant and third quarters of 2016.vesting dates. The 2019 year-to-date rate was negatively impacted by a $0.6 million discrete tax expense related to a permanent difference between book and tax restricted stock expense based on a decrease in our stock price between the grant and vesting dates.
Supplemental Financial Information
As supplemental information, we provide a non-U.S. generally accepted accounting principles (“non-GAAP”)are providing non-GAAP performance measuremeasures that we refer to as Economic Earnings.Earnings (Loss) and Economic EPS. We provide this measurethese measures in addition to, but not as a substitute for, net income (loss) and earnings (loss) per share, which are reported on a U.S. generally accepted accounting principles (“GAAP”)GAAP basis. Our management and Board of Directors review Economic Earnings (Loss) and Economic EPS to evaluate our ongoing performance, allocate resources, and review theour dividend policy. We believe that thisthese non-GAAP performance measure,measures, while not a substitutesubstitutes for GAAP net income is(loss) or earnings (loss) per share, are useful for management and investors when evaluating our underlying operating and financial performance and our available resources. We do not advocate that investors consider thisthese non-GAAP measuremeasures without also considering financial information prepared in accordance with GAAP.
In calculatingWe define Economic Earnings we add back to(Loss) as net income the(loss) plus non-cash expense associated with equity-based compensation awards of restricted stock,expense, impairment expense, amortization of intangible assets, currency translation adjustment reclassification and deferred taxes related to the tax-basis amortization of goodwill. Although depreciation on property and equipmentfixed assets is a non-cash expense, we do not add it back when calculating Economic Earnings (Loss) because depreciation charges represent aan allocation of the decline in the value of the related assets that will ultimately require replacement. In addition, we do not adjust Economic Earnings (Loss) for tax deductions related to restricted stock expense or amortization of intangible assets. Economic EPS represents Economic Earnings (Loss) divided by diluted weighted average shares outstanding.
The following tables provide a reconciliation of Net income (loss) to Economic Earnings (Loss) and Economic Earnings (Loss) by segment (in thousands, except share and per share amounts):
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | % Change |
| | 2017 | | 2016 | |
Net income | | $ | 4,132 |
| | $ | 5,887 |
| | (30 | )% |
Add: Stock-based compensation expense | | 4,233 |
| | 4,082 |
| | 4 |
|
Add: Intangible amortization | | 469 |
| | 490 |
| | (4 | ) |
Add: Tax benefit from goodwill amortization | | 156 |
| | 156 |
| | — |
|
Economic Earnings | | $ | 8,990 |
| | $ | 10,615 |
| | (15 | )% |
Diluted weighted average shares outstanding | | 8,420,749 |
| | 8,179,956 |
| | |
Economic Earnings per share | | $ | 1.07 |
| | $ | 1.30 |
| | |
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | % Change |
| | 2017 | | 2016 | |
Net Income | | $ | 17,092 |
| | $ | 15,070 |
| | 13 | % |
Add: Stock-based compensation expense | | 12,298 |
| | 12,164 |
| | 1 |
|
Add: Intangible amortization | | 1,449 |
| | 1,470 |
| | (1 | ) |
Add: Tax benefit from goodwill amortization | | 469 |
| | 390 |
| | 20 |
|
Economic Earnings | | $ | 31,308 |
| | $ | 29,094 |
| | 8 | % |
Diluted weighted average shares outstanding | | 8,350,926 |
| | 8,212,468 |
| | |
Economic Earnings per share | | $ | 3.75 |
| | $ | 3.54 |
| | |
25We fund our operations and cash requirements with cash generated from operating activities. We may also use cash from operations to pay dividends to our stockholders. We suspended our dividend in the second quarter of 2020 in order to preserve capital and provide additional financial flexibility amid the uncertainties created by COVID-19. As of September 30, 20172020 and December 31, 2016,2019, we had no debt. The changes in net cash provided by operating activities generally reflect the changes in earnings plus the effects of non-cash items and changes in working capital.capital, including liquidation of investments used to cover current liabilities. Changes in working capital, especially accounts receivable and accounts payable, are generally the result of timing differences between collection of fees billed and payment of operating expenses.
Westwood Trust must maintain cash and investments in an amount equal to the minimum restricted capital of $4.0 million, as required by the Texas Finance Code. Restricted capital is included in Investments in the accompanying Condensed
Our future liquidity and capital requirements will depend upon numerous factors, including our results of operations, the timing and magnitude of capital expenditures or strategic initiatives, our dividend policy and other business and risk factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, filed with the SEC. We believe that current cash and short-term investment balances andplus cash generated from operations will be sufficient to meet both the operating and capital requirements of our ordinary business operations through at least the next twelve months. However, there can be no assurance that we will not require additional financing within this time frame. The 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.
There have been no significant changes in our Quantitative and Qualitative Disclosures about Market Risk from those previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. 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 Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
The following table displays information with respect to the treasury shares we purchased during the three months ended September 30, 2017:2020: