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WHG > SEC Filings for WHG > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for WESTWOOD HOLDINGS GROUP INC

Form 10-K for WESTWOOD HOLDINGS GROUP INC


28-Feb-2014

Annual Report


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 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. 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

our relationships with investment consulting firms

our relationships with current and potential customers

our ability to retain qualified personnel

our ability to develop and market new investment strategies successfully

our ability to maintain our fee structure in light of competitive fee pressures


competition in the marketplace

downturns in financial markets

new legislation adversely affecting the financial services industries

interest rates

changes in our effective tax rate

our ability to maintain an effective system of internal controls

other risks as detailed from time to time in our SEC reports

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 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 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, Westwood Trust and Westwood International. Westwood Management provides investment advisory services to corporate and public retirement plans, endowments and foundations, the Westwood Funds , other mutual funds, 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, 2013 Westwood Management, Westwood Trust and Westwood International collectively managed assets valued at approximately $18.9 billion.

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 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 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 mutual fund markets. The cost of developing new products and 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 Highlights

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.

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.

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.

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 in assets under management.


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

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.

Our financial position remains strong with liquid cash and investments of $75.4 million as of December 31, 2013.

Revenues

We derive 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 based 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 advisory 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, or are based on a daily or monthly analysis of assets under management for the stated period. Westwood Management and Westwood International recognize revenues as services are rendered. A limited number of our clients have agreed to contractual performance-based fees, which generate 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. Since most of our advance paying clients' billing periods coincide with the calendar quarter to which payment relates, revenue related to those clients is fully recognized within the quarter. Consequently, no significant amount of deferred revenue is contained in our consolidated financial statements.

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 billing 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 no significant amount of deferred revenue is contained in our consolidated financial statements.

Our other revenues generally consist of interest and investment income. Although we invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds, including the Westwood Funds and common trust funds sponsored by Westwood Trust.

Assets Under Management

Assets under management increased $4.7 billion, or 34%, to $18.9 billion at December 31, 2013 compared to $14.2 billion at December 31, 2012. Quarterly average assets under management increased $2.6 billion, or 19%, to $16.3 billion for 2013 compared with $13.7 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.

The following table sets forth our assets under management as of December 31, 2013, 2012 and 2011:

                             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 %


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.

Mutual Funds include the Westwood Funds , a family of mutual funds for which Westwood Management serves as advisor.

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

The increase in assets under management for the year ended December 31, 2013 was primarily due to new inflows of $4.3 billion and market appreciation of $3.3 billion, partially offset by outflows of $2.8 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. 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


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 )%


Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Total Revenue. In 2013 our total revenues increased by 18% to $91.8 million compared with $77.5 million in 2012. Asset-based advisory fees increased by 21% to $70 million in 2013 from $57.9 million in 2012 due to higher average assets under management primarily reflecting market appreciation of assets and net inflows. We earned a performance-based advisory fee of $2.6 million in 2013 compared to $1.3 million in 2012. Trust fees increased by 23% to $18.4 million in 2013 from $15 million in 2012 due to higher average assets under management primarily reflecting market appreciation of assets. Other revenues, which generally consist of interest and investment income, decreased by $2.5 million to $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.

Employee Compensation and Benefits. Employee compensation and benefits, which generally consist of salaries, incentive compensation, equity-based compensation and benefits, increased by 9% to $47.8 million compared with $43.7 million in 2012. This increase was primarily due to net increases of $1.6 million in salary expense primarily relating to additional hires at Westwood Management, Westwood Trust and Westwood International; $0.9 million in incentive compensation including 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. We had 106 full-time employees as of December 31, 2013 compared to 96 at December 31, 2012.

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% to $1.3 million in 2013 compared with $1.1 million in 2012 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 87% to $2.2 million in 2013 compared with $1.2 million in 2012 primarily due to an increase of $0.6 million in shareholder servicing fees on higher fund assets and an increase of $140,000 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 13% to $2.9 million in 2013 compared with $2.6 million in 2012 primarily due to an increase 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.

Professional Services. Professional services expenses generally consist of audit, external subadvisor expense, legal 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 2012 partially offset by an increase in legal expense in 2013.

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% to $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 increase in non-income taxes.

Provision for Income Taxes. Provision for income taxes increased by 31% to $10.4 million in 2013 compared with $7.9 million in 2012. The effective tax rate decreased to 36.7% from 39.6% in 2012 primarily due to reduced operating losses from Westwood International, 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 million 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.


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.

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