Alpha
is …
Investing for the Future | Investing Where It Counts
Westwood Holdings Group, Inc. | 2018 Annual Report
How We
The investment industry defines “alpha”
as a manager’s ability to exceed the
“expected” returns of an investment
product. At Westwood, we view alpha as
a material, positive performance edge, to
be gained without taking excessive risk.
Our goal is to create alpha responsibly across all segments of our
business. This means pushing our teams’ ambitious expectations
and idea generation capabilities to gain a significant and
sustainable advantage in product performance, technology,
sales and marketing, while preserving our distinctive
customer-oriented culture.
After 36 years as investment managers, we have weathered
– and learned from – some of the most challenging markets
and economic conditions in history. While our investment
philosophy remains the same, for us to gain a competitive
edge, we must innovate, evolve and challenge the status quo,
especially in the face of adversity, to deliver broad-based
alpha to our stockholders.
Westwood Holdings Group, Inc. | 2018 Annual Report
ABOUT WESTWOOD HOLDINGS GROUP
Westwood Holdings Group, Inc. provides investment management services to institutional investors, private wealth clients and financial intermediaries. The firm has
$16.6 billion in assets under management, of which $3.0 billion are in values-based and socially responsible investment mandates as of December 31, 2018. Westwood
offers a range of investment strategies including U.S. equities, Multi-Asset, Emerging Markets equities, Global Convertible securities and Master Limited Partnerships
(MLPs) portfolios. Access to these strategies is available through separate accounts, the Westwood Funds® family of mutual funds, UCITS funds and other pooled vehicles.
Westwood benefits from significant, broad-based employee ownership and trades on the New York Stock Exchange under the symbol “WHG.” Based in Dallas, Westwood
also maintains offices in Toronto, Boston and Houston.
For more information on Westwood, please visit
For more information on Westwood Funds, please visit
westwoodgroup.com.
westwoodfunds.com.
ASSETS BY ACCOUNT TYPE
ASSETS UNDER MANAGEMENT DIVERSIFICATION
2% UCITS
2002
2018
20%
Westwood
Mutual Funds
24%
Wealth Management
INSTITUTIONAL CLIENT TYPE
8%
Foundations/
Endowments
3%
UCITS
6%
Sovereign
Wealth
17%
Corporate
54%
Institutional
Separate
Accounts and
Other Managed
Accounts
7%
Taft-Hartley/
Superannuation
21%
Public Funds
38%
Sub-Advisory
STRATEGY BREAKDOWN
3%
4%
Low Volatility Equity
Liquid Alternatives
3%
Liquid Real Assets
(MLPs)
17%
Emerging
Markets Equity
21%
Multi-Asset
35%
U.S. Value Equity
17%
Wealth Management
and Other Institutional
Strategies
16%
84%
$4.1 billion
2%
20%
24%
54%
$16.6 billion
Institutional Separate Accounts and Other Managed Accounts
Wealth Management
Westwood Mutual Funds
UCITS
ASSETS UNDER MANAGEMENT (in billions)
$25
$20
$15
$10
$5
$0
2014
2015
2016
2017
2018
REVENUES (in millions)
$140
$120
$100
$80
$60
$40
$20
$0
2014
2015
2016
2017
2018
FINANCIAL HIGHLIGHTS (in thousands, except per share data)
Years ended December 31,
OPERATING RESULTS
Revenues
Income before income taxes
Net income
Earnings per share – diluted
Economic earnings
BALANCE SHEET DATA
Cash and investments
Total assets
Stockholders’ equity
Dividends declared
2018
2017
2016
$122,300
36,462
26,751
3.13
43,943
$118,230
190,485
161,149
24,833
$133,785
33,893
19,989
2.38
38,917
$105,573
192,659
156,396
22,552
$123,021
34,010
22,647
2.77
41,108
$ 90,164
179,678
146,069
20,440
ASSETS UNDER MANAGEMENT (in millions)
$ 16,606
$ 24,229
$ 21,241
Investing
Where It Counts
Our mission is to
exceed client
expectations through
exceptional performance
and ethical conduct.
We serve our global client
Our Dublin-based
base from our company
Undertakings for Collective
headquarters in Dallas, as well
Investment in Transferable
as offices in Toronto, Boston
Securities (UCITS) umbrella
and Houston.
fund offers two sub-funds for
non-U.S. investors.
Investing for the Future | Investing Where It Counts
Alpha is …
the difference between
Performance
Human Capital
Sales
Marketing
Mergers &
Acquisitions
Product
Innovation
Operations
Digital
Client
Experience
At Westwood, responsible alpha is
what we seek to generate across
all segments of our business.
Reaching for alpha in everything
that we do holds us accountable
to provide nothing short of
excellence for our clients.
CRM
Advice
Client
For Life
Contents
2
6
To Our Clients,
Stockholders
and Employees
Product
Alpha Through
Innovation
8
Delivering
Customer Alpha,
Forging Clients
for Life
10
12
14
Redefining
Marketing and
Sales Alpha
Generating
Digital Alpha
Across the Firm
Our Most
Important
Source of Alpha
W e s t w o o d H o l d i n g s G r o u p , I n c . | 1
There is a “difference.”
To Our Clients, Stockholders and Employees
Global Markets in Transition – A Year of Development for Westwood
2018 proved to be a challenging and volatile year for global securities markets as
confidence and complacency gave way to heightened caution in the latter months of
the year. Although the market correction late last year may prove to be limited, and
instead simply a good buying opportunity, we believe that volatility will remain
elevated into 2019.
Last year the S&P 500 delivered its first negative annual return since 2008 as the Federal
Funds Rate climbed a full percentage point, its largest one-year hike in 12 years, and
market volatility, as measured by the VIX, registered its highest year-end level since
2008. While the U.S. economy appears stable, actual and potential headwinds have been
appearing both in the U.S. and abroad. Regardless of whether these risks materialize or
fade away, Westwood’s increasingly diversified and reinvigorated business is poised
to capitalize on any outcome.
Ironically, an increasingly anxious and uncertain marketplace has historically benefited
our active, high-conviction strategies. During times of uncertainty, quality companies rise
to the surface. Market volatility often unearths new investment opportunities as quality
companies become mispriced. Our consistent, long-term, high-conviction approach
focused on alpha, with an emphasis on downside protection, will serve us well as we
enter a period where robust equity returns may be difficult to achieve.
As expected, passive products continued to dominate allocations, a trend that presented
challenges for active managers. Westwood expects to capitalize on shifts in market and
economic sentiment with major steps in technology, marketing and distribution, including
the introduction of highly innovative fee structures to increase our AUM and revenue.
Several large investment banks are beginning to stress the importance of actively-
managed products, and an active management renaissance may have already begun as
the percentage of active mutual funds ticked up to 75.2 percent in 2018 from 74.3 percent
in 2017. Nonetheless, hurdles remain for active managers with continued earnings and
revenue pressure, ever-increasing costs and underperformance.
2 | W e s t w o o d H o l d i n g s G r o u p , I n c .
Westwood is prepared to challenge the industry with uncommon offerings and growth
tactics. We are embracing many changes in the marketplace, and we have the capacity
to meet demand with best-of-breed technology. Our distribution teams will be pushing
hard in 2019 to expand our global reach.
As for our current product portfolio, Westwood performed strongly in some areas, but
there was room for improvement in others. One of several challenges was the migration
into passive, along with reallocations, consultant changes and underperformance – all of
which contributed to a decrease in AUM. Our LargeCap Select and LargeCap Value strategies
delivered top-quartile peer performance last year and nearly all our U.S. Value and Emerging
Markets strategies beat their primary benchmarks, gross of fees, for the year.
Westwood’s core revolves around our time-tested investment process and, most
importantly, our people.
Maintaining Our Discipline
As industry forces introduce nuances into the investment management business, we
believe that our diverse product lineup, with solid performance, marketed and supported
by a dedicated and talented team, will lead us across the finish line. We have used
previous transition years as motivation to hone our approach, and once again, we are not
standing still. We are not afraid to break from the herd in our quest to deliver alpha.
ANNUAL DIVIDENDS (in millions)
Over $190 million of dividends paid out from 2002 to 2018
$30
$25
$20
$15
$10
$5
$0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Annual Dividends
Special Dividends
As of December 31, 2018
W e s t w o o d H o l d i n g s G r o u p , I n c . | 3
Our AUM finished the year at $16.6 billion, down $7.6 billion from 2017, $1.4 billion
of which was due to market depreciation. Total 2018 revenues were $122.3 million, a
9 percent decrease from the previous year. Diluted EPS rose 32 percent to $3.13 per share,
and net income increased 34 percent to $26.8 million, a rise due to foreign currency
transaction gains, lower incentive compensation expense and a lower federal tax rate as
part of the 2017 Tax Cuts and Jobs Act. At year end, our P/E ratio was 11.0x versus
15.6x for the S&P 500. Since we began trading as WHG in June 2002, our stock has
returned 434.0 percent versus 254.5 percent for the S&P 500 during the same period,
and WHG has typically commanded a P/E premium to the index.
We continue to maintain a strong balance sheet, with $118 million in liquid cash and
investments and no debt as of December 31, 2018. In October 2018, our board approved
a 6 percent dividend increase to an annual rate of $2.88 per share, bringing our dividend
yield to 8 percent as of December 31, 2018. We have raised our dividend every year
since we became a public company, consistent with our stated goal of providing superior
dividend growth.
Continued Transformation, Propelled by Technology and Distribution
Westwood continues to execute its long-term plans to deliver alpha, including substantial
investments in systems, technology and people. Our operational infrastructure has been
completely migrated to the cloud-based Microsoft Azure platform, substantially increasing
efficiency, scalability and security.
The integration with Bloomberg is complete and will be instrumental in streamlining
our performance measurement, accounting, data and reporting needs. Our portfolio
management and operations teams have faster, more powerful tools to increase
efficiency and improve results.
2018 marked the start of our partnership and integration with digital solutions powerhouse
InvestCloud – a platform that will help us deliver a higher level of service to our clients.
On the distribution side, we made two strategic hires to strengthen our team and increase
our product exposure globally. Steve Paddon, Head of Distribution, brings 36 years of
experience to Westwood having served as Head of Institutional Distribution at Oppenheimer
and Head of Consultant Relations at Investec. He has already instituted several changes,
including a reorganization of our sales and service roles and support infrastructure.
Harvey Steele joined Westwood as Head of Intermediary Distribution. Mr. Steele brings
15+ years of asset management expertise across multiple channels in retail. Most
recently, he led the retail distribution channel as Managing Director – National Sales
Manager and Head of Retail Distribution at New York Life Mainstay Investments.
4 | W e s t w o o d H o l d i n g s G r o u p , I n c .
All distribution and marketing teams were brought together under Steve’s leadership,
allowing us to execute a more integrated sales strategy across all channels to drive
new business.
We look forward to the effects of the positive changes they have already initiated.
Staying Ahead of Industry Trends
Westwood is reshaping its approach to offer a more holistic solution for all clients, driven
by data, digital offerings and tailored support, ranging from individual wealth management
clients to our largest institutional clients. Internally, we are building a data-driven sales
framework for institutional investors and intermediaries to better define opportunities
and more effectively target prospects. Outwardly, we are working hard to align ourselves
better with our clients.
Westwood is focused on solving investor challenges with active management fees, in an
effort to level the playing field for investors. To accomplish this, we have developed a simple
fee framework available to eligible investors on our new high conviction or “Select” product
line. This framework, called Westwood Sensible Fees™, embraces the core principles
of evaluating pure manager skill, addressing the low cost of indexing and protecting
investors using risk-based fees – all with the goal of changing how investors make active
decisions, versus passive, and reversing the historical precedent set in the industry by
giving the asset owner the asymmetric advantage. Our risk-adjusted performance fees
are offered using two different options to be selected at the discretion of the investor.
Sensible Fees™ integrates built-in guardrails for investors that negate unnecessary or
uncompensated risk-tasking in pursuit of performance fees.
Investing Where It Counts
As we’ve done for 36 years, Westwood invests in ideas knowing that our dollars will yield
more than average returns. With no debt and $118 million in cash and investments on
our balance sheet, we will continue to invest wisely and methodically where we see the
most value for employees and stockholders.
We are using this opportunity to transform our business and continue to make strategic
investments as an agile, boutique investment firm that still has tremendous room to grow.
In an environment of increasing complexity, regulatory requirements and unprecedented
competition, we believe our integrated digital platform, global resources and strong cash
position make us an ideal partner for investment teams and wealth management firms that
seek to be a part of a larger, scalable platform.
Brian O. Casey
President & Chief Executive Officer
W e s t w o o d H o l d i n g s G r o u p , I n c . | 5
Alpha is …
the difference between
average
Diversified Strategies and Client Base | Investing Where It Counts
Product Alpha Through Innovation
W estwood’s investment teams, U.S. Value and Multi-Asset based in Dallas,
Emerging Markets based in Toronto and Global Convertibles based in Boston,
manage a diversified portfolio of investment products for institutional investors,
intermediaries, financial advisors and wealth management clients. Product development
efforts focus on high-conviction, high active share equity and outcome-oriented strategies.
Our LargeCap strategies provided top-quartile returns in 2018 and have delivered top-
decile results since inception. LargeCap Select, which invests in about 15 to 30 high-quality
companies, continued to outperform exceptionally well, outpacing its benchmark by
4 percent, gross of fees, in 2018.
Our biggest challenge in 2018 was associated with client outflows, related to past
performance, in two of our offerings, SMidCap and Emerging Markets. Performance
challenges abated somewhat in 2018 for our SMidCap strategy, after two years of
significant performance challenges. In addition, our Emerging Markets strategies
Providing a broad range of diverse investment products
PRODUCT BREADTH ACROSS THE RISK SPECTRUM
Market
Neutral
Income
Flexible
Income
Worldwide
Income
Opportunity
LargeCap
Select
Select
Equity
SMidCap
SmallCap
Value
Emerging
Markets
SMidCap
Low
Volatility
Income
Opportunity
Strategic
Global
Convertibles
LargeCap
Value
AllCap
Value
SMidCap
Plus
MLP
Strategies
High
Volatility
Emerging
Markets &
Emerging
Markets Plus
6 | W e s t w o o d H o l d i n g s G r o u p , I n c .
and innovation.
outperformed their benchmarks, gross of fees, in an exceptionally volatile year in which
the Emerging Markets index was down about 15 percent for the year. We look to more
settled global trade agreements and economic conditions to fuel growth and stability in
the Emerging Markets sector. We believe that last year’s correction will help us uncover
hidden potential in high-quality companies.
On a more positive note, we launched Flexible Income in 2018, targeting the hordes of
baby boomers heading into, or already in, their retirement years. Flexible Income beat its
benchmark by 1.8 percent in 2018 and was ranked in the top decile in its category.
To remain competitive in the changing active management landscape, we created a new
Product Innovation team in 2018. This team is charged with cultivating, developing and
prioritizing new product strategies and services. This group will ensure that our current
products are positioned properly in their investment categories and segments as well as
across the Firm product continuum to maximize the potential of our product lineup.
Alpha is the difference.
We believe innovation will position Westwood well in this challenging environment.
Diverse Client Base
We serve institutional investors, a
wide spectrum of private wealth
clients and financial intermediaries.
Risk Aware and
Disciplined Approach
We have applied the same investment
philosophy and core principles since
our founding in 1983. Our portfolios
are focused on high active share, built
from a bottom-up process with an
emphasis on downside risk.
A Custom Fit
Every client is unique and deserves
a strategy that is tailored to their
specific needs.
W e s t w o o d H o l d i n g s G r o u p , I n c . | 7
Alpha is …
the difference between
being a number
Wealth Management | Investing Where It Counts
Delivering Customer Alpha, Forging Clients for Life
W estwood’s goal is to create a Client for Life in every aspect of our business.
Our wealth management division, Westwood Wealth Management – which
includes Westwood Trust and Westwood Advisors, LLC – is a large part of how
we work to achieve this goal. The bonds we cultivate with our wealth clients are essential
Alpha for Clients
Clients for Life
Putting Clients First is
central to everything
we do. Clients for Life is
our way of delighting
clients, providing them
with the personalized
service and advice
they deserve and
helping them solve
life’s problems.
to our success. Our clients have access to distinct investment strategies and, as needed,
completely customized strategies.
Serving clients out of our Dallas and Houston offices, Westwood Wealth Management offers
fiduciary and investment services including comprehensive wealth management, financial
planning and investment management, trust and estate administration and management,
agent and custody service, IRA administration, charitable planning and specialized fiduciary
services for charitable organizations. Our focus is to help clients address their financial
complexities, so they can achieve their goals and objectives.
Our services and technological capabilities extend well beyond the typical wealth
management firm. The rollout of WealthCoach 2.0 and the integration of InvestCloud will
allow us to dramatically enhance the client experience by making it easier than ever for
them to open and fund accounts, monitor positions and risk and seamlessly interact with
us – as they become Westwood Clients for Life!
8 | W e s t w o o d H o l d i n g s G r o u p , I n c .
and being priority #1.
Westwood continues to add solutions to help clients with their retirement
planning, wealth transfers between generations and the many complexities
relevant to high net worth and ultra-high net worth segments. To complement
our client experience, increase client engagement and attract a broader array of
ultra-high net worth prospects, we have partnered with a local bank and plan
to open a private bank in 2019. Located adjacent to our headquarters in Dallas,
the private bank will offer ultra-high net worth clients an enhanced experience
with a broad array of banking solutions and a bespoke service model that is
second to none. This will enable us to strengthen our relationships with current
clients and deliver the white-glove service they deserve.
Whatever it takes, we will take our time to get it right!
The rollout of WealthCoach 2.0 and
the integration of InvestCloud will
allow us to dramatically enhance
the client experience by making
it easier than ever for them to
open and fund accounts, monitor
positions and risk and seamlessly
interact with us. For WealthCoach in
particular, we partnered with Apex
Clearing which provides the custody
and backbone for the best online
advice platforms in the world.
Alpha is the difference.
We are committed to delivering an enhanced experience that includes on-demand account access.
Client Portal
Our new client portal will provide
clients with one place to find the
financial information they need or
to visit their money, store important
documents and interact with
Westwood when and how they prefer.
Preparing for the
Client of Tomorrow
As the world continues to become
more digital, we are committed to
providing clients with digital access
including integrated reminders
and built-in recommendations.
Westwood Experience
Westwood is small enough that we
know our clients personally and large
enough to offer the products and
services clients have come to expect.
W e s t w o o d H o l d i n g s G r o u p , I n c . | 9
Alpha is …
the difference between
routine
Distribution | Investing Where It Counts
Redefining Marketing and Sales Alpha
S timulated by the complete reinvigoration of our brand, we will deliver alpha in
marketing and distribution by strengthening our sales and service teams and
developing a more refined approach to gathering new business. This may seem
like a large undertaking, but much of the framework is already in place. Capitalizing on
data-driven insights, we will blend traditional, digital and targeted marketing initiatives,
aimed at raising brand awareness and showcasing our capabilities and our award-
winning culture. We are committed to selling our services holistically as a firm, rather
than simply promoting products.
Steve Paddon, New Head of Distribution
As Head of Distribution, Mr. Paddon leads both our Institutional and our Intermediary sales efforts.
He joined Westwood bringing 36 years of experience, having served as Head of Institutional Distribution
at Oppenheimer and Head of Consultant Relations at Investec. He has already instituted several changes,
including a reorganization of our sales and service roles and support infrastructure.
Harvey Steele, New Head of Intermediary Distribution
Mr. Steele brings 15+ years of asset management expertise, having successfully led business strategy,
generated sales growth and managed distribution teams across multiple channels. Most recently, Mr. Steele
served as Managing Director – National Sales Manager and Head of Retail Distribution at New York Life
Mainstay Investments, where he led the retail distribution channel.
1 0 | W e s t w o o d H o l d i n g s G r o u p , I n c .
and re-energized.
Achieving efficiency across our organization will help manage costs as we
Measuring Alpha
re-engineer our sales and service departments to better serve our existing
client base and take on new business. We are working to refresh our Request for
Proposal (RFP) process and content library to help us win more municipal and
institutional business.
Investment distribution will be led by our new Heads of Distribution and
Intermediary Distribution. Together, they bring decades of success to
Westwood and have already begun to optimize our teams to improve results.
We look forward to seeing the fruits of their efforts in 2019 and beyond.
The hard work spent on increasing
our digital presence is already
paying off as the number of users
of westwoodgroup.com climbed
72 percent last year and pageviews
jumped 85 percent. In short,
Westwood is getting a lot more
digital love – and we’re just
getting started.
Alpha is the difference.
Westwood is strengthening our approach to distribution to showcase our capabilities and award-winning culture.
Increased
Public Outreach
In addition to our community support
in 2018, we dedicated time and
resources to increasing brand visibility,
especially in Texas. We sponsored art
events in Dallas and partnered with the
Society of Performing Arts in Houston.
Evolving Westwood.
New Staff. New Ideas.
With a new leadership team in
place, we will be rolling out several
new initiatives. One very important
initiative is our new Sensible Fees™
platform, which is designed to align
asset owners and asset managers.
An Agile Operation
All distribution and marketing
teams work together to deliver a
more integrated sales strategy
across all channels.
W e s t w o o d H o l d i n g s G r o u p , I n c . | 1 1
Alpha is …
the difference between
ordinary
Technology | Investing Where It Counts
Generating Digital Alpha Across the Firm
R ecently, Westwood has been tackling technological integration. We achieved
several major breakthroughs in 2018 with significant progress on infrastructure,
security, data centralization and delivery – from our integration with Bloomberg,
to continued expansion of digital content through our new website and content
designed to improve Search Engine Optimization (SEO).
In 2017, we introduced WealthCoach, our digital solution offering online educational
content, account resources and smart financial commentary. Built by InvestCloud and
supported by industry-leading Apex Clearing, the launch of WealthCoach 2.0 in 2019
will make it easier than ever for prospective clients to open and fund accounts.
We have begun migrating to a customizable, digital experience far beyond the capabilities
of many competitors. As wealth moves to younger generations who want and need
comprehensive, digital content, the WealthCoach experience will enable them to select a
mix of human and digital interactions and personally relevant content.
More Accessible Alpha
As our digital footprint grows and develops, we are adding more ways
for clients and the public to interact with Westwood. We launched
Basis Points, featuring market commentary and financial perspective,
which is published every Tuesday and Thursday.
1 2 | W e s t w o o d H o l d i n g s G r o u p , I n c .
and supercharged.
New digital outreach through consumer-focused content from WealthCoach
Embracing Technology
will be instrumental in attracting a new generation of clients to Westwood.
These efforts will expand our clients’ digital experience and will provide
complete, customized solutions through client-facing systems.
Put simply, we will have a one-stop, comprehensive platform where our clients
can do what they want, when they want, on their mobile devices or desktops.
We believe that our new platform will help create and maintain Clients for Life.
As we look to the future, we
know that being tech-forward
is critical to our growth. As the
world continues to become more
and more reliant on technology,
Westwood is determined to
be a leader in delivering
state-of-the-art digital tools.
Alpha is the difference.
2018 was a monumental year for Westwood when it comes to technological integration.
InvestCloud
Bloomberg Platform
Microsoft Azure
InvestCloud will transform client
engagement by creating a holistic
experience that is customizable, based
on distribution channel, to access
information easily anytime and in any
way that suits the client.
This multi-asset and multi-currency
platform will facilitate expansion
into new asset classes and access to
best-in-class trading and portfolio
management data.
Microsoft Azure, an ever-expanding,
scalable host of cloud services,
furnishes Westwood with access to
world-class security protocols as they
become available.
W e s t w o o d H o l d i n g s G r o u p , I n c . | 1 3
Alpha is …
the difference between
employees
Westwood Culture | Investing Where It Counts
Our Most Important Source of Alpha
F ounded 36 years ago, Westwood prides itself on diversity and inclusiveness.
Walk into any Westwood office and you will find a mix of backgrounds that all
bring a unique perspective that is the soul of Westwood – more than 50 percent
of our employees are women, and every employee has a voice within our company.
A Different
Culture
Our commitment to
culture, values and
investment discipline
led us to be named a
Pensions & Investments’
Best Places to Work in
Money Management
for the fifth year in a
row. Delivering alpha
to our clients is made
possible because of
our people.
From day one, we realized that owners act differently than employees. Our goal is for
all employees to become owners, reinforcing our alignment with the needs of our clients.
Equity ownership is a meaningful component of every employee’s compensation with
employees and directors currently holding over 21 percent* of Westwood stock.
We celebrated our 35th anniversary in 2018. This was an opportune time to reflect
on all that we have accomplished since we were founded in 1983. One of our most
distinguishing attributes is our long history of community engagement.
The firm supported over 110 charitable organizations, donating over $305,000 in 2018.
In addition, Westwood signed the United Nations Principles for Responsible Investment
(UNPRI) in 2018. This reflects our commitment to sustainable investing, which links to our
investment process and spans across our high-conviction equity and outcome-oriented
solutions through our bottom-up, fundamental assessment of companies.
* as of March, 2018
1 4 | W e s t w o o d H o l d i n g s G r o u p , I n c .
and ambassadors.
Westwood’s core will always revolve around our time-tested investment
processes and, most importantly, our people. Our culture continues to thrive,
and for five years in a row, we have been named one of Pensions & Investments’
Best Places to Work in Money Management. Our human capital is our greatest
source of alpha, hands down.
Alpha is the difference.
Community involvement, a cornerstone of our culture, also drives engagement and makes employees
proud to work at Westwood.
The Planet
Its People
W e s t w o o d H o l d i n g s G r o u p , I n c . | 1 5
Investing for the Future | Investing Where It Counts
Alpha is …
We are active investment managers with conviction
in our approach. In a changing, and often challenging
investment landscape, we are leveraging technology,
pushing innovation, refining our products and expanding
our marketing and service efforts to add alpha at every step
and to ensure that every client is a Client for Life. Moving
forward, we will continue to challenge the status quo with
fresh ideas and initiatives that support our products and
services in order to grow the Westwood brand. We will not
stand by and let others shape our future.
At Westwood, we are active. It’s what we do!
1 6 | W e s t w o o d H o l d i n g s G r o u p , I n c .
… the difference
between thinking and
knowing we’re ready.
2018
Financial Review
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
Form 10-K
____________________________________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-31234
____________________________________________________________________________
WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
200 Crescent Court, Suite 1200
Dallas, Texas 75201
(Address of principal executive offices)
75-2969997
(I.R.S. Employer
Identification No.)
75201
(Zip Code)
Registrant’s telephone number, including area code: (214) 756-6900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class:
Common Stock, par value $0.01 per share
Name of each exchange on which registered:
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
____________________________________________________________________________
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
No
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See
the definitions of “large accelerated filer”, “accelerated filer”,“smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value on June 30, 2018 of the voting and non-voting common equity held by non-affiliates of the registrant was $427,426,109. For purposes of this calculation,
the registrant has assumed that stockholders that are not officers or directors of the registrant are not affiliates of the registrant.
The number of shares of registrant’s Common Stock, par value $0.01 per share, outstanding as of February 15, 2019: 8,899,174.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders, which will be filed with the U.S. Securities and Exchange Commission
within 120 days after the end of the fiscal year to which this report relates, are incorporated by reference into Part III hereof.
WESTWOOD HOLDINGS GROUP, INC.
Index
PART I:
Item 1. Business ................................................................................................................................................
Item 1A. Risk Factors ......................................................................................................................................
Item 1B. Unresolved Staff Comments ............................................................................................................
Item 2. Properties .............................................................................................................................................
Item 3. Legal Proceedings................................................................................................................................
Item 4. Mine Safety Disclosures ......................................................................................................................
PART II:
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ..........................................................................................................................................
Item 6. Selected Financial Data.......................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .......
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .....................................................
Item 8. Financial Statements and Supplementary Data ...............................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......
Item 9A. Controls and Procedures..................................................................................................................
Item 9B. Other Information ............................................................................................................................
PART III:
Item 10. Directors, Executive Officers and Corporate Governance............................................................
Item 11. Executive Compensation...................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.........................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence...........................
Item 14. Principal Accounting Fees and Services..........................................................................................
PART IV:
Item 15. Exhibits, Financial Statement Schedules ........................................................................................
PAGE
1
12
20
20
20
20
21
23
24
37
38
38
39
42
42
42
42
42
42
43
i
PART I
Item 1.
Business.
Unless the context otherwise requires, the term “we,” “us,” “our,” “Westwood,” or “Westwood Holdings
Group” when used in this Form 10-K (“Report”) and in the Annual Report to the Stockholders refers to Westwood Holdings
Group, Inc., a Delaware corporation, and its consolidated subsidiaries taken as a whole. This Report contains some forward-
looking statements within the meaning of the federal securities laws. Actual results and the timing of some events could differ
materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including
without limitation those set forth under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Item 1A. Risk Factors.”
General
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 adviser and referred to
hereinafter together as “Westwood Management”), Westwood International Advisors Inc. (“Westwood International Advisors”)
and Westwood Trust. Westwood Management, founded in 1983, provides investment advisory services to institutional
investors, a family of mutual funds called the Westwood Funds®, other mutual funds, an Irish investment company authorized
pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulation 2011 (as
amended) (the “UCITS Fund”), individual investors and clients of Westwood Trust. Westwood International Advisors was
established in 2012 and provides investment advisory services to institutional clients, the Westwood Funds®, other mutual
funds, the UCITS Fund and clients of Westwood Trust. Westwood Trust, founded as a state-chartered trust company in 1974,
provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth
individuals. Our revenues are generally derived from fees based on a percentage of assets under management. Westwood
Management, Westwood International Advisors and Westwood Trust collectively managed assets valued at approximately
$16.6 billion at December 31, 2018. We were incorporated under the laws of the State of Delaware on December 12, 2001. Our
common stock is listed on the New York Stock Exchange under the ticker symbol “WHG.” We are a holding company whose
principal assets consist of the capital stock of Westwood Management, Westwood Trust and Westwood International Advisors.
The success of our business is dependent on client, institutional investment consultant and intermediary
relationships. We believe that, in addition to investment performance, client service is paramount in the asset management
business. Accordingly, a major business focus is to build strong relationships with clients to enhance our ability to anticipate
their needs and satisfy their investment objectives. Our team approach is designed to deliver efficient, responsive service to our
clients.
We have focused on building our foundation in terms of personnel and infrastructure to support a larger business.
We have developed investment strategies that we expect to be desirable within our target institutional, wealth management and
mutual fund markets. Developing new investment strategies and building the organization can result in incurring expenses
before significant offsetting revenues are realized. We continue to evaluate new strategies and resources in terms of meeting
actual and potential investor needs.
Available Information
We maintain a website at westwoodgroup.com. Information contained on, or connected to, our website is not
incorporated by reference into this Report and should not be considered part of this Report or any other filing that we make
with the Securities and Exchange Commission (“SEC”). All of our filings with the SEC, including our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available
free of charge on our website. Our Code of Business Conduct, Corporate Governance Guidelines and Audit Committee,
Compensation Committee and Governance/Nominating Committee Charters are available without charge on our website.
Stockholders also may obtain print copies of these documents free of charge by submitting a written request to Terry Forbes,
our Chief Financial Officer and Treasurer, at the address set forth on the front of this Report. The public can also obtain any
public document we file with the SEC at www.sec.gov.
1
Advisory
General
Our advisory business is comprised of Westwood Management and Westwood International Advisors and
encompasses three distinct investment teams – the U.S. Value Team, the Global Convertible Securities Team and the Emerging
Markets Equity Team.
Westwood Management provides investment advisory services to large institutions, including corporate
retirement plans, public retirement plans, endowments and foundations. Institutional separate account minimums vary by
investment strategy and generally range from $5 million to $25 million. Westwood Management also provides advisory
services to individuals, the Westwood Funds® and the UCITS Fund, as well as subadvisory services to other mutual funds and
pooled investment vehicles. Westwood Management’s investment strategies are managed by the U.S. Value Team, based in
Dallas, Texas, and by the Global Convertible Securities Team, based in Boston, Massachusetts. Our U.S. investment
professionals average fifteen years of investment experience. We believe team continuity and years of experience are among
the critical elements required for successfully managing investments.
Westwood International Advisors, based in Toronto, Canada, provides investment advisory services to large
institutions, pooled investment vehicles and the UCITS Fund, as well as subadvisory services to the National Bank Westwood
Funds, which are mutual funds offered by National Bank of Canada. Institutional separate account minimums vary by
investment strategy and generally range from $10 million to $25 million. Westwood International Advisors' investment
strategies are managed by the Emerging Markets Equity Team, with an average of 23 years of investment experience.
Westwood International Advisors has entered into a Memorandum of Understanding (“MOU”) with Westwood Management
pursuant to which Westwood International Advisors is considered a “participating affiliate” of Westwood Management as that
term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisers to use portfolio management
or research resources of advisory affiliates subject to the supervision of a registered adviser. Pursuant to the MOU, Westwood
International Advisors professionals provide advisory and subadvisory services to certain Westwood Funds®, pooled
investment vehicles and large institutions under the supervision of Westwood Management.
Investment Strategies
We offer a broad range of investment strategies, which enables us to serve a variety of client types with different
investment objectives, including five investment strategies each with over $1 billion in assets under management: our Income
Opportunity, LargeCap Value, SMidCap, SmallCap Value and Emerging Markets strategies.
U.S. Value Team
The U.S. Value team employs a value-oriented approach. The common thread that permeates the team's strategies
is a disciplined approach to controlling risk and preserving client assets whenever possible. The team seeks to invest in
companies with high levels of free cash flow, improving returns on equity and strengthening balance sheets that are well
positioned for growth but whose value is not fully recognized in the marketplace. Through investments in companies that
exhibit these characteristics, we seek to generate consistently superior performance relative to our industry peers and relevant
benchmark indices. This investment approach is intended to preserve capital during unfavorable periods and provide superior
real returns over the long term. We have established a track record of delivering competitive risk-adjusted returns for our
clients. The principal investment strategies currently managed by the U.S. Value Team are as follows:
LargeCap Value: Investments in equity securities of approximately 40 to 60 companies with market
capitalizations at purchase generally over $5 billion.
LargeCap Select: Investments in equity securities of approximately 15 to 30 companies with market
capitalizations at purchase generally over $5 billion.
SMidCap Plus: Investments in equity securities of approximately 45 to 65 companies with market
capitalizations generally within the range of the Russell Midcap Index above $2 billion.
SMidCap: Investments in equity securities of approximately 50 to 70 companies with market
capitalizations generally within the range of the Russell 2500 Index.
SmallCap Value: Investments in equity securities of approximately 50 to 70 companies with market
capitalizations generally within the range of the Russell 2000 Index.
AllCap Value: Investments in equity securities of approximately 50 to 80 companies with market
capitalizations at purchase generally over $100 million.
2
Income Opportunity: Investments across a broad spectrum of income-producing securities of
approximately 60 to 80 companies.
Worldwide Income Opportunity: Investments across a broad spectrum of income-producing
securities of approximately 60 to 80 global companies.
Master Limited Partnership Infrastructure Renewal: Investments in the securities of approximately
25 to 35 companies that span Master Limited Partnership (“MLP”) subsectors and/or have MLP-like
characteristics, with market capitalizations of any size and generally with a 7.5% maximum position size at
purchase, unless the security is held by the index. If the security is held by the index, then the portfolio may hold
up to its weight in the index.
Master Limited Partnership Opportunities: Investments in the securities of approximately 25 to 35
companies that span MLP subsectors and/or have MLP-like characteristics, with market capitalizations of any size
and generally with a 4% maximum position size at purchase.
Master Limited Partnership and Strategic Energy: Investments in the securities of approximately 25
to 40 companies that span MLP subsectors, have MLP-like characteristics, and/or primarily involve energy-
related activities, with market capitalizations of any size. Investments in publicly traded partnerships for this
strategy will be limited to 25% of the portfolio.
Low Volatility Equity: Investments in the common stock or convertible securities of approximately
40 to 80 companies, seeking a lower level of volatility than traditional equity-oriented strategies. (Jointly
managed by U.S. Value and Global Convertible Securities teams).
Flexible Income: Investments in securities across a company’s capital structure with the objective of
achieving higher yield and lower volatility than other income alternatives strategies.
Global Convertible Securities Team
The Global Convertible Securities Team manages both long-only and liquid alternative global convertible
securities strategies combining a disciplined investment process with rigorous risk management. The team's investment
philosophy is based on the following beliefs:
•
•
•
•
the asymmetric return profile of balanced convertible bonds can provide superior risk-adjusted returns over
medium- to long-term time horizons;
convertible securities markets are inefficient, creating opportunities to benefit from pricing anomalies;
a global focus provides more robust opportunities and a clearer picture of the broad convertibles universe;
and
proprietary fundamental research is the best way to identify solid companies with attractive risk-adjusted
return profiles.
The team draws on the proprietary fundamental research of all three of Westwood's investment teams in order to
identify securities with attractive risk-adjusted return profiles. The principal investment strategies currently managed by the
Global Convertible Securities Team are as follows:
Strategic Global Convertibles: Investments in convertible securities of approximately 60 to 90
global companies, utilizing both a top-down and bottom-up investment process.
Market Neutral Income: Investments utilizing three primary strategies, consisting of short-duration
yield-oriented portfolio of global convertible securities, a convertible arbitrage strategy, and a macro hedging
strategy.
Emerging Markets Equity Team
The Emerging Markets Equity Team emphasizes Economic Value Added (EVA) in its investment process and
seeks to identify mispriced businesses that can generate sustainable earnings growth. The team offers emerging markets equity
investment strategies as follows:
Emerging Markets: Investments in equity securities of approximately 70 to 90 emerging markets
companies with market capitalizations generally over $500 million.
3
Emerging Markets Plus: Investments in equity securities of approximately 70 to 90 emerging
markets companies with market capitalizations generally over $1.5 billion.
Emerging Markets SMidCap: Investments in equity securities of approximately 50 to 70 emerging
markets companies with market capitalizations at purchase generally between $165 million and $9 billion.
Our ability to grow assets under management is primarily dependent on our ability to generate competitive
investment performance, our success in building strong relationships with investment consulting firms and other financial
intermediaries, as well as our ability to develop new client relationships while nurturing and maintaining existing relationships.
We continually seek to expand assets under management by growing our existing investment strategies, as well as identifying
and developing new ones. We intend to grow our investment strategies internally but may also consider acquiring new
investment strategies from third parties, as discussed under “Growth Strategy” below. Our growth strategy provides clients with
more investment opportunities and diversifies our assets under management, thereby reducing risk in any one area of
investment and increasing our competitive ability to attract new clients. Our ten largest clients accounted for approximately
20% of our fee revenues for the year ended December 31, 2018. The loss of some or all of these large clients could have a
material adverse effect on our business and our results of operations.
Advisory and Subadvisory Agreements
Westwood Management and Westwood International Advisors manage client accounts under investment advisory
and subadvisory agreements. Typical for the asset management industry, these agreements are usually terminable upon short
notice and provide for compensation based on the market value of client assets under management. Westwood’s advisory fees
are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears
based on assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of
assets under management for the stated period. A few clients have contractual performance-based fee arrangements, which
generate additional revenues if we outperform a specified index over a specific period of time. Revenue for performance-based
fees is recorded at the end of the measurement period. Revenue from advance payments is deferred and recognized over the
period that services are performed. Pursuant to these agreements, Westwood provides overall investment management services,
including directing investments in conformity with client-established investment objectives and restrictions. Unless otherwise
directed in writing by clients, Westwood has the authority to vote all proxies with respect to securities in client portfolios.
Westwood Management and Westwood International Advisors are parties to subadvisory agreements with other
investment advisers under which they perform similar services under advisory agreements. Our subadvisory fees are generally
computed based upon the average daily assets under management and are payable on a monthly basis.
Westwood Management provides investment advisory services to the Westwood Funds® family of mutual funds:
Westwood Emerging Markets (WWEMX)
Westwood Flexible Income (WFLEX)
Westwood Income Opportunity (WHGIX)
Westwood LargeCap Value (WHGLX)
Westwood Low Volatility Equity (WLVIX)
Westwood Opportunistic High Yield (WWHYX)(1)
Westwood Short Duration High Yield (WHGHX)(1)
Westwood SmallCap (WHGSX)
Westwood SMidCap (WHGMX)
Westwood SMidCap Plus (WHGPX)
Westwood Market Neutral Income (WMNIX)
Westwood Strategic Convertibles (WSCIX)
Westwood MLP & Strategic Energy (WMLPX)
Westwood Worldwide Income Opportunity (WWIOX)
(1) Subadvised by SKY Harbor Capital Management, LLC, a registered investment adviser based in Greenwich, Connecticut
As of December 31, 2018, the Westwood Funds® had assets under management of $3.2 billion.
4
Trust
General
Through the combined efforts of the Dallas and Houston offices of Westwood Trust, we provide fiduciary and
investment services to high net worth individuals and families, non-profit endowments and foundations, public and private
retirement plans and individual retirement accounts (“IRAs”). Westwood Trust is chartered and regulated by the Texas
Department of Banking. Fees charged by Westwood Trust are separately negotiated with each client and are typically based on
assets under management. Clients generally have at least $1 million in investable assets.
On September 6, 2017, we entered into an agreement to sell the Omaha-based component of our Wealth
Management business. The sale was completed on January 12, 2018. The sale does not represent a major strategic shift in our
business. Further information on the sale is included in Note 1 “Description of the Business” to our Consolidated Financial
Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” accompanying this Report.
Fiduciary Services
Westwood Trust’s fiduciary services include but are not limited to: financial planning, wealth transfer planning,
customizable trust services, trust administration and estate settlement. Westwood Trust also provides custodial services, tax
reporting, accounting of trust income and principal, beneficiary and retiree distributions and safekeeping of assets.
Investment Services
Westwood Trust utilizes a consultative approach in developing a client’s portfolio asset allocation. Our approach
involves examining clients' financial situations, including their current portfolio of investments, and advising clients on ways to
reduce risk, enhance investment returns and strengthen their financial position based on each client’s unique objectives and
constraints. Westwood Trust seeks to define and improve risk/return profiles of client investment portfolios by offering a
comprehensive investment solution or enhancing clients’ existing investment strategies. Westwood Trust manages separate
portfolios of equity and fixed income securities for certain agency and trust clients. Equity portfolios are generally patterned
after the institutional strategies offered by Westwood Management or developed by the internal investment team in our Houston
office. Fixed income portfolios consist of targeted “laddered” portfolios of primarily high-quality municipal securities.
Westwood Trust also sponsors a range of common trust funds in which client assets are commingled to achieve
economies of scale. Westwood Trust’s common trust funds fall within two basic categories: personal trusts and employee
benefit trusts. Westwood Trust sponsors common trust funds for most of the investment strategies managed by Westwood
Management and Westwood International Advisors. Westwood Trust has also engaged SKY Harbor Capital Management, LLC
and Brandywine Global Investment Management, LLC, both registered investment advisers, to subadvise our High Yield Bond
and International Fixed Income common trust funds, respectively.
Westwood Trust also develops asset allocation models for certain clients utilizing mutual funds managed by
Westwood Management and Westwood International Advisors, as well as from certain other mutual fund families.
Enhanced Balanced® Portfolios
Westwood Trust is a strong proponent of asset class diversification and offers its clients the ability to diversify
among many different asset classes. Westwood Trust Enhanced Balanced® portfolios allocate assets among these asset classes
into a customizable portfolio for clients seeking to maximize return for a given level of risk. Periodic adjustments are made to
asset class weightings in Enhanced Balanced® portfolios based on historical returns, risk and correlation data, and our current
capital markets outlook.
Select Equity Strategy
The Westwood Select Equity strategy aims to provide low-frequency turnover and tax efficiency to high net
worth individuals. The offering allows individuals to own a diversified portfolio of best ideas from across Westwood's
investment teams. The portfolios are diversified and include value and growth stocks, along with small-, mid- and large-cap
stocks. Westwood Select Equity is also available without the tax efficiency overlay.
5
Distribution Channels
We market our services through several distribution channels to optimize the reach of our investment advisory
and trust services. These channels enable us to leverage distribution infrastructures and capabilities of other financial services
firms and intermediaries while focusing on our core competency of developing and managing investment strategies.
Institutional
In our institutional channel, we market our investment strategies through institutional investment consultants,
financial intermediaries, managed accounts programs and directly to institutional investors. Institutional investment consultants
serve as gatekeepers to the majority of corporate retirement plans, public retirement plans, endowments and foundations, which
represent Westwood’s primary institutional target markets. Consultants provide guidance to their clients in setting asset
allocation strategies and creating investment policies. Consultants also make recommendations for investment firms they
believe can best meet their clients' investment objectives. We have established strong relationships with many global, national
and regional investment consulting firms, which collectively have contributed to our being considered and hired by their
clients. Continuing to enhance existing consulting firm relationships, as well as forging new relationships, increases the
awareness of our services in both the consultant community and within their institutional client base.
Marketing our investment strategies to financial intermediaries, via subadvisory relationships, allows us to extend
the reach of our investment advisory services to clients of other investment companies with broad, established distribution
capabilities. In subadvisory arrangements, our client is generally the investment company through which our services are
offered to investors, typically via mutual fund offerings. The investment company that sponsors the mutual fund is responsible
for appropriate marketing, distribution and operational and accounting activities.
Managed accounts are similar in some respects to subadvisory relationships in that a third-party financial
institution, such as a brokerage firm or turnkey asset management program provider, handles distribution to the end client. The
end client in a managed account is typically a high net worth individual or small institution. In these arrangements, the third-
party financial institution is responsible to the end client for client service, operations and accounting.
We also market our investment strategies directly to pension funds, endowments, foundations and other
institutional investors.
Mutual Funds
In our mutual funds channel, we market our registered mutual funds, the Westwood Funds®, to institutional
investment consultants, financial intermediaries, registered investment advisers, select broker-dealers and fund supermarkets.
By leveraging our existing relationships with institutional investment consulting firms we are able to participate when their
defined contribution and other retirement plan clients require a mutual fund vehicle. We also seek relationships with financial
intermediaries that manage discretionary fund models in order to have our funds placed in such models. Our wholesaling group
markets our funds directly to registered investment advisers, select broker-dealers and mutual fund supermarkets.
Wealth Management
In our wealth management channel, we generate awareness of our trust fiduciary and investment services through
investment consultants, centers of influence, community involvement, and targeted direct marketing to high net worth
individuals, families and small to medium-sized institutions. We also seek asset growth generated by referrals from existing
clients.
6
Growth Strategy
We believe that we have established a strong platform to support future growth, deriving our strength in large part
from the experience and capabilities of our management team and skilled investment professionals. We believe that this
focused, stable team has contributed significantly to our solid investment performance, superior client service and a growing
array of investment strategies. We believe that opportunities for future growth will come from our ability to:
•
•
•
•
•
•
•
•
•
•
generate growth from new and existing clients and consultant relationships;
attract and retain key employees;
grow assets in our existing investment strategies;
enhance our digital capabilities;
foster continued growth of the wealth management platform and distribution channel;
foster expanded intermediary distribution;
pursue strategic corporate development opportunities;
pursue opportunities internationally through targeted sales and relationships with international distributors and
institutional investors;
continue to strengthen our brand name; and
develop or acquire new investment strategies.
Generate growth from new and existing clients and consultant relationships. As our primary business objective,
we intend to maintain and enhance existing relationships with clients and investment consultants by providing solid investment
performance and attentive client service. During 2018, we hired a new Head of Institutional Sales, who has already created
distinct sales and service roles to improve our proactive sales and client engagement strategy. We also intend to pursue growth
via targeted sales and marketing efforts that emphasize our investment philosophy, performance and superior client service.
New institutional client accounts are sourced from either investment consultants or from our direct sales efforts with
institutional investors. We believe that the in-depth knowledge of our firm, our people and our processes embedded in our
consultant relationships, as well as in existing and prospective client relationships, is a key factor when being considered for
new client investment mandates.
Attract and retain key employees. To achieve our investment performance and client relationship objectives, we
must be able to attract and retain talented professionals. We believe that we have created a workplace environment in which
motivated, performance-driven and client-oriented individuals can thrive. As a public company, we offer our employees a
compensation program that includes strong equity incentives to closely align their success with that of our clients and
stockholders. We believe that these factors are critical to maintaining a stable, client-focused environment that can support
significant future growth.
Grow assets in our existing investment strategies. We have significant capacity to manage additional assets across
our existing range of investment strategies, which we have continued to expand. We have developed a range of institutional
investment strategies by building on the core competencies of our U.S. Value Team. Our Emerging Markets Equity Team
provides equity strategies that focus on emerging markets that have experienced strong investor demand, and we believe they
provide additional growth opportunities. Our Global Convertible Securities Team manages a long-only strategy called Strategic
Global Convertibles and a market neutral strategy called Market Neutral Income. We have the team in place to support these
investment strategies and, with strong investment performance, we believe that demand for these strategies can provide
meaningful growth for our assets under management.
Enhance our digital capabilities. Over the past three years we have invested significant capital to enhance our
automation and digital efficiency. We moved our technology infrastructure to secure, cloud-based access, created a data
warehouse to improve our investment operations work flow and upgraded our trade order management and trade compliance
systems. We are currently in the process of digitizing our portfolio accounting and reconciliation system and developing a fully
digital platform for our institutional and wealth management clients. We believe these investments position us to improve
efficiencies and better respond to consumer demand for digital interaction with investment advisors.
7
Foster continued growth of the wealth management platform and distribution channel. Westwood Trust serves
small to medium-sized institutions as well as high net worth individuals and families. We anticipate continued interest from
clients and prospects in our diversified, highly attentive service model. A significant percentage of asset growth at Westwood
Trust stems from referrals, as well as gathering additional assets from existing clients. We believe that our Enhanced
Balanced® strategy, which offers diversified exposure to multiple asset classes in a comprehensive manner, our Select Equity
strategy, which offers diversified equity exposure in a tax-efficient manner, and our offerings for separately managed portfolios
will all provide opportunities for growth. Additionally, we are exploring opportunities to offer passive investment management
strategies to enhance our wealth management client experience.
Foster expanded intermediary distribution. During 2018 we hired a new Head of Intermediary Sales in order to
expand and target our geographic approach and focus coverage for intermediary distribution. We plan to expand our
intermediary sales team to extend our coverage and accelerate growth in top markets. We believe that providing investors
access to our mutual funds is a key component to achieving asset growth in the defined contribution and retirement
marketplaces as well as with registered investment advisers.
Pursue strategic corporate development opportunities. We evaluate strategic corporate development opportunities
to augment organic growth. We may pursue various transactions, including acquisitions of asset management firms, mutual
funds, wealth management firms, or other financial institutions, as well as hiring investment professionals or teams. We
consider opportunities to enhance our existing operations, expand our range of investment strategies and services or further
develop our distribution capabilities. By acquiring investment firms or by hiring investment professionals or teams that
successfully manage investment strategies beyond our current expertise, we can both attract new clients and provide existing
clients with an even more diversified range of investment strategies. We may also consider forging alliances with other
financial services firms to leverage our core competency of developing and managing investment strategies with alliance
partners that can provide enhanced distribution capabilities or additional service offerings.
Pursue opportunities internationally through targeted sales and relationships with international distributors and
institutional investors. In recent years we have increased our sales efforts outside of the U.S. As of December 31, 2018, non-
U.S. clients represented approximately 20% of our assets under management compared with 16% as of December 31, 2014.
The growth in our non-U.S. client base has primarily been a function of the broadening of our range of investment strategies to
include Emerging Markets equity and Global Convertible Securities. In addition, we established a UCITS platform in 2013 for
non-U.S. investors. We intend to continue our sales efforts outside of the U.S. We have also engaged a third-party distribution
firm focused on intermediary and institutional distribution throughout Continental Europe. We may consider forging alliances
with additional international financial services firms or partners to obtain enhanced distribution capabilities and greater access
to global customers. Additionally, we continue to target select institutional clients around the globe.
Continue to strengthen our brand name. We believe that the strength of our brand name has been a key
component to our long-term success in the investment industry and will be instrumental to our future success. We have
developed strong brand name largely through our performance, coupled with high profile coverage in investment publications
and electronic media. Several of our investment professionals have been visible in print and electronic media, and we will
continue to look for creative ways to strengthen our brand name and reputation in our target markets.
Develop or acquire new investment strategies. We continue to look for opportunities to expand the range of
investment strategies that we offer to existing and prospective clients. We may consider internally-developed strategies that
extend our existing investment process to new markets, and we may also consider externally acquired investment strategies. An
expanded range of investment strategies offers additional ways to serve our client base, generating more diversified revenue
streams, as well as providing asset and revenue growth opportunities.
8
Competition
We are subject to substantial and growing competition in all aspects of our business. Barriers to entry in the asset
management business are relatively low, and we expect to face a growing number of competitors. Although no single company
dominates the asset management industry, many companies are larger, better known and have greater resources.
We compete with other asset management firms on the basis of investment strategies offered, their investment
performance both in absolute terms and relative to peer groups, quality of service, fees charged, the level and type of
compensation offered to key employees and the manner in which investment strategies are marketed. Many of our competitors
offer more investment strategies and services and have substantially greater assets under management.
We compete against numerous investment dealers, banks, insurance companies, mutual fund companies,
exchange-traded funds, brokerage and investment firms and others that sell equity funds, taxable income funds, tax-free
investments and other investment products. In addition, the allocation of assets by many investors from active equity
investment to index funds, fixed income or similar asset classes has enhanced the ability of firms offering non-equity asset
classes and passive equity management to compete effectively with us. The demand for passive strategies with low-fee
structures has rapidly increased, and investors more frequently demand customized and personalized strategies to fit their
investment needs. This shift in the marketplace may benefit competitors that offer certain investment vehicles that we do not
currently offer. In summary, our competitive landscape is intense and dynamic, which may affect our ability to compete
successfully in the future as an independent company.
Additionally, most prospective clients perform a thorough review of an investment manager’s background,
investment policies and performance before committing assets to that manager. In many cases, prospective clients invite a
number of competing firms to make presentations. The process of obtaining a new client typically takes twelve to eighteen
months from the time of the initial contact. While we have achieved success in competing for new clients, it is a process to
which we dedicate significant resources over an extended period, with no certainty of winning.
Regulation
Virtually all aspects of our business are subject to federal, state and other non-U.S. jurisdictions' laws and
regulations. These laws and regulations are primarily intended to protect investment advisory clients. Under such laws and
regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit, restrict
or prohibit advisers from carrying on their business if they fail to comply with such laws and regulations. Possible sanctions
include suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time,
revocation of investment adviser and other registrations, censures and fines. We believe that we are in compliance with all
material laws and regulations.
Westwood Management
Our business is subject to regulation at federal and state levels by the SEC and other regulatory bodies. Westwood
Management Corp. and Westwood Advisors, L.L.C. are registered with the SEC under the Investment Advisers Act of 1940
(the “Investment Advisers Act”) and under the laws of various states. As registered investment advisers, Westwood
Management Corp. and Westwood Advisors, L.L.C. are regulated and subject to examination by the SEC. The Investment
Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, record keeping,
operational and marketing requirements and disclosure obligations. Westwood Management Corp. also acts as adviser to the
Westwood Funds®, a family of mutual funds registered with the SEC under the Investment Company Act of 1940 (the
“Investment Company Act”). As an adviser to a registered investment company, Westwood Management Corp. must comply
with the Investment Company Act and related regulations. The Investment Company Act imposes numerous obligations on
registered investment companies, including requirements relating to operations, fees charged, sales, accounting, record keeping,
disclosure, governance, and restrictions on transactions with affiliates. Under SEC rules and regulations promulgated pursuant
to the federal securities laws, we are subject to periodic SEC examinations. The SEC can institute proceedings and impose
sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from censure to termination
of an investment adviser’s registration. The failure of Westwood Management Corp. and Westwood Advisors, L.L.C. to comply
with SEC requirements could have a material adverse effect on Westwood. We must also comply with anti-money laundering
laws and regulations, including the USA PATRIOT Act of 2001, as subsequently amended and reauthorized (the “Patriot Act”).
We believe that we are in compliance with the regulations under the Investment Advisers Act, the Investment Company Act and
the Patriot Act.
9
As an investment adviser, we have a fiduciary duty to our clients. The SEC has interpreted that duty to impose
standards, requirements and limitations on, among other things: trading of client accounts, allocation of investment
opportunities among clients, use of soft dollars, execution of transactions and recommendations to clients. We manage accounts
for our clients with the authority to buy and sell securities, select broker-dealers to execute trades and negotiate brokerage
commission rates. We may receive soft dollar credits from certain broker-dealers that are used to pay for brokerage and
research-related products, which reduces certain company operating expenses. We intend to use soft dollars to pay for only
those brokerage and research related products and services that fall within the safe harbor provisions of the Securities Exchange
Act of 1934. If our ability to use soft dollars were reduced or eliminated as a result of the implementation of statutory
amendments or new regulations, our operating expenses would increase.
Westwood Trust
Westwood Trust operates in a highly regulated environment and is subject to extensive supervision and
examination. As a Texas chartered trust company, Westwood Trust is subject to the Texas Finance Code (the “Finance Code”),
the rules and regulations promulgated under the Finance Code and supervision by the Texas Department of Banking. These
laws are intended primarily for the protection of Westwood Trust’s clients and creditors rather than for the benefit of investors.
The Finance Code provides for and regulates a variety of matters, such as:
• minimum capital maintenance requirements;
•
•
•
•
•
•
•
•
restrictions on dividends;
restrictions on investments of restricted capital;
lending and borrowing limitations;
prohibitions against engaging in certain activities;
periodic fiduciary and information technology examinations by the Texas Department of Banking Commissioner;
furnishing periodic financial statements to the Texas Department of Banking Commissioner;
fiduciary record keeping requirements; and
prior regulatory approval for certain corporate events (such as mergers, the sale or purchase of all or substantially
all trust company assets and transactions transferring control of a trust company).
The Finance Code also gives the Banking Commissioner broad regulatory powers (including penalties and civil
and administrative actions) if the trust company violates certain provisions of the Finance Code, including implementing
conservatorship or closure if Westwood Trust is determined to be in a “hazardous condition” (as defined by applicable law).
Westwood Trust’s failure to comply with the Finance Code could have a material adverse effect on Westwood.
Westwood Trust is limited by the Finance Code in the payment of dividends to undivided profits, which is
described as the part of equity capital equal to the balance of net profits, income, gains and losses since formation minus
subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate board
resolutions. At the discretion of its Board of Directors, Westwood Trust has made quarterly and special dividend payments to
Westwood Holdings Group, Inc. out of undivided profits.
Westwood International Advisors
Westwood International Advisors is registered with the Ontario Securities Commission (“OSC”) and the Autorité
des marchés financiers (“AMF”) in Québec.
The OSC is an independent Crown corporation responsible for regulating the capital markets in Ontario. Its
statutory mandate is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and
efficient capital markets and confidence in capital markets. The OSC has rule making and enforcement powers to help
safeguard investors, deter misconduct and regulate participants involved in capital markets in Ontario. It regulates firms and
individuals that sell securities and provide advice in Ontario, and also regulates public companies, investment funds and
marketplaces, such as the Toronto Stock Exchange. The OSC’s powers are granted under the Securities Act (Ontario), the
Commodity Futures Act (Ontario) and certain provisions of the Business Corporations Act. It operates independently from the
government and is funded by fees charged to market participants. The OSC is accountable to the Ontario Legislature through
the Minister of Finance.
10
The AMF is the entity mandated by the government of Québec to regulate the province’s financial markets and
provide assistance to consumers of financial products and services. Established on February 1, 2004 under an Act regarding the
Autorité des marchés financiers, the AMF integrates the regulation of the Québec financial sector, notably in the areas of
insurance, securities, deposit institutions (other than banks) and the distribution of financial products and services. Specifically,
the AMF’s mission is to:
•
•
•
•
•
•
provide assistance to consumers of financial products and services;
ensure that financial institutions and other regulated financial sector entities comply with applicable solvency and
other obligations imposed by law;
supervise activities connected with distribution of financial products and services;
supervise stock market and clearing house activities and monitor the securities market;
supervise derivatives markets, including derivatives exchanges and clearing houses and ensure that regulated
entities and other derivatives market practitioners comply with obligations imposed by law; and
implement protection and compensation programs for consumers of financial products and services, and
administer compensation funds set up by law.
Employee Retirement Income Security Act of 1974
We are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to its
related regulations insofar as we are a “fiduciary” under ERISA with respect to some clients. ERISA and applicable provisions
of the Internal Revenue Code impose certain duties on fiduciaries under ERISA or on entities that provide services to ERISA
plan clients and prohibit certain transactions involving ERISA plan clients.
Tax Reform Act
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax
Reform Act”). The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates
and creating a territorial tax system with a one-time mandatory deemed repatriation tax on previously deferred earnings of
foreign subsidiaries. The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21%
rate, effective January 1, 2018.
We have recognized the incremental tax impacts related to deemed repatriated earnings and the revaluation of
deferred tax assets and liabilities and included these amounts in our Consolidated Financial Statements for the year ended
December 31, 2017. We completed the accounting for our 2017 U.S. corporate income tax return in the third quarter of 2018
and made no significant changes to the amounts provisionally recognized. Further information on the tax impacts of the Tax
Reform Act is included in Note 7 “Income Taxes” to our Consolidated Financial Statements included in Part II, Item 8,
“Financial Statements and Supplementary Data” accompanying this Report.
Employees
At December 31, 2018, we had 182 full-time employees (164 based in the United States and 18 based in Canada).
No employees are represented by a labor union, and we believe our employee relations are favorable.
11
Item 1A. Risk Factors.
We believe these represent the material risks currently facing our business. Our business, financial condition or
results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline
due to any of these risks, and you may lose all or part of your investment. You should carefully consider the risks described
below before making an investment decision. You should also refer to the other information included or incorporated by
reference in this Report, including our financial statements and related notes.
Risks Related to the Investment Industry
Our results of operations depend upon the market value and composition of assets under management,
which can fluctuate significantly based on various factors, some of which are beyond our control.
Our revenues are primarily generated from fees derived as a percentage of assets under management (“AUM”).
The value of our AUM can be negatively impacted by several factors, including:
• Market performance: Performance of the securities markets could be impacted by a number of factors beyond our
control, including, among others, general economic downturns, political uncertainty, acts of terrorism or natural
disasters. Negative performance within the securities markets or short-term volatility within the securities markets
could result in investors withdrawing assets, decreasing their rates of investment or shifting assets to cash or other
asset classes or strategies that we do not manage, all of which could reduce our revenues. In addition, during
periods of slowing growth or declining revenues, profits and profit margins are adversely affected because certain
expenses remain relatively fixed.
•
Investment performance: Because we compete with many asset management firms on the basis of our investment
strategies, the maintenance and growth of assets under management is dependent, to a significant extent, on the
investment performance of the assets that we manage. Poor performance may result in the loss or reduction of
client accounts, which decreases revenues. Underperformance relative to peer groups and/or relevant benchmarks
for our various investment strategies could adversely affect our results of operations, especially if such
underperformance continues for an extended period of time. The historical returns of our strategies and the ratings
and rankings we, or the mutual funds that we advise, have received in the past should not be considered indicative
of the future results of these strategies or of any other strategies that we may develop in the future. The
investment performance we achieve for our customers varies over time and variances can be wide. In addition,
certain of our investment strategies have capacity constraints, as there may be a limit to the number of securities
available for certain strategies to operate effectively. In those instances, we may choose to limit access to new or
existing investors.
Our business is subject to extensive regulation, which is subject to frequent change, with attendant
compliance costs and serious consequences for violations; expansion into international markets and introduction of new
products and services increases our regulatory and operational risks.
Virtually all aspects of our business are subject to laws and regulations, including the Investment Advisers Act,
the Investment Company Act, the Patriot Act, the Finance Code and anti-money laundering laws. These laws and regulations
generally grant regulatory agencies broad administrative powers, including the power to limit or restrict us from operating our
business, as well as powers to place us under conservatorship or closure if we fail to comply with such laws and regulations.
Violations of such laws or regulations could subject us or our employees to disciplinary proceedings and civil or criminal
liability, including revocation of licenses, censures, fines or temporary suspensions, permanent barring from the conduct of
business, conservatorship or closure. Any such proceeding or liability could have a material adverse effect upon our business,
financial condition, results of operations and business prospects.
In addition, the regulatory environment in which we operate is subject to change. We may be adversely affected
as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and
regulations. In recent years, regulators have increased their oversight of the financial services industry. Some regulations are
focused directly on the investment management industry, while others are more broadly focused but affect our industry as well.
12
The Dodd-Frank Act of 2010 significantly increased and revised the federal rules and regulations governing the
financial services industry and, in addition to other regulations, has generally resulted in increased compliance and
administrative requirements. For example, the SEC’s adoption of Form PF and revisions to Form ADV impose additional
reporting requirements for SEC-registered investment advisors. Additionally, ERISA Section 408(b)(2) and related regulations
require additional information to be provided to ERISA-governed retirement plans. While we believe that changes in laws,
rules and regulations, including those discussed above, have increased our administrative and compliance costs, we are unable
to quantify the increased costs attributable to such changes. See “Item 1. Business — Regulation.”
We engage in product offerings and international business activities through our emerging markets, global multi-
asset and global convertible securities product offerings that we make available to our international and domestic clients. As of
December 31, 2018, approximately 20% of our AUM is managed for clients who are domiciled outside the United States. As a
result, we face increased operational, regulatory, compliance, marketing, client service, reputational and foreign exchange rate
risks. In particular, rapid regulatory change is occurring internationally with respect to financial institutions, including, but not
limited to, anticipated revisions to the European Communities (Undertakings for Collective Investment in Transferable
Securities) Regulations 2011 and the Markets in Financial Instruments Directive (MiFID II). The failure of our compliance and
internal control systems to properly identify and mitigate such additional risks, or of our operating infrastructure to support
international activities, could result in operational failures and actions by regulatory agencies, which could have a material
adverse effect on our business.
We devote considerable time and resources to both domestic and international compliance; however, we may fail
to timely and properly identify regulatory requirements or modify our compliance procedures for changes in our regulatory
environment, which may subject us to legal proceedings, domestic and foreign government investigations, penalties and fines.
The investment management and wealth management industry is highly competitive and innovative.
The investment management and wealth management industry is highly competitive based on a variety of factors,
including investment performance, fee rates, continuity of investment professionals and client relationships, the quality of
services provided to clients, corporate positioning, business reputation and differentiated products. A number of factors
increase our competitive risks, including the following:
•
Potential competitors have a relatively low cost of entering the investment management industry;
• Many competitors have greater financial, technological, marketing and other resources, more comprehensive
name recognition and more personnel than we do;
•
•
•
•
•
•
•
The continuing trend toward consolidation in the investment management industry, and the securities business in
general, has served to increase the size and strength of some of our competitors;
Recent changes in consumer demand for technological capabilities, including the enhanced ability for firms to
offer lower fee passive management strategies, has increased competition in our industry;
Shifts in demand for alternative investment styles, asset classes and distribution vehicles may cause our
competitors to be perceived as more attractive;
Other industry participants, hedge funds and alternative asset managers may seek to recruit our investment
professionals;
Some competitors charge lower fees for their investment management services than we do;
Some competitors may provide more comprehensive client services, including banking, financial planning and tax
planning at levels beyond what we currently provide; and
Some competitors may have more sophisticated, innovative or advanced distribution networks than we do.
In particular, we have faced significant competition from competitors with lower fee, passive investment
strategies. Investment advisors that emphasize passive products have gained, and may continue to gain, significant market share
from active managers like us, which could have a material adverse effect on our business. If we are unable to compete
effectively, our earnings could be reduced and our business could be adversely affected.
13
Some of our strategies invest in the securities of non-U.S. companies, which involve foreign currency
exchange, tax, political, social and economic uncertainties and risks.
As of December 31, 2018, approximately 24% of our assets under management were invested in strategies
offering access to global and emerging markets with significant exposure to non-U.S. companies. Fluctuations in foreign
currency exchange rates could negatively affect the returns of clients invested in these strategies. Investments in non-U.S.
issuers may also be affected by tax positions taken in countries or regions in which we are invested, as well as political, social
and economic uncertainty or other diplomatic developments. Many financial markets are less developed or efficient than U.S.
financial markets with limited liquidity and higher price volatility, and may lack an established regulatory framework. Liquidity
and price volatility may be adversely affected by political or economic events, government policies and social or civil unrest
within a particular country. These risks, among others, could adversely affect the performance of our strategies invested in
securities of non-U.S. issuers and may be particularly acute in emerging or less developed markets. As a result, we may be
unable to attract or retain client investments in these strategies, or assets invested in these strategies may experience significant
declines in value and our results of operations may be negatively affected.
Due to the substantial cost and time required to introduce new investment strategies or expand the market
for current strategies, we may not be able to successfully introduce investment strategies in a timely manner, or at all.
We have incurred significant costs to develop new investment strategies, launch new mutual funds under the
Westwood Funds® name, launch the UCITS Fund and upgrade our business infrastructure. We expect to continue to incur
significant costs related to such improvements.
The development of new investment strategies, whether through acquisition or internal development, requires a
substantial amount of time and significant financial resources, including expenses related to compensation, sales and
marketing, information technology, legal counsel and other professional services. Our ability to market and sell a new
investment strategy depends on our financial resources, the investment performance of the specific strategy, the timing of the
offering, the timing of regulatory approvals and our marketing strategies. Once an investment strategy is developed, we must
effectively introduce the strategy to existing and prospective clients. Our ability to sell new investment strategies to existing
and prospective clients may depend on our ability to meet or exceed the performance of our competitors offering the same or a
similar strategy. We may not be able to manage the assets within a given investment strategy profitably, and it may take years
before we produce the kind of results that will attract clients. If we are unable to realize the benefits of the costs and expenses
incurred in developing new investment strategies, we may experience losses as a result of our management of these investment
strategies, and our ability to introduce further new investment strategies and compete in our industry may be hampered.
To introduce new investment strategies, we may seek to add new investment teams. To the extent we are unable
to recruit and retain investment teams to complement our existing business model, we may not be successful in further
diversifying and increasing our investment strategies and client assets, which could have a material adverse effect on our
business and future prospects. The addition of a new team using an investment strategy with which we may have limited or no
experience may require additional resources to update our operational platform and could strain our operational resources and
increase the possibility of operational errors. Additional investments may be required to improve our operational platform. If
any new teams or strategies perform poorly and fail to attract sufficient assets, our results of operations and reputation may be
adversely affected.
Risks Related to our Business
Damage to our reputation could harm our business and have a material adverse effect on our results of
operations.
Our brand is a valuable intangible asset that could be vulnerable to threats that can be difficult or impossible to
anticipate or control. Regulatory inquiries and rumors could damage our reputation, even if they are unfounded or satisfactorily
addressed. Our reputation could also be negatively affected by employees and third parties acting on our behalf, who may
circumvent our controls or act in a manner inconsistent with our policies and procedures. Damage to our brand could impede
our ability to attract and retain customers and key employees and could reduce our assets under management, which could have
a material adverse effect on our results of operations.
14
Our success depends on certain key employees and our ability to attract and develop new, talented
professionals. Our inability to attract and retain key employees could compromise our future success.
Our future success depends upon our ability to attract and retain professional and executive employees, including
investment, marketing, client service and management personnel. There is substantial competition for skilled personnel within
the asset management business, and the failure to attract, develop, retain and motivate qualified personnel could negatively
impact our business, financial condition, results of operations and future prospects. A limited number of our employees,
including our Chief Executive Officer and certain investment employees, have employment contracts, while other key
employees do not have employment contracts. In order to retain or replace key personnel, we may be required to increase
compensation, which would decrease net income. Investment and sales professionals often maintain strong relationships with
their clients, and their departure may cause us to lose client accounts, which could have a material impact on our revenues and
results of operations.
Failure to implement and maintain effective cyber security controls could disrupt our operations and have
a material adverse effect on our results of operations, reputation and stock price.
Our business is dependent on information technology systems and the cyber security controls we and our third
party vendors have in place to protect those systems and the information contained therein. Despite the implementation of
protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software, networks and
vendors may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial
of service attacks, computer viruses and other malicious code, and other events that could result in significant liability and
damage to our reputation, and have an ongoing impact on the security and stability of our operations. The techniques used in
these attacks are increasingly sophisticated, change frequently and are often not recognized until launched. A failure of our and
our third party vendors' controls to protect our information technology from an external or internal attack or to prevent a breach
of confidential client or competitive information could materially interrupt our operations and expose us to regulatory and legal
actions, which could have a material adverse effect on our operating results, reputation and stock price. As attempted attacks
continue to evolve in scope and sophistication, we may be required to expend substantial additional resources to modify or
enhance our protective measures, to investigate and remediate vulnerabilities or other exposures or to communicate about cyber
attacks to our customers.
Additionally, the SEC issued guidance in February 2018 stating that, as a public company, we are expected to
have controls and procedures that relate to cyber security disclosure, and are required under the federal securities laws to
disclose information relating to certain cyber attacks or other information security breaches. Successful cyber attacks at other
asset management companies or other market participants, whether or not we are affected, could lead to a general loss of
customer confidence in the industry that could negatively affect us, including harming the market perception of the
effectiveness of our security measures, which could result in a loss of business.
Failure to perform operational tasks or the misrepresentation of products and services could have an
adverse effect on our reputation and our business, financial condition and results of operations.
Our operations are complex, and our failure to properly perform portfolio responsibilities, including security
pricing, corporate actions, investment restrictions compliance, daily net asset value calculations, account reconciliations, tax
reporting, investment performance calculations and portfolio oversight could result in reputational harm or subject us to
regulatory sanctions, fines, penalties and litigation.
We use advertising materials, public relations information and other external communications to market and sell
our investment products. Failure to accurately calculate and present investment performance data within established guidelines
and regulations could result in reputational harm or subject us to regulatory sanctions, fines, penalties and litigation.
Damage to our reputation could impede our ability to attract and retain customers and key employees and could
reduce our assets under management, which could have a material adverse effect on our results of operations. Significant
regulatory sanctions, fines, penalties, and litigation could also materially adversely affect our financial condition and results of
operations.
15
Failure to correctly identify our strategic growth plan or execute our strategic plan could result in damage
to our reputation and could have a material adverse effect on our business, financial condition and results of operations.
We believe that we have established a strong platform to support future growth, but there is no assurance that we
will appropriately execute our strategic plans, including but not limited to acquisitions, divestitures or other strategic
transactions.
Acquisitions involve inherent risks that could compromise the success of the combined business and dilute the
holdings of current stockholders. As part of our long-term business strategy, we may pursue corporate development transactions
including the acquisition of asset management firms, mutual funds, wealth management firms and investment professionals or
teams. See “Item 1. Business — Growth Strategy.” If we are incorrect when assessing the value, strengths, weaknesses,
liabilities and potential profitability of such transactions, or if we fail to adequately integrate the acquired businesses or
individuals, the success of the combined business could be compromised. Business acquisitions are subject to the risks
commonly associated with such transactions including, among others, potential exposure to unknown liabilities of acquired
companies and to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the
acquired companies, potential disruptions to the business of the combined company and potential diversion of management’s
time and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of
changes in management, potential litigation or other legal risks, potential write-downs related to goodwill impairments in
connection with acquisitions and dilution to the stockholders of the combined company if the acquisition is made for stock of
the combined company. In addition, investment strategies, technologies or businesses of acquired companies may not be
effectively assimilated into our business or may have a negative effect on the combined company’s revenues or earnings. The
combined company may also incur significant expenses to complete acquisitions and support acquired investment strategies
and businesses. Further, any such acquisitions may be funded with cash, debt or equity, which could dilute the holdings or limit
the rights of stockholders. Finally, we may not be successful in identifying attractive acquisition candidates or completing
acquisitions on favorable terms.
Divestitures involve inherent risks that could compromise the success of our business. Risks related to
divestitures can include difficulties in the separation of the divested business, loss of clients, retention or obligation to
indemnify certain liabilities, the failure of counterparties to satisfy payment obligations, unfavorable market conditions that
may impact any earnout or contingency payment due to us and unexpected difficulties in losing employees of the divested
business.
As consumer demand for digital interaction with investment advisors and portfolios continues to grow, we are
exploring opportunities to develop digital solutions to enhance services to our clients. If we are incorrect in assessing the value,
strengths, weaknesses and potential profitability of such passive strategies, or if we fail to adequately integrate the strategies
into our wealth management business, the success of our overall business could be compromised. The initial investment in the
necessary technological capabilities and the potential diversion of management’s time and attention could have a material
impact to our business, financial condition and results of operations.
There is no assurance that we will be successful in overcoming these or other risks encountered with
acquisitions, divestitures and other strategic transactions. These risks may prevent us from realizing the expected benefits from
acquisitions or divestitures and could result in the failure to realize the full economic value of a strategic transaction.
Our business is vulnerable to systems failures that could have a material adverse effect on our business,
financial condition and results of operations.
Any delays or inaccuracies in securities pricing information or information processing could give rise to claims
that could have a material adverse effect on our business, financial condition and results of operations. We are highly dependent
on information systems and third-party vendors for securities pricing information, information processing and updates for
certain software. We, or our third-party vendors, may suffer a systems failure or interruption, whether caused by an earthquake,
fire, other natural disaster, power or telecommunications failure, unauthorized access, force majeure, act of war or otherwise,
and back-up procedures and capabilities may be inadequate to prevent the risk of extended interruptions in operations.
16
Failure to select appropriate third-party vendors and apply appropriate oversight of third-party vendors
could disrupt our operations and have a material adverse effect on our business, financial condition and results of
operations.
We rely on third-party vendors to perform important portions of our operations, and there is no assurance that our
third-party vendors will properly perform or follow our processes, policies and procedures. There is no assurance that our plans
for transition or delegation to a third-party vendor will be successful or that there will not be interruptions in service from these
third parties. A third-party vendor's failure to accurately perform important operations or follow our processes, policies and
procedures could result in the loss of clients, significant regulatory sanctions, fines, penalties and litigation, which could have a
material adverse effect on our business, financial condition and results of operations.
Misuse of assets and information in the possession of our employees and third-party vendors could damage
our reputation and result in costly litigation and liability for our clients and us.
Our employees and certain third-party vendors handle significant amounts of assets along with financial and
personal information for our clients. Our employees or third party vendors could misuse or improperly disclose such
information, either inadvertently or intentionally, which could harm our reputation. We have implemented a system of controls
to minimize the risk of fraudulent use of assets and information; however, our controls may be insufficient to prevent
fraudulent actions by employees or third party vendors. If our controls are ineffective, we could be subject to costly litigation,
which could consume financial resources, distract management, damage our reputation and result in regulatory sanctions. Such
fraudulent actions could also adversely affect clients, causing them to seek redress.
Our business involves risks of being engaged in litigation and liability that could increase our expenses and
reduce our results of operations.
Many aspects of our business involve substantial risks of liability. We could be named as defendants or co-
defendants in lawsuits or could be involved in disputes that involve the threat of lawsuits seeking substantial damages. As an
SEC-registered investment adviser, mutual fund adviser, trustee to certain Trust clients and publicly-traded entity, we are
subject to governmental and self-regulatory organization examinations, investigations and proceedings. Similarly, the
investment strategies that we manage could be subject to actual or threatened lawsuits and governmental and self-regulatory
organization investigations and proceedings, any of which could harm the investment returns or reputation of the applicable
fund or result in our being liable for any resulting damages. There has been an increased incidence of litigation and regulatory
investigations in the asset management industry in recent years, including customer claims, as well as class action suits seeking
substantial damages. While customers do not have legal recourse against us solely on the basis of poor investment results, if our
investment strategies perform poorly or we provide poor financial advice, we are more likely to become subject to litigation
brought by dissatisfied clients. In addition, to the extent customers are successful in claiming that their losses resulted from
fraud, negligence, willful misconduct, breach of contract or other similar misconduct, these clients may have remedies against
us, the mutual funds and other funds we advise or our investment professionals under the federal securities laws or state law.
See the discussion of legal proceedings in Item 3. “Legal Proceedings”.
Failure to properly identify and address conflicts of interest could harm our reputation or cause clients to
withdraw funds, which could adversely affect our business and results of operations.
The SEC and other regulators have increased their scrutiny of potential conflicts of interest, and we have
implemented procedures and controls that we believe are reasonably designed to address these issues. However, appropriately
dealing with conflicts of interest is complex, and if we fail, or appear to fail, to deal appropriately with conflicts of interest, we
could face reputational damage, litigation or regulatory proceedings, any of which may adversely affect our results of
operations.
As we expand the scope of our business and our client base, we must also continue to monitor and address any
potential new conflicts between the interests of our stockholders and those of our clients. Our clients may withdraw funds if
they perceive conflicts of interest between the investment decisions we make for strategies in which they have invested and our
obligations to our stockholders. For example, we may limit the growth of assets in or close strategies or otherwise take action to
slow the flow of assets when we believe it is in the best interest of our clients, even though our assets under management and
investment management fees may be negatively impacted. Similarly, we may establish or add new investment teams or expand
operations into other geographic areas or jurisdictions if we believe such actions are in the best interest of our clients, even
though our results of operations may be adversely affected in the short term. Although we believe such actions enable us to
retain client assets and maintain our profit margins, if clients perceive a change in our investment or operational decisions
favors a strategy to maximize short term results, they may withdraw funds, which could adversely affect our revenues and
results of operations.
17
Insurance coverage may be inadequate to cover legal and regulatory proceedings.
We maintain insurance coverage in amounts and on terms we believe appropriate to cover legal and regulatory
matters and potential cyber security attacks; however, we can make no assurance that there will be adequate coverage or that a
specific claim will be covered by our insurance policies. Additionally, insurance premiums may rise for substantially the same
coverage amounts and terms, which will increase our expenses and reduce net income.
Various factors may hinder the declaration and payment of dividends.
We have historically paid a quarterly dividend; however, payment of future dividends is subject to the discretion
of our Board of Directors, and various factors may prevent us from paying dividends. Such factors include our financial
position, capital requirements and liquidity, tax regulations, stock repurchase plans, state corporate and banking law
restrictions, results of operations and other factors that our Board of Directors may consider relevant. As a holding company,
our ability to pay dividends is dependent on the dividends and income we receive from our subsidiaries. Currently, our primary
source of cash consists of dividends from Westwood Management or Westwood Trust. The payment of dividends by Westwood
Trust is subject to the discretion of its Board of Directors and compliance with applicable laws, including the provisions of the
Finance Code applicable to Westwood Trust. See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
We may not be able to fund future capital requirements on favorable terms, if at all.
We cannot be certain that financing to fund our working capital or other cash requirements, if needed, will be
available on favorable terms, if at all. Our capital requirements may vary greatly from quarter to quarter depending on, among
other things, capital expenditures, technological investments and fluctuations in our operating results and financing activities. If
financing becomes necessary, we may or may not be able to obtain financing on favorable terms, if at all. Further, any future
equity financings could dilute the relative percentage ownership of then existing common stockholders, and any future debt
financings could involve restrictive covenants that limit our ability to take certain actions.
Failure to maintain effective internal controls could have a material adverse effect on our business and
stock price.
Effective internal controls are necessary to provide reliable financial reports. If we cannot provide reliable
financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed,
contain inherent limitations, and systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
We cannot be certain that the measures we take to evaluate and improve our internal controls will ensure that we
implement and maintain adequate controls over our financial processes and reporting. Any failure to implement required new
or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations. If we fail to maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended, we may not be able to ensure that we can conclude that we have effective internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an
effective internal control environment could cause investors to lose confidence in our reported financial information, which
could have a material adverse effect on our stock price.
Our stock is thinly traded and may be subject to volatility.
Although our common stock is traded on the New York Stock Exchange, it may remain relatively illiquid, or
“thinly traded,” which can increase share price volatility and make it difficult for larger investors to buy or sell shares in the
public market without affecting the share price. Investors may be unable to buy or sell a certain quantity of our shares in the
public market within one or more trading days. If limited trading in our stock continues, it may be difficult for holders to sell
their shares in the public market at any given time at prevailing prices.
The prevailing market price of our common stock may fluctuate significantly in response to a number of factors,
some of which are beyond our control, including actual or anticipated fluctuations in operating results; changes in market
valuations of other similar companies; additions or departures of key personnel; future sales of common stock; deviations in net
revenues or in losses from levels expected by the investment community; and trading volume fluctuations.
18
Our organizational documents contain provisions that may prevent or deter another group from paying a
premium over the market price to our stockholders to acquire our stock.
Our organizational documents currently contain provisions that require a two-third vote of the shares of stock
entitled to vote to remove directors with or without cause, establish that stockholders cannot act by written consent, and that
authorize our Board of Directors to issue, without shareholder approval, blank check preferred stock. Our Board of Directors
has approved amendments to our organizational documents that would require a majority vote of the shares of stock entitle to
vote to remove directors with or without cause, which we anticipate will be submitted for stockholder approval at our 2019
Annual Meeting of Stockholders. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law relating to business combinations. These provisions could delay, deter or prevent a merger,
consolidation, tender offer or other business combination or change of control involving us that could include a premium over
the market price of our common stock that some or a majority of our stockholders might consider to be in their best interests.
We are a holding company dependent on the operations and funds of our subsidiaries.
We are a holding company, with no revenue-generating operations or assets other than our ownership interests in
Westwood Management, Westwood Trust and Westwood International Advisors. Accordingly, we are dependent on the cash
flow generated by these operating subsidiaries and rely on dividends or other intercompany transfers from our operating
subsidiaries to generate the funds necessary to meet our obligations.
Risks Related to our Clients
Competitive fee pressures could reduce revenues and profit margins.
To the extent we have to compete on the basis of price, we may not be able to maintain a profitable fee structure.
Although our investment management fees vary from product to product, we have competed primarily on the performance of
our products and client service rather than on the level of our investment management fees relative to our competitors. In recent
years, there has been a trend toward lower fees in the investment management industry driven in large part by low-cost, passive
strategies. In order to maintain a profitable fee structure in a competitive environment, we must be able to continue to provide
clients with investment returns and service levels that make investors willing to pay our fees. We cannot be assured that we will
succeed in providing investment returns and service levels that will allow us to maintain a profitable fee structure. Continued
fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.
In addition, we have performance fee agreements with a few clients, who pay us a fee if we outperform a
specified index over predetermined periods of time. We may not be able to outperform such indexes, and failure to do so would
cause us to earn none or only part of those potential revenues, which could have a material adverse effect on our revenues and
results of operations. Our revenues from performance-based fees could fluctuate significantly between measurement periods,
depending on how we perform relative to the indexes specified in these agreements. For example, we earned performance fees
of $3.0 million in 2018, $1.4 million in 2017 and $0.6 million in 2016.
Our business is dependent on investment advisory, subadvisory, and trust agreements that are subject to
termination or non-renewal. As a result, we could lose clients on very short notice.
Substantially all of our revenues are derived pursuant to investment advisory, subadvisory and trust agreements
with our clients that are subject to termination without advance notice. Investors in funds that we advise or subadvise may
redeem their investments at any time without prior notice, thereby reducing our assets under management. These investors may
redeem for any reason, including general financial market conditions, our absolute or relative investment performance or their
own financial condition and requirements. In a declining stock market, the pace of redemptions could accelerate. For example,
we experienced a $7.6 billion decrease in assets under management during 2018 primarily due to $6.2 billion in net outflows.
As a result, our revenues derived from advisory-based fees decreased in 2018 as compared to 2017. Substantial additional
redemptions or a termination or failure to renew a material number of these agreements would adversely affect our revenues
and have a material adverse effect on our earnings and financial condition.
19
A small number of clients account for a substantial portion of our business, and a reduction or loss of
business with any of these clients could have a material adverse effect on our business, financial condition and results of
operations.
Our ten largest clients accounted for approximately 20% of our fee revenue for each of the years ended December
31, 2018, 2017 and 2016. We are dependent to a significant degree on our ability to maintain our relationships with these
clients. There can be no assurance that we will be successful in maintaining existing client relationships, securing additional
clients or achieving the superior investment performance necessary to earn performance-based advisory fees. Our failure to
retain one or more of these large clients or to establish profitable relationships with additional clients could have a material
adverse effect on our business, financial condition and results of operations.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Westwood, Westwood Management and Westwood Trust conduct their principal operations using approximately
45,000 square feet of leased office space in Dallas, Texas pursuant to a lease with an initial term that expires in March 2026. In
addition, we lease approximately 8,000 square feet of office space in Houston, Texas pursuant to a lease that expires in June
2024 and approximately 2,600 square feet of office space in Southborough, Massachusetts pursuant to a lease that expires in
August 2023. Westwood International Advisors conducts its principal operations using approximately 6,000 square feet of
office space in Toronto, Ontario pursuant to a lease that expires in October 2021. We continue to assess these facilities to ensure
their adequacy to serve our anticipated business needs.
Item 3.
Legal Proceedings.
We are subject from time to time to certain claims and legal proceedings arising in the ordinary course of our
business.
On August 3, 2012, AGF Management Limited and AGF Investments Inc. (together “AGF”) filed a lawsuit in the
Ontario Superior Court of Justice against Westwood, certain Westwood employees and Warren International, LLC (“Warren”),
an executive recruiting firm. The action related to the hiring of certain members of Westwood’s emerging markets investment
team previously employed by AGF. On November 5, 2012, Westwood issued a response to AGF’s lawsuit with a counterclaim
against AGF for defamation, and on November 6, 2012, AGF filed a second lawsuit against Westwood. Westwood sought $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 sought $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 agreed to pay AGF a one-time payment of $10 million CDN, half of which
was covered by our insurance. During 2017, we recorded a net $4.0 million ($5 million CDN) charge related to the settlement
and associated insurance coverage, with a $4.0 million ($5 million CDN) receivable from our insurance provider included in
“Other current assets” on our Consolidated Balance Sheets at December 31, 2017. We received the insurance proceeds of $4.0
million during the year ended December 31, 2018 and had no receivable related to the settlement at December 31, 2018.
Item 4.
Mine Safety Disclosures.
Not applicable.
20
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our common stock trades on the New York Stock Exchange (the “NYSE”) under the symbol “WHG.” At
December 31, 2018, there were approximately 235 record holders of our common stock, although we believe that the number
of beneficial owners of our common stock is substantially greater.
Dividends
We have declared a cash dividend on our common stock for each quarter since our common stock was first
publicly traded. On February 6, 2019, we declared a quarterly cash dividend of $0.72 per share on our common stock payable
on April 1, 2019 to stockholders of record on March 8, 2019. We intend to continue paying cash dividends in such amounts as
our Board of Directors may determine to be appropriate. Any future payments of cash dividends will be at the discretion of the
Board of Directors and subject to limitations under the Delaware General Corporation Law.
Westwood Holdings Group is the sole stockholder of Westwood Management, Westwood Trust and Westwood
International Advisors. Westwood Trust is limited under applicable Texas law in the payment of dividends to the amount of
undivided profits, which is defined as that part of equity capital equal to the balance of net profits, income, gains and losses
since its formation minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or
appropriate Board of Directors’ resolutions.
Issuer Purchases of Equity Securities
On July 20, 2012, our Board of Directors authorized management to repurchase up to $10 million of our
outstanding common stock on the open market or in privately negotiated transactions. The share repurchase program has no
expiration date and may be discontinued at any time by the Board of Directors. In July 2016, Westwood's Board of Directors
authorized an additional $5.0 million of repurchases under the share repurchase program. As of December 31, 2018,
approximately $5.4 million remained available under the share repurchase program.
Between January 1, 2018 and December 31, 2018, under the share repurchase program the Company repurchased
108,289 shares of our common stock at an average price of $36.94 per share, including commissions, for an aggregate purchase
price of $4.0 million.
The following table displays information with respect to the treasury shares we purchased during the three months
ended December 31, 2018:
Period
Repurchase program(1) ....................................
November 1-30, 2018 ................................
December 1-31, 2018.................................
Canadian Plan(2) ..............................................
Employee transactions(3)
Total
number of
shares
purchased
Average
price paid
per share
Total number
of shares
purchased as part of
publicly announced
plans or programs
Maximum number (or
approximate dollar
value) of shares that
may yet be purchased
under the plans or
programs (1)
$
5,366,000
16,990
91,299
$
$
—
38.98
36.56
—
16,990
91,299
— CDN $
3,478,136
October 1-31, 2018....................................
1,520
$
44.49
—
—
(1) These purchases relate to the share repurchase program and were authorized in July 2012 and 2016.
(2) On April 18, 2013, our stockholders approved the Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries
(the “Canadian Plan”), which contemplates a trustee purchasing up to $10 million CDN of our outstanding common stock on the open market for the purpose
of making share awards to our Canadian employees. The Canadian Plan has no expiration date and may be discontinued at any time by the Board of Directors.
(3) Consists of shares of common stock tendered by an employee at the market close price on the date of vesting in order to satisfy the employee’s minimum
tax withholding obligations from vested restricted shares. We anticipate having additional shares tendered in subsequent periods for the same purpose.
21
Performance Graph
The following graph compares total stockholder returns of Westwood since December 31, 2013 with the total
return of the Russell 2000 Index and the SNL Asset Manager Index, a composite of 41 publicly-traded asset management
companies.
Index
2013
2014
2015
2016
2017
2018
Westwood Holdings Group, Inc.................
$ 100.00
$ 103.00
$
90.12
$ 108.12
$ 124.61
$
67.59
Russell 2000 Index.....................................
SNL Asset Manager Index .........................
100.00
100.00
104.89
105.50
100.26
89.97
121.63
95.18
139.44
126.39
124.09
95.35
Period ended December 31,
Cumulative
Five-Year Total
Return
(32.41)%
24.09 %
(4.65)%
The total return for our stock and for each index assumes $100 invested on December 31, 2013 in our common
stock, the Russell 2000 Index, and the SNL Asset Manager Index, including reinvestment of dividends. Our common stock is
traded on the NYSE under the ticker symbol “WHG.”
The closing price of our common stock on the last trading day of the year ended December 31, 2018 was $34.00
per share. Historical stock price performance is not necessarily indicative of future price performance.
22
Item 6.
Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data, together with assets under management data presented below, should be
read in conjunction with “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included elsewhere in this Report. Historical results are not necessarily indicative of future results.
Consolidated Statements of Income Data:
Year ended December 31,
(in thousands, except per share and % amounts)
(1)
2018
(2)
2017
(3)
2016
(4)
2015
(5)
2014
Total revenues..................................................................................... $ 122,300
Employee compensation and benefits................................................. $
Employee compensation and benefits as a % of Total revenues ........
Income before income taxes ............................................................... $
Income before income taxes as a % of Total revenues .......................
59,959
36,462
49.0%
29.8%
Net income.......................................................................................... $
Earnings per share – basic .................................................................. $
Earnings per share – diluted................................................................ $
Cash dividends declared per common share....................................... $
26,751
3.20
3.13
2.76
Economic Earnings(6) .......................................................................... $
Economic Earnings per common share .............................................. $
43,943
5.14
________________
$ 133,785
$ 123,021
$ 130,936
$ 113,241
$
64,955
$
61,509
$
63,562
$
52,847
48.6%
50.0%
48.5%
46.7%
$
33,893
$
34,010
$
42,220
$
42,036
25.3%
27.6%
32.2%
37.1%
$
$
$
$
$
$
19,989
2.45
2.38
2.54
38,917
4.63
$
$
$
$
$
$
22,647
2.84
2.77
2.33
41,108
5.03
$
$
$
$
$
$
27,105
3.49
3.33
2.07
46,496
5.71
$
$
$
$
$
$
27,249
3.63
3.45
1.82
41,445
5.24
(1) Our 2018 financial results were impacted by a $2.8 million foreign currency transaction gain, which positively impacted both diluted earnings per
share and basic earnings per share by $0.26 per share.
(2) Our 2017 financial results were impacted by a $1.6 million foreign currency transaction loss, a $2.5 million legal settlement charge, net of insurance
recovery and tax and a $3.4 million incremental income tax expense related to tax reform. These items negatively impacted diluted earnings per share
by $0.12 per share, $0.30 per share and $0.40 per share, respectively.
(3) Our 2016 financial results were impacted by $1.3 million of one-time costs, net of tax, associated with implementation of new information technology
platforms, which negatively impacted diluted earnings per share by $0.16 per share.
(4) The financial results related to the acquisition of our Westwood Trust office in Houston are included in our 2015 results from the acquisition date of
April 1, 2015. Our 2015 results also include a pre-tax $1.0 million non-cash charge related to acceleration of stock-based compensation expense for a
particular grant and an $807,000 tax expense for uncertain tax positions related to prior years. These items negatively impacted diluted earnings per
share by $0.08 per share and $0.10 per share, respectively.
(5) Our 2014 Income before income taxes as a percentage of Total revenues improved as increases in Total revenues outpaced increases in expenses.
(6) Economic Earnings is a non–U.S. generally accepted accounting principles (“non-GAAP”) performance measure that is provided as supplemental
information. See the definition of Economic Earnings and the reconciliation from Net income in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Supplemental Financial Information.”
Consolidated Balance Sheets Data (in thousands):
Cash and investments ...............................................................
$ 118,230
$ 105,573
$
90,164
$
95,060
$
97,751
Total assets ...............................................................................
Stockholders’ equity .................................................................
190,485
161,149
192,659
156,396
179,678
146,069
181,336
133,967
139,874
110,007
As of December 31,
2018
2017
2016
2015
2014
Assets Under Management (in millions) .........................................
$
16,606
$
24,229
$
21,241
$
20,762
$
20,168
23
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”, “explore,” “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 Exchange Act. Because forward-looking statements relate to the future, they are
subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside
of our control. Actual results, our financial condition, and the timing of some events could differ materially from those
projected in or contemplated by the forward-looking statements. Therefore you should not rely on any of these forward-looking
statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated
in the forward-looking statements include, among others:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the composition and market value of our assets under management;
regulations adversely affecting the financial services industry;
competition in the investment management industry;
our assets under management include investments in foreign companies;
our ability to develop and market new investment strategies successfully;
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 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 significant concentration of our revenues in a small number of customers.
Additional factors that could cause our actual results and financial condition to differ materially from those
indicated in the forward-looking statements are discussed under the section entitled “Item 1A. Risk Factors” and elsewhere in
this Report. The forward-looking statements are based only on currently available information and speak only as of the date of
this Report. We are not obligated and do not undertake an obligation to publicly 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.
24
Overview
We manage investment assets and provide services for our clients through our subsidiaries, Westwood
Management, Westwood Trust and Westwood International Advisors. Westwood Management and Westwood International
Advisors provide investment advisory services to institutional clients, the Westwood Funds®, other mutual funds, an Irish
investment company authorized pursuant to the European Communities (Undertakings for Collective Investment in
Transferable Securities) Regulation 2011 (as amended) (the “UCITS Fund”), individuals and clients of Westwood Trust.
Westwood Trust provides trust and custodial services and participation in common trust funds to institutions and high net worth
individuals. Our revenues are generally derived from fees based on a percentage of assets under management, and at
December 31, 2018, Westwood Management, Westwood International Advisors and Westwood Trust collectively managed
assets valued at approximately $16.6 billion. We have established a track record of delivering competitive, risk-adjusted returns
for our clients.
With respect to most 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 and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized
in the marketplace. This investment approach is designed to preserve capital during unfavorable periods and provide superior
real returns over the long term. Our investment teams have significant industry experience. Our investment team members have
average investment experience of seventeen 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,
wealth management and mutual fund markets. The cost of developing new products and growing the organization as a whole
has resulted in our incurring expenses that, in some cases, do not currently have significant offsetting revenues. While we
continue to evolve our products, we believe that the appropriate foundation and products are in place such that investors will
recognize the value in these products, thereby generating new revenue streams for Westwood.
2018 Highlights
The following items are highlights for the year ended December 31, 2018:
• Assets under management as of December 31, 2018 were $16.6 billion, a 31% decrease compared to
December 31, 2017. Quarterly average assets under management decreased 8% to $21.4 billion for 2018
compared to 2017, which contributed to the 9% decrease in total revenue from 2017.
• Our LargeCap Value, Emerging Markets Plus, SMidCap, SMidCap Plus, Emerging Markets, and Emerging Markets
SMidCap strategies exhibited strong performance.
• Our SmallCap strategy was selected as a subadvisor to the Morningstar U.S. Equity Fund.
• The effective tax rate decreased to 26.6% for 2018 compared to 41.0% for 2017 related to the Tax Reform Act enacted
in December 2017.
•
In October 2018, our Board approved a 6% increase in our quarterly dividend to $0.72 per share for an annual rate
of $2.88 per share, which results in a dividend yield of 8.5% using the year-end stock price of $34.00 per share.
• We repurchased 108,289 shares of our common stock for an aggregate purchase price of $4.0 million.
• Our financial position remains strong with liquid cash and short-term investments of $118.2 million and no debt
as of December 31, 2018.
• We closed the sale of our Omaha-based Wealth Management operations, received net proceeds of $10.0 million
and recognized a $0.5 million gain on sale.
25
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, 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. 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 quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. We
recognize advisory fee revenues as services are rendered. A limited number of our clients have a contractual performance-based
fee component in their contracts, which generates additional revenues if we outperform a specified index over a specific period
of time. We record revenue for performance-based fees at the end of the measurement period. Since our advance paying clients’
billing periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter, and
our 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. Westwood Trust
also provides trust services to a small number of clients on a fixed fee basis. Trust fees are primarily either paid quarterly in
arrears based on a daily average of assets under management for the quarter, or monthly based on the month-end assets under
management. Since billing periods for most of Westwood Trust's clients coincide with the calendar quarter, revenue is fully
recognized within the quarter and our Consolidated Financial Statements do not contain a significant amount of deferred
revenue.
Our other revenues generally consist of interest and investment income. Although we generally invest most of our
cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds, including seed
money for new investment strategies.
Employee Compensation and Benefits
Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity-based
compensation expense and benefits.
Sales and Marketing
Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing
and advertising costs.
Westwood Mutual Funds
Westwood Mutual Funds expenses relate to our marketing, distribution and administration 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, legal and other
professional services.
Legal Settlement
Legal settlement expenses consist of settlements related to litigation claims, net of any amounts covered by our
insurance policies.
General and Administrative
General and administrative expenses generally consist of costs associated with the lease of office space,
amortization, depreciation, insurance, custody expense, Board of Directors fees, investor relations, licenses and fees, office
supplies and other miscellaneous expenses.
Gain (loss) on foreign currency transactions
Gain (loss) on foreign currency transactions consist of foreign currency transactions primarily related to
Westwood International Advisors.
26
Gain on Sale of Operations
Gain on sale of operations includes the gain on the sale of our Omaha-based component of our Wealth
Management business.
Assets Under Management
Assets under management decreased $7.6 billion, or 31%, to $16.6 billion at December 31, 2018 compared to
$24.2 billion at December 31, 2017. Quarterly average assets under management decreased $1.8 billion, down 8%, to $21.4
billion for 2018 compared with $23.1 billion for 2017. The decrease in average assets under management is due principally to
net outflows, including $1.1 billion of outflows related to the sale of the Omaha-based component of our Wealth Management
business, and asset depreciation over the last twelve months.
Assets under management increased $3.0 billion, or 14%, to $24.2 billion at December 31, 2017 compared to
$21.2 billion at December 31, 2016. Quarterly average assets under management increased $2.0 billion, up 9%, to $23.1 billion
for 2017 compared with $21.2 billion for 2016. The increase in average assets under management is due principally to market
appreciation over the preceding twelve months and $713 million in a long-only convertibles fund that transitioned from assets
under
advisement (“AUA”) to AUM during the third quarter of 2017.
The following table presents our assets under management as of December 31, 2018, 2017 and 2016:
Institutional.....................................................................
Wealth Management.......................................................
Mutual Funds..................................................................
Total Assets Under Management(1) .............................
________________
As of December 31,
(in millions)
% Change
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
$
9,327
$
14,421
$
11,911
4,043
3,236
5,566
4,242
5,520
3,810
$
16,606
$
24,229
$
21,241
(35)%
(27)%
(24)%
(31)%
21%
1%
11%
14%
(1) AUM for 2018, 2017 and 2016 excludes approximately $228 million, $382 million and $1.0 billion of AUA, respectively, related to our model
portfolios, for which we provide consulting advice but do 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.
Our assets under management disclosure reflects management’s view of our three types of accounts: institutional,
wealth management 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; pooled investment
vehicles, including the UCITS Fund and collective investment trusts; and managed account relationships with
brokerage firms and other registered investment advisors that offer Westwood products to their customers.
• 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. provided advisory services to high net
worth individuals. Prior to 2018, it also included assets for which Westwood Advisors, L.L.C. provided 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 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 following an inter-
generational transfer of wealth.
• Mutual Funds include the Westwood Funds®, a family of mutual funds for which Westwood Management serves
as advisor. These funds are available to individual investors, as well as offered as part of our investment strategies
for institutional and wealth management accounts.
27
Roll-Forward of Assets Under Management
Assets Under Management (in millions)
Beginning of period assets .................................................................
Client flows:
Inflows/new accounts..................................................................
Outflows/closed accounts(1) ........................................................
Net outflows .......................................................................................
Market depreciation............................................................................
Net change..........................................................................................
End of period assets............................................................................
________________
Year Ended December 31, 2018
Institutional
Wealth
Management
Mutual
Funds
Total
$
14,421
$
5,566
$
4,242
$
24,229
1,353
(5,536)
(4,183)
(911)
(5,094)
378
(1,639)
(1,261)
(262)
(1,523)
879
(1,672)
(793)
(213)
(1,006)
2,610
(8,847)
(6,237)
(1,386)
(7,623)
$
9,327
$
4,043
$
3,236
$
16,606
(1) Wealth Management outflows include approximately $1.1 billion of assets related to the sale of our Omaha-based component of our Wealth
Management business.
The decrease in assets under management for the year ended December 31, 2018 was due to net outflows of $6.2
billion, which included approximately $1.1 billion of outflows related to the divestiture of our Omaha operations, and market
depreciation of $1.4 billion. Flows were primarily related to net outflows in our SMidCap strategies, Emerging Markets
strategies, LargeCap Value strategy and Income Opportunity strategy.
Assets Under Management (in millions)
Beginning of period assets...............................................................
Client flows:
Inflows/new accounts(1)............................................................
Outflows/closed accounts(2)......................................................
Net inflows (outflows).....................................................................
Market appreciation.........................................................................
Net change .......................................................................................
End of period assets.........................................................................
________________
Year Ended December 31, 2017
Institutional
Wealth
Management
Mutual
Funds
Total
$
11,911
$
5,520
$
3,810
$
21,241
2,966
(2,714)
252
2,258
2,510
786
(1,357)
(571)
617
46
986
(1,065)
(79)
511
432
4,738
(5,136)
(398)
3,386
2,988
$
14,421
$
5,566
$
4,242
$
24,229
(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.
(2) Wealth Management outflows include approximately $397 million of assets related to the sale of our Omaha-based component of our Wealth
Management business.
The increase in assets under management for the year ended December 31, 2017 was due to market appreciation
of $3.4 billion, partially offset by net outflows of $398 million, which included approximately $713 million of inflows in our
Strategic Global Convertibles strategy that transitioned from AUA to AUM in the third quarter of 2017. Flows were primarily
driven by net outflows in our SMidCap strategies and LargeCap Value strategy, partially offset by net inflows in our SmallCap
Value and Market Neutral Income strategies.
28
Assets Under Management (in millions)
Beginning of period assets ................................................................
Client flows:
Inflows/new accounts(1) ...........................................................
Outflows/closed accounts(1).....................................................
Net outflows ......................................................................................
Market appreciation ..........................................................................
Net change.........................................................................................
End of period assets ..........................................................................
________________
Year Ended December 31, 2016
Institutional
Wealth
Management
Mutual
Funds
Total
$
11,752
$
5,393
$
3,617
$
20,762
1,694
(2,877)
(1,183)
1,342
159
623
(826)
(203)
330
127
939
(1,088)
(149)
342
193
3,256
(4,791)
(1,535)
2,014
479
$
11,911
$
5,520
$
3,810
$
21,241
(1)
Institutional outflows include approximately $30 million in an account that transitioned to our model portfolio for which we no longer have direct
discretionary investment authority. This account is included in AUA aggregating $1.0 billion as of December 31, 2016.
The increase in assets under management for the year ended December 31, 2016 was due to market
appreciation of $2.0 billion, partially offset by net outflows of $1.5 billion. Flows were primarily related to net outflows in our
SMidCap, Income Opportunity, LargeCap Value, AllCap Value and Market Neutral Income strategies, partially offset by net
inflows in our Emerging Markets Plus and SmallCap Value strategies.
29
Results of Operations
The following table and discussion of our results of operations is based upon data derived from our Consolidated
Statements of Comprehensive Income contained in our Consolidated Financial Statements and should be read in conjunction
with these statements included elsewhere in this Report.
Years ended December 31,
(in thousands)
2018
2017
2016
% Change
2018
vs. 2017
2017
vs. 2016
Revenues:
Advisory fees:
Asset-based................................................................
$
89,367
$
99,201
$
91,492
(10)%
8 %
Performance-based ....................................................
Trust fees ........................................................................
Other revenues, net.........................................................
2,984
28,953
996
1,411
31,621
1,552
635
30,313
581
Total revenues.......................................................
122,300
133,785
123,021
Expenses:
Employee compensation and benefits ............................
59,959
64,955
61,509
Sales and marketing .......................................................
Westwood mutual funds .................................................
Information technology ..................................................
Professional services ......................................................
Legal settlement .............................................................
General and administrative.............................................
(Gain) loss on foreign currency transactions..................
Total expenses.......................................................
Net operating income ............................................................
Gain on sale of operations ..............................................
Income before income taxes................................................
Provision for income taxes ....................................................
Net income............................................................................
1,936
3,808
9,103
4,783
—
9,564
(2,791)
86,362
35,938
524
36,462
9,711
2,042
3,938
7,785
5,916
4,009
9,652
1,595
99,892
33,893
—
33,893
13,904
$
26,751
$
19,989
$
22,647
111
(8)
(36)
(9)
(8)
(5)
(3)
17
(19)
(14)
6
8
(30)
34 %
1,919
3,155
7,735
5,622
89,011
34,010
34,010
11,363
—
NM
9,433
(1)
(362)
NM
—
NM
122
4
167
9
6
6
25
1
5
2
NM
NM
12
—
NM
—
22
(12)%
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Total Revenues. Total revenues decreased $11.5 million, or 9%, to $122.3 million compared with $133.8 million
for 2017. The decrease was attributable to a $9.8 million decrease in asset-based advisory fees and a $2.7 million decrease in
Trust fees, partially offset by a $1.6 million increase in performance-based fees. Advisory-based fees decreased as a result of
lower average assets under management compared to 2017. Trust fees decreased primarily due to the sale of the Omaha-based
component of our Wealth Management business.
30
Employee Compensation and Benefits. Employee compensation and benefit costs decreased $5.0 million, or 8%,
to $60.0 million compared with $65.0 million in 2017 primarily due to the elimination of compensation following the sale of
the Omaha-based component of our Wealth Management business and decreases in short- and long-term incentive
compensation as a result of lower assets-based fees compared to the prior year.
Information Technology. Information technology costs increased $1.3 million, or 17%, to $9.1 million compared
with $7.8 million in 2017 primarily due to implementation costs as we continue to invest in our technology infrastructure and
increased research expenses.
Professional Services. Professional services costs decreased $1.1 million, or 19%, to $4.8 million compared to
$5.9 million in 2017 primarily due to reduced legal fees as the AGF litigation was settled in 2017 and the sale of our Omaha-
based component was finalized in the first quarter of 2018.
Legal Settlement. We recorded a net $4.0 million charge related to the AGF legal settlement, net of associated
insurance coverage, during the third quarter of 2017. See further discussion of the settlement in Note 14 “Commitments and
Contingencies” to our Consolidated Financial Statements included in Part II. Item 8. “Financial Statements and Supplementary
Data.”
(Gain) loss on foreign currency transactions. We recorded $2.8 million foreign currency transaction gains in 2018
due to an 8% increase in the Canadian dollar exchange rate.
Provision for Income Taxes. The effective tax rate decreased to 26.6% for 2018 compared to 41.0% for 2017
primarily related to the Tax Reform Act enacted in December 2017.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Total Revenues. Total revenues increased $10.8 million, or 9%, to $133.8 million compared with $123.0 million
for 2016. The increase was attributable to a $7.7 million increase in asset-based advisory fees, a $1.3 million increase in Trust
fees, and a $0.8 million increase in performance-based fees. Advisory-based and Trust fees increased as a result of higher
average assets under management compared to 2016.
Employee Compensation and Benefits. Employee compensation and benefit costs increased $3.4 million, or 6%,
to $65.0 million compared with $61.5 million in 2016. This increase was primarily due to higher incentive compensation and
performance-based restricted stock expense as a result of higher pre-tax income (excluding legal settlement costs), as well as
increased average headcount and merit increases. We had 181 full-time employees as of December 31, 2017 compared to 174 at
December 31, 2016.
Westwood Mutual Funds. Westwood mutual funds expenses increased 25% to $3.9 million compared to $3.2
million for 2016 primarily due to increased overall shareholder servicing costs on higher mutual funds average assets under
management and increased commission fees related to the addition of a third-party seller at the end of 2016.
Legal Settlement. We recorded a net $4.0 million charge related to a legal settlement, net of associated insurance
coverage, during the third quarter of 2017. See further discussion of the settlement in Note 14 “Commitments and
Contingencies” to our Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary
Data”.
(Gain) loss on foreign currency transactions. We recorded $1.6 million foreign currency transaction losses in
2017 as a result of a 7% decrease in the Canadian dollar exchange rate.
Provision for Income Taxes. The effective tax rate increased to 41.0% for 2017 compared to 33.4% for 2016. The
increase is primarily related to the Tax Reform Act signed into law in December 2017. We recorded $3.4 million incremental
income tax expense related to the mandatory deemed repatriation of earnings in our Canadian subsidiary and the revaluation of
our deferred tax assets as a result of the decrease in the federal tax rate.
31
Supplemental Financial Information
As supplemental information, we provide a non-U.S. generally accepted accounting principles (“non-GAAP”)
performance measure that we refer to as Economic Earnings. We provide this measure in addition to, but not as a substitute for,
net income reported on a U.S. generally accepted accounting principles (“GAAP”) basis. Our management and Board of
Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and review our dividend policy.
We believe that this non-GAAP performance measure, while not a substitute for GAAP net income, is useful for management
and investors when evaluating our underlying operating and financial performance and our available resources. We do not
advocate that investors consider this non-GAAP measure without considering financial information prepared in accordance
with GAAP.
In calculating Economic Earnings, we add back to net income the non-cash expense associated with equity-based
compensation awards of restricted stock, amortization of intangible assets, and 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.
For the year ended December 31, 2018, our Economic Earnings increased by 13% to $43.9 million compared
with $38.9 million for the year ended December 31, 2017. The current year benefited from foreign currency transaction gains
of $2.8 million, a lower effective tax rate related to the Tax Reform Act signed into law in December 2017 and lower employee
compensation costs, offset by lower total revenue due to a decrease in average assets under management and non-recurrence of
a $4.0 million legal settlement expense recorded in the prior year.
The following table provides a reconciliation of net income to Economic Earnings for the years presented:
For the years ended December 31,
(in thousands, except share data)
2018
2017
2016
2015
2014
% Change
2018 vs.
2017
2017 vs.
2016
2016 vs.
2015
2015 vs.
2014
Net Income ...........................................
$ 26,751
$ 19,989
$ 22,647
$ 27,105
$ 27,249
34%
(12)%
(16)%
(1)%
Add: Restricted stock expense.........
15,283
16,430
15,954
17,574
13,685
Add: Intangible amortization...........
1,672
1,872
1,960
1,546
Add: Tax benefit from goodwill
amortization .....................................
237
626
547
271
359
152
Economic Earnings .............................
$ 43,943
$ 38,917
$ 41,108
$ 46,496
$ 41,445
Economic Earnings per Share............
$
5.14
$
4.63
$
5.03
$
5.71
$
5.24
(7)
(11)
3
(4)
(9)
27
28
331
(62)
14
102
13%
11%
(5)%
(8)%
(12)%
(12)%
78
12 %
9 %
Liquidity and Capital Resources
Balance Sheet Data (in thousands)
Cash and cash equivalents............................................................................................................
Accounts receivable .....................................................................................................................
Total liquid assets..................................................................................................................
Investments, at fair value .............................................................................................................
$
$
$
As of December 31,
2018
2017
52,449
$
18,429
70,878
65,781
$
$
54,249
21,660
75,909
51,324
We had cash and short-term investments of $118.2 million and $105.6 million as of December 31, 2018 and 2017,
respectively. Cash and cash equivalents includes approximately $33 million of undistributed income from Westwood
International Advisors for both periods ending December 31, 2018 and 2017. In accordance with the one-time mandatory
deemed repatriation required under tax legislation signed into law in December 2017, we paid $1.8 million in income taxes
related to this undistributed income. If these funds were needed for our U.S. operations, we would be required to accrue and
pay incremental Canadian withholding taxes to repatriate a portion of these funds. Our current intent is to permanently reinvest
the funds subject to withholding taxes outside of the U.S., and our current forecasts do not demonstrate a need to repatriate
them to fund our U.S. operations.
At December 31, 2018 and 2017, working capital aggregated $114.0 million and $106.6 million, respectively. As
required by the Finance Code, Westwood Trust is subject to a minimum capital requirement of $4.0 million. At December 31,
32
2018, Westwood Trust had approximately $18.6 million in excess of its minimum capital requirement. We had no debt at
December 31, 2018 or December 31, 2017.
Cash Flow Data (in thousands)
Operating cash flows..............................................................................................
Investing cash flows...............................................................................................
Financing cash flows..............................................................................................
For the years ended December 31,
2018
2017
2016
$
31,484
$
48,009
$
47,392
3,597
(34,115)
(1,167)
(28,577)
(1,810)
(34,944)
Historically we have funded our operations and cash requirements with cash generated from operating activities.
We may also use cash from operations to pay dividends to our stockholders. As of December 31, 2018 and 2017, 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. Changes in working capital, especially accounts receivable and accounts payable,
generally result from timing differences between collection of fees billed and payment of operating expenses.
During 2018, cash flow provided by operating activities aggregated $31.5 million compared to cash provided by
operations of $48.0 million during 2017 and $47.4 million during 2016. The decrease of $16.5 million from 2017 to 2018 was
primarily due to cash transferred to our investment accounts offset by changes in operating assets and liabilities and net income.
The increase of $0.6 million from 2016 to 2017 was primarily due to changes in operating assets and liabilities and net income,
partially offset by cash transferred from our investment accounts.
Cash flow provided by investing activities during 2018 of $3.6 million was primarily related to the proceeds from
the sale of our Omaha-based component of our Wealth Management business, partially offset by a $5.4 million private equity
investment. Cash flow used in investing activities during 2017 and 2016 of $1.2 million and $1.8 million primarily related to
the purchase of property and equipment.
Cash used in financing activities of $34.1 million during 2018 compared to $28.6 million and $34.9 million
during 2017 and 2016, respectively. The increase in 2018 primarily related to repurchases of common stock under our share
repurchase plan. The decrease from 2016 to 2017 related to a 2016 payment of contingent consideration related to the
acquisition of our Westwood Trust Houston office and 2016 repurchases of common stock under our share repurchase plan.
Our future liquidity and capital requirements will depend upon numerous factors, including results of operations,
the timing and magnitude of capital expenditures or strategic initiatives, our dividend policy and other business and risk factors
described under “Item 1A. Risk Factors” in this Report. We believe that current cash and short-term investment balances and
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.
33
Cash Dividends
The following table summarizes dividends declared during 2018 and 2017:
2018 Dividends
Declaration Date
February 7, 2018
April 25, 2018
July 25, 2018
October 24, 2018
Record Date
March 9, 2018
June 8, 2018
September 7, 2018
December 7, 2018
Paid Date
Dividend Per Share
April 2, 2018
July 2, 2018
October 1, 2018
January 2, 2019
$0.68
$0.68
$0.68
$0.72
$2.76
2017 Dividends
Declaration Date
February 8, 2017
April 27, 2017
July 28, 2017
October 24, 2017
Record Date
March 10, 2017
June 9, 2017
September 8, 2017
December 8, 2017
Paid Date
Dividend Per Share
April 3, 2017
July 3, 2017
October 2, 2017
January 2, 2018
$0.62
$0.62
$0.62
$0.68
$2.54
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2018 (in thousands).
Payments due in:
Total
Less than
1 year
1-3
years
4-5
years
After 5
years
Purchase obligations(1)..........................................................
Operating lease obligations ..................................................
$
$
11,669
13,181
$
$
3,926
2,110
$
$
4,580
4,225
$
$
1,759
3,443
$
$
1,404
3,403
________________
(1) A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding and
that specifies all significant terms, including (a) fixed or minimum quantities to be purchased; (b) fixed, minimum or variable
price provisions; and (c) the approximate timing of the transaction. Our purchase obligations relate to obligations associated
with implementing and operating new information technology platforms and outsourcing services. The above purchase
obligations exclude agreements that are cancelable without significant penalty.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent losses and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of revenues and expenses during the reporting period. In applying accounting principles, we often must make
individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates. We believe the following are areas where the
degree of judgment and complexity in determining amounts recorded in our Consolidated Financial Statements make
accounting policies critical.
Consolidation
We assess each legal entity that we manage to determine whether consolidation is appropriate at the onset of the
34
relationship. We first determine whether the entity is a variable interest entity (“VIE”), or a voting interest entity (“VOE”),
under U.S. generally accepted accounting principles (“GAAP”) and whether we have a controlling financial interest in the
entity.
A VIE is an entity in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its
activities without subordinated financial support, (ii) the at-risk equity holders, as a group, lack the characteristics of a
controlling financial interest or (iii) the entity is structured with disproportionate voting rights, and substantially all of the
activities are conducted on behalf of an investor with disproportionately few voting rights. That is, the at-risk equity holders do
not have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity
that most significantly impact the entity’s economic performance. An enterprise must consolidate all VIEs of which it is the
primary beneficiary. We determine if a sponsored investment meets the definition of a VIE by considering whether the fund’s
equity investment at risk is sufficient to finance its activities without additional subordinated financial support and whether the
fund’s at-risk equity holders absorb any losses, have the right to receive residual returns and have the right to direct the
activities of the entity most responsible for the entity’s economic performance. The primary beneficiary of a VIE is defined as
the party who, considering the involvement of related parties and de facto agents, has (i) the power to direct the activities of the
VIE that most significantly affect its economic performance and (ii) the obligation to absorb losses of the entity or the right to
receive benefits from the entity that could potentially be significant to the VIE. This evaluation is updated on a continuing
basis.
A VOE is an entity that is outside the scope of the guidance for VIEs. Consolidation of a VOE is required when a
reporting entity owns a controlling financial interest in a VOE. Ownership of a majority of the voting interests is the usual
condition for a controlling financial interest. Assessing whether or not an entity is a VIE or VOE involves judgment and
analysis. Factors included in this assessment include the legal organization of the entity, our contractual involvement with the
entity and any related party or de facto agent implications of the Company’s involvement with the entity. Determining if the
Company is the primary beneficiary of a VIE also requires significant judgment. There is judgment involved to assess if the
Company has the power to direct the activities that most significantly impact the entity’s economic results and to assess if the
Company has an obligation to absorb the majority of expected losses or a right to receive the majority of residual returns. We
reconsider whether entities are a VIE or VOE whenever contractual arrangements change, the entity receives additional equity
or returns equity to its investors or changes in facts and circumstances occur that change an investor's ability to direct the
activities of the entity.
We have evaluated (i) our advisory relationships with Westwood Investment Funds PLC (the “UCITS Fund”) and
the Westwood Funds®, (ii) 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 Fund LP (collectively the “Private Equity
Funds”) and (iii) the private company discussed in Note 3 “Investments” to our Consolidated Financial Statements included in
Part II. Item 8 “Financial Statements and Supplementary Data” (“Private Equity”) 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 CTFs and
Private Equity Funds 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. Prior to the sale of our
Omaha-based operations, we also considered our advisory relationship with ten limited liability companies (“LLCs”) as VIEs,
but as of December 31, 2018, we no longer serve as the managing member of the funds and do not control the activities that
most significantly impact the entities' economic performance. Therefore these LLCs are no longer considered VIEs. Although
we have related parties on the UCITS Fund board of directors, the shareholders have rights to remove the current directors by a
simple majority vote and so we determined that the UCITS Fund is not a VIE. As the Company and its representatives do not
have representation on the Westwood Funds® or the Private Equity independent boards of directors, which direct the activities
that most significantly impact the entities' economic performance, we determined that the Westwood Funds® and the Private
Equity were not VIEs. Therefore, the UCITS Fund, Westwood Funds® and Private Equity should be analyzed under the VOE
consolidation method.
Based on our analysis of our investments in these entities for the periods ending December 31, 2018 and 2017, we
have not consolidated the CTFs, Private Equity Funds or LLCs under the VIE method or the UCITS Fund, Westwood Funds®
or Private Equity under the VOE method, and therefore the financial results of these entities are not included in the Company’s
consolidated financial results. We have included the disclosures related to VIEs and VOEs in Note 12 “Variable Interest
Entities” to our Consolidated Financial Statements included in Part II. Item 8 “Financial Statements and Supplementary Data.”
Business Combinations
In allocating the purchase price of a business combination, the Company records all assets acquired and liabilities
assumed at fair value with the excess of the purchase price over the aggregate fair values recorded as goodwill. ASC 820, Fair
35
Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The purchase price of an acquisition is
allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of
acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired
and liabilities assumed such excess is allocated to goodwill. The Company determines the estimated fair values after review
and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by
management. The fair value assigned to identifiable intangible assets acquired is based on estimates and assumptions made by
management at the time of the acquisition. The Company adjusts the preliminary purchase price allocation, as necessary, during
the measurement period of up to one year after the acquisition closing date as it obtains more information as to the facts and
circumstances existing as of the acquisition date. Acquisition-related costs are recognized separately from the acquisition
purchase price and are expensed as incurred.
Goodwill
Goodwill is not amortized but is tested for impairment, at least annually. We assess the recoverability of the
carrying amount of goodwill either qualitatively or quantitatively as of July 1 of each fiscal year or whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be fully recoverable. When assessing the recoverability
of goodwill, we may first assess qualitative factors. If an initial qualitative assessment indicates that it is more likely than not
that the carrying amount exceeds fair value, a quantitative analysis may be required. We may also elect to skip the qualitative
assessment and proceed directly to the quantitative analysis.
Recoverability of the carrying value of goodwill is measured at the reporting unit level. We have identified two
reporting units, which are consistent with our reporting segments. In performing a quantitative analysis, we measure the
recoverability of goodwill for our reporting units using a combination of the income approach and the market multiple
approach. The income approach is based on the long-term projected future cash flows of the reporting units. We discount the
estimated cash flows to present value using a weighted average cost of capital that considers factors such as market
assumptions, the timing of cash flows and the risks inherent in such cash flows. The key assumptions used in the market
multiple valuation require significant management judgment, including the determination of our peer group and the valuation
multiples of such peer group. If the carrying value exceeds the fair value, an impairment loss is measured by reducing the
goodwill to the fair market value.
We completed our annual impairment assessments during 2018, 2017 and 2016 and concluded that no impairment
losses were required.
Intangible Assets
Our definite-lived intangible assets represent the acquisition date fair value of the intangible assets acquired, net
of amortization. The values of these assets are comprised mostly of client relationships but also include valuations of trade
names and non-compete agreements. In valuing these assets, we made significant estimates regarding the useful life, growth
rates and potential attrition of the assets acquired. We periodically review our intangible assets for events or circumstances that
would indicate impairment. If we determine the carrying value exceeds fair value, we would record an impairment to remove
the amount that exceeded fair value.
We completed our annual impairment assessments during 2018, 2017 and 2016 and concluded that no impairment
losses were required.
Stock-Based Compensation
We have granted restricted stock to employees and non-employee directors. We calculate compensation cost for
restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued and
an adjustment for restrictions on dividends. We amortize compensation cost on a straight-line basis over the applicable service
period. We adjust our compensation cost for forfeitures as they occur.
We grant performance-based share awards to certain employees, the vesting of which is subject to the employee’s
continuing employment and the Company's achievement of certain performance goals. We assess actual performance versus the
predetermined performance goals and record compensation costs once we conclude that it is probable that we will meet the
performance goals required to vest the applicable performance-based awards. The estimated number of awards that will
ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such
amounts will be recorded as a cumulative adjustment in the period estimates are revised.
36
Accounting for Income Taxes
We operate in several states and countries and are required to allocate our income, expenses and earnings under
the various laws and regulations of these tax jurisdictions. Accordingly, our provision for income taxes reflects the statutory tax
obligations of the jurisdictions in which we operate. Significant judgment and complex calculations are used when determining
our tax liability and in evaluating our tax positions, and we are subject to audits by taxing authorities in each of the jurisdictions
in which we operate. We adjust our income tax provision in the period in which we determine that actual outcomes will likely
be different from our estimates. Changes in tax laws may result in changes to our tax position and effective tax rates. We
include penalties and interest on income-based taxes in the “General and administrative” line on our Consolidated Statements
of Comprehensive Income. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law.
Further information on the tax impacts of the Tax Reform Act is included in Note 7 “Income Taxes” to our Consolidated
Financial Statements included in Part II. Item 8 “Financial Statements and Supplementary Data.”
We have not recognized a deferred tax liability on the undistributed earnings of our foreign subsidiary, Westwood
International Advisors. If these funds were needed for our U.S. operations, we would be required to accrue and pay incremental
foreign withholding taxes to repatriate a portion of these funds. Our current intent is to permanently reinvest the funds subject
to withholding taxes outside of the U.S.
We are required to assess whether a valuation allowance should be established against our deferred tax assets
based on consideration of all available evidence, using a more-likely-than-not standard. As of December 31, 2018 and 2017, we
have not recorded a valuation allowance on any deferred tax assets. In the event that sufficient taxable income does not result in
future years, a valuation allowance may be required.
We account for uncertain tax positions by recognizing the impact of a tax position in our Consolidated Financial
Statements when we believe it is more likely than not that the tax position would not be sustained upon examination by the
appropriate tax authority based on the merits of the position. We periodically review our tax positions and adjust the balances as
new information becomes available. In making these assessments, we often must analyze complex tax laws of multiple
domestic and international jurisdictions. The actual outcome of our tax positions, if significantly different from our estimates,
could materially impact the financial statements. Further information on uncertain tax positions is included in Note 7 “Income
Taxes” to our Consolidated Financial Statements included in Part II. Item 8 “Financial Statements and Supplementary Data.”
Accounting Developments
See Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in
Part II, Item 8, “Financial Statements and Supplementary Data” for a description of new accounting standards and their
anticipated effects on our Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our revenues are primarily generated from fees derived as a percentage of our AUM, which is subject to market
risks. Additionally, we invest corporate capital in various financial instruments, including United States treasury bills and
equity funds, all of which present inherent market risks. We do not currently participate in any hedging activities, nor do we
utilize any derivative financial instruments. The following information describes the key aspects of certain financial
instruments that involve market risks.
Securities Markets and Interest Rates
The value of assets under management is affected by fluctuations in securities markets and changes in interest
rates. Since we derive a substantial portion of our revenues from investment advisory and trust fees based on the value of assets
under management, our revenues may be adversely affected by a decline in the prices of securities or changing interest rates. A
hypothetical 10% decrease in our average assets under management during the year ended December 31, 2018 would have
reduced our reported consolidated total revenue by approximately $12 million.
Our cash equivalents and other investment instruments are exposed to financial market risk due to fluctuations in
interest rates, which may affect interest income. We do not expect interest income to be significantly affected by sudden
changes in market interest rates.
Foreign Currency Risk
Westwood International Advisors operates in Toronto, Canada and accordingly we are exposed to foreign
currency fluctuation risk associated with changes in the value of the Canadian dollar relative to the United States dollar. For the
37
year ended December 31, 2018, Westwood International Advisors represented 42% of our consolidated income before income
taxes. Changes in the currency exchange rate result in cumulative translation adjustments included in “Accumulated other
comprehensive loss” on our Consolidated Balance Sheets and potentially result in transaction gains or losses, which are
included in our earnings. The low and high currency exchange rates for a Canadian dollar into a United States dollar for the
year ended December 31, 2018 were 0.7271 and 0.8157, respectively. A hypothetical 10% devaluation in the average quoted
United States dollar-equivalent of the Canadian dollar exchange rate during the year ended December 31, 2018 would have
reduced our reported consolidated income before income taxes by approximately $1.5 million.
Item 8.
Financial Statements and Supplementary Data
The independent registered public accounting firm's report and our Consolidated Financial Statements listed in
the accompanying index are included in Item 15 of this Report. See “Index to Financial Statements” on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
The Company had no disagreements with its current independent registered public accounting firms.
38
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our management, including
our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were
effective at the reasonable assurance level as of December 31, 2018 to ensure that information required to be disclosed by us in
the reports we file or submit under the Exchange Act was (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives.
Changes in Internal Control over Financial Reporting
During the quarterly period ended December 31, 2018, there has been no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
39
REPORT OF WESTWOOD HOLDINGS GROUP, INC.’S MANAGEMENT ASSESSMENT OF INTERNAL
CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Westwood Holdings Group, Inc.:
The management of Westwood Holdings Group, Inc. (“Westwood”) is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Westwood’s internal
control system was designed to provide reasonable assurance to the company’s management and Board of Directors regarding
the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, contain inherent limitations. Therefore, even those systems
determined to be effective can only provide reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The management of Westwood assessed the effectiveness of Westwood’s internal control over financial reporting as of
December 31, 2018. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in the 2013 Internal Control — Integrated Framework. Based on our assessment, we
believe that, as of December 31, 2018, Westwood’s internal control over financial reporting is effective based on those criteria.
Westwood’s independent registered public accounting firm has issued an audit report on our assessment of Westwood’s internal
control over financial reporting. This report appears on page 41.
By:
/s/ Brian O. Casey
Brian O. Casey, President & Chief Executive Officer
/s/ Murray Forbes III
Murray Forbes III, Chief Financial Officer & Treasurer
February 21, 2019
Dallas, Texas
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Westwood Holdings Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Westwood Holdings Group, Inc. and subsidiaries (the
“Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our
report dated February 21, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Westwood
Holdings Group, Inc.’s Management Assessment of Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 21, 2019
41
Item 9B. Other Information.
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this item is, or will be, set forth in the definitive proxy statement relating to the 2019
Annual Meeting of Stockholders of Westwood Holdings Group, Inc., which is to be filed with the SEC pursuant to Regulation
14A under the Exchange Act (the “Proxy Statement”). The Proxy Statement relates to a meeting of stockholders involving the
election of directors, and the portions therefrom required to be set forth in this Report by this item are incorporated herein by
reference pursuant to General Instruction G(3) to Form 10-K.
Item 11.
Executive Compensation.
The information required by this item is, or will be, set forth in the Proxy Statement. The Proxy Statement relates
to a meeting of stockholders involving the election of directors, and the portions therefrom required to be set forth in this
Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table gives information as of December 31, 2018 about shares of our common stock that may be
issued upon the exercise of options, warrants and rights under our Fifth Amended and Restated Westwood Holdings Group, Inc.
Stock Incentive Plan and the Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its
Subsidiaries, which are our only equity compensation plans in effect at that time. The material terms of these plans were
approved by our stockholders and are discussed in Note 10 “Employee Benefits” to our Consolidated Financial Statements
included in Part II. Item 8 “Financial Statements and Supplementary Data.”
Plan Category
Equity compensation plans approved by security holders ......
Equity compensation plans not approved by security holders
Total .........................................................................................
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted- average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) (c)
— $
—
— $
—
—
—
527,000 (1)
—
527,000
(1) Includes 452,000 shares available under our Fifth Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan and
approximately 75,000 shares available under the Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its
Subsidiaries.
The other information required by this item is, or will be, set forth in the Proxy Statement. The Proxy Statement
relates to a meeting of stockholders involving the election of directors, and the portions therefrom required to be set forth in
this Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is, or will be, set forth in the Proxy Statement. The Proxy Statement relates
to a meeting of stockholders involving the election of directors, and the portions therefrom required to be set forth in this
Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
Item 14.
Principal Accounting Fees and Services.
The information required by this item is, or will be, set forth in the Proxy Statement. The Proxy Statement relates
to a meeting of stockholders involving the election of directors, and the portions therefrom required to be set forth in this
Report by this item are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
42
Item 15.
Exhibits, Financial Statement Schedules.
Financial Statement Schedules
PART IV
The financial statements included in this Report are listed in the Index to Financial Statements on page F-1 of this
Report. Schedules for which provision is made in the applicable accounting regulations of the SEC are either not required
under the related instructions or are not applicable.
Exhibits
The exhibits required to be furnished pursuant to Item 15 are listed in the Index to Exhibits filed herewith, which
Index to Exhibits is incorporated herein by reference.
43
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
WESTWOOD HOLDINGS GROUP, INC.
By:
/s/ Brian O. Casey
Brian O. Casey
President, Chief Executive Officer and Director
Dated: February 21, 2019
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Westwood Holdings Group, Inc., a Delaware
corporation, and the undersigned directors and officers of Westwood Holdings Group, Inc. hereby constitutes and appoints
Brian O. Casey its, his or her true and lawful attorney-in-fact and agent, for it, him or her and in its, his or her name, place and
stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each
such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and
perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and
purposes as it, he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
/s/ Brian O. Casey
Brian O. Casey
/s/ Murray Forbes III
Murray Forbes III
/s/ Richard M. Frank
Richard M. Frank
/s/ Susan M. Byrne
Susan M. Byrne
/s/ Ellen H. Masterson
Ellen H. Masterson
/s/ Robert D. McTeer
Robert D. McTeer
/s/ Geoffrey R. Norman
Geoffrey R. Norman
/s/ Martin J. Weiland
Martin J. Weiland
/s/ Raymond E. Wooldridge
Raymond E. Wooldridge
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
Chairman of the Board of Directors
Vice Chairman of the Board of Directors
Director
Director
Director
Director
Director
44
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm...........................................................................................
Consolidated Balance Sheets as of December 31, 2018 and 2017 .................................................................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 ...........
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 ................
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016...............................
Notes to Consolidated Financial Statements ..................................................................................................................
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and Board of Directors of Westwood Holdings Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Westwood Holdings Group, Inc. and subsidiaries (the
“Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on the criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 21, 2019, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 21, 2019
We have served as the Company's auditor since 2015.
F-2
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2018 and 2017
(in thousands, except par values and share amounts)
2018
2017
Current Assets:
ASSETS
Cash and cash equivalents .................................................................................................
Accounts receivable...........................................................................................................
Investments, at fair value...................................................................................................
Prepaid income taxes.........................................................................................................
Other current assets ...........................................................................................................
Total current assets .....................................................................................................
Investments .................................................................................................................................
Goodwill......................................................................................................................................
Deferred income taxes ................................................................................................................
Intangible assets, net ...................................................................................................................
Property and equipment, net of accumulated depreciation of $6,462 and $5,673 ......................
Total assets ................................................................................................................
$
52,449
$
18,429
65,781
349
2,731
54,249
21,660
51,324
4,269
6,612
139,739
138,114
5,425
19,804
5,102
15,961
4,454
—
27,144
3,407
19,804
4,190
$
190,485
$
192,659
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities ..........................................................................
Dividends payable .............................................................................................................
Compensation and benefits payable ..................................................................................
Income taxes payable ........................................................................................................
Total current liabilities................................................................................................
Accrued dividends.......................................................................................................................
Noncurrent income taxes payable ...............................................................................................
Deferred rent ...............................................................................................................................
Total long-term liabilities ...........................................................................................
Total liabilities...........................................................................................................
Commitments and contingencies (Note 14)
Stockholders’ Equity:
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 10,182,583 and
outstanding 8,904,902 shares at December 31, 2018; issued 9,980,827 and
outstanding 8,899,587 shares at December 31, 2017 .....................................................
Additional paid-in capital ..................................................................................................
Treasury stock, at cost – 1,277,681 shares at December 31, 2018; 1,081,240 shares at
December 31, 2017.........................................................................................................
Accumulated other comprehensive loss ............................................................................
Retained earnings ..............................................................................................................
Total stockholders’ equity ..........................................................................................
Total liabilities and stockholders’ equity.................................................................................
$
2,518
$
7,710
15,102
365
25,695
1,576
—
2,065
3,641
29,336
102
194,116
(58,711)
(4,883)
30,525
161,149
$
190,485
$
3,501
7,357
19,075
1,598
31,531
1,717
1,017
1,998
4,732
36,263
100
179,241
(49,788)
(1,764)
28,607
156,396
192,659
See Notes to Consolidated Financial Statements.
F-3
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2018, 2017 and 2016
(in thousands, except shares and per share data)
Revenues:
Advisory fees:
Asset-based .............................................................................................
Performance-based .................................................................................
Trust fees........................................................................................................
Other revenues, net ........................................................................................
Total revenues.........................................................................................
$
89,367
$
99,201
$
91,492
2,984
28,953
996
122,300
1,411
31,621
1,552
133,785
635
30,313
581
123,021
2018
2017
2016
Expenses:
Employee compensation and benefits............................................................
Sales and marketing .......................................................................................
Westwood mutual funds.................................................................................
Information technology..................................................................................
Professional services......................................................................................
Legal settlement .............................................................................................
General and administrative ............................................................................
(Gain) loss on foreign currency transactions .................................................
Total expenses.........................................................................................
Net operating income ............................................................................................
Gain on sale of operations..............................................................................
Income before income taxes..................................................................................
Provision for income taxes.............................................................................
Net income..............................................................................................................
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ......................................................
Other comprehensive income (loss) ........................................................................
Total comprehensive income.................................................................................
Earnings per share:
Basic ............................................................................................................
Diluted .........................................................................................................
Weighted average shares outstanding:
59,959
64,955
61,509
1,936
3,808
9,103
4,783
—
9,564
(2,791)
86,362
35,938
524
36,462
9,711
2,042
3,938
7,785
5,916
4,009
9,652
1,595
99,892
33,893
—
33,893
13,904
$
26,751
$
19,989
$
1,919
3,155
7,735
5,622
—
9,433
(362)
89,011
34,010
—
34,010
11,363
22,647
401
401
(3,119)
(3,119)
23,632
3.20
3.13
$
$
$
$
$
$
2,523
2,523
22,512
$
23,048
2.45
2.38
$
$
2.84
2.77
Basic ............................................................................................................
Diluted .........................................................................................................
8,365,360
8,547,370
8,147,742
8,400,022
7,961,891
8,165,475
See Notes to Consolidated Financial Statements.
F-4
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2018, 2017 and 2016
(in thousands, except share and per share data)
Westwood Holdings
Group, Inc.
Common Stock, Par
Shares
Amount
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
8,630,687
$
94
$
143,797
$
(34,910) $
(4,688) $
29,674
$ 133,967
22,647
22,647
8,810,375
$
98
$
162,730
$
(44,353) $
(4,287) $
31,881
$ 146,069
80,253
296,376
1
3
BALANCE, January 1, 2016 ..............................
Net income ............................................................
Other comprehensive income................................
Issuance of common stock for acquisition ............
Issuance of restricted stock, net of forfeitures.......
Stock-based compensation expense ......................
Reclassification of compensation liability to be
paid in shares.......................................................
Tax benefit related to stock-based compensation..
Dividends declared ($2.33 per share)....................
Issuance of treasury stock under employee stock
plans ....................................................................
Restricted stock returned for payment of taxes .....
BALANCE, December 31, 2016 .........................
Cumulative Adjustment for ASU 2016-09 ............
Net income ............................................................
Other comprehensive income................................
Purchases of treasury stock ...................................
(128,026)
20,375
(80,963)
Issuance of restricted stock, net of forfeitures.......
178,889
2
Stock-based compensation expense ......................
Reclassification of compensation liability to be
paid in shares.......................................................
Dividends declared ($2.54 per share)....................
Purchases of treasury stock ...................................
(23,822)
Issuance of treasury stock under employee stock
plans ....................................................................
Restricted stock returned for payment of taxes .....
BALANCE, December 31, 2017 .........................
Net income ............................................................
Other comprehensive loss .....................................
22,091
(87,946)
3,733
(3)
15,954
167
(256)
(662)
(6,248)
662
(3,857)
401
401
3,734
—
15,954
167
(256)
(20,440)
(20,440)
(6,248)
—
(3,857)
711
(2)
16,430
591
(1,219)
(1,326)
1,219
(5,328)
(711)
19,989
2,523
—
19,989
2,523
—
16,430
591
(22,552)
(22,552)
(1,326)
—
(5,328)
8,899,587
$
100
$
179,241
$
(49,788) $
(1,764) $
28,607
$ 156,396
Issuance of restricted stock, net of forfeitures.......
201,756
2
Stock-based compensation expense ......................
Reclassification of compensation liability to be
paid in shares.......................................................
Dividends declared ($2.76 per share)....................
Purchases of treasury stock ...................................
(121,320)
Issuance of treasury stock under employee stock
plans ....................................................................
Restricted stock returned for payment of taxes .....
10,327
(85,448)
(2)
15,283
165
(571)
(4,726)
571
(4,768)
26,751
(3,119)
26,751
(3,119)
—
15,283
165
(24,833)
(24,833)
(4,726)
—
(4,768)
BALANCE, December 31, 2018 .........................
8,904,902
$
102
$
194,116
$
(58,711) $
(4,883) $
30,525
$ 161,149
See Notes to Consolidated Financial Statements.
F-5
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017 and 2016
(in thousands)
Cash flows from operating activities:
Net income .....................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
$
26,751
$
19,989
$
22,647
2018
2017
2016
Depreciation...........................................................................................................
Amortization of intangible assets...........................................................................
Unrealized (gains) losses on trading investments..................................................
Stock-based compensation expense.......................................................................
Deferred income taxes ...........................................................................................
Excess tax benefits from stock-based compensation .............................................
Gain on sale of operations......................................................................................
Other ......................................................................................................................
Changes in operating assets and liabilities:
Net (purchases) sales of investments – trading securities......................................
Accounts receivable ...............................................................................................
Other current assets................................................................................................
Accounts payable and accrued liabilities...............................................................
Compensation and benefits payable.......................................................................
Income taxes payable.............................................................................................
Other liabilities.......................................................................................................
Net cash provided by operating activities......................................................
Cash flows from investing activities:
Purchases of property, equipment and other..................................................................
Proceeds from Omaha divestiture..................................................................................
Purchases of investments ...............................................................................................
Proceeds on sale of property and equipment .................................................................
Net cash provided by (used in) investing activities .......................................
Cash flows from financing activities:
Purchases of treasury stock............................................................................................
Purchases of treasury stock under employee stock plans ..............................................
Restricted stock returned for payment of taxes..............................................................
Excess tax benefits from stock-based compensation .....................................................
Payment of contingent consideration in acquisition ......................................................
Cash dividends paid .......................................................................................................
Net cash used in financing activities..............................................................
Effect of currency rate changes on cash ................................................................................
Net increase (decrease) in cash and cash equivalents .......................................................
Cash and cash equivalents, beginning of year...................................................................
Cash and cash equivalents, end of year .............................................................................
Supplemental cash flow information:
Cash paid during the year for income taxes...................................................................
Common stock issued for acquisition ............................................................................
Accrued dividends .........................................................................................................
Tenant allowance included in Property and equipment .................................................
Non-cash accrued Property and equipment ...................................................................
$
$
$
$
$
$
See Notes to Consolidated Financial Statements.
F-6
867
1,672
737
15,283
(1,749)
—
(524)
—
(15,194)
2,678
3,755
(644)
(3,636)
1,643
(155)
31,484
(991)
10,013
(5,425)
—
3,597
(4,000)
(726)
(4,768)
—
—
(24,621)
(34,115)
(2,766)
(1,800)
54,249
1,044
1,872
(617)
16,430
7,542
—
—
—
5,778
2,161
(4,234)
763
2,262
(4,816)
(165)
48,009
(1,167)
—
—
—
(1,167)
—
(1,326)
(5,328)
—
—
(21,923)
(28,577)
2,305
20,570
33,679
52,449
$
54,249
$
9,766
$
— $
$
9,286
237
$
— $
10,770
9,074
$
— $
$
— $
$
69
969
1,960
(510)
15,954
149
(165)
—
269
16,345
(3,493)
567
(926)
(2,848)
(3,655)
129
47,392
(1,819)
—
—
9
(1,810)
(5,634)
(614)
(3,857)
165
(5,562)
(19,442)
(34,944)
301
10,939
22,740
33,679
14,860
3,734
8,446
1,236
—
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS:
Westwood Holdings Group, Inc. (“Westwood”, “the Company”, “we”, “us” or “our”) was incorporated under the
laws of the State of Delaware on December 12, 2001. Westwood manages investment assets and provides services for its clients
through its wholly-owned subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (each of which is an
SEC registered investment adviser and referred to hereinafter together as “Westwood Management”), Westwood Trust and
Westwood International Advisors Inc. (“Westwood International Advisors”). Westwood Management and Westwood
International Advisors provide investment advisory services to institutional clients, a family of mutual funds called the
Westwood Funds®, other mutual funds, an Irish investment company authorized pursuant to the European Communities
(Undertakings for Collective Investment in Transferable Securities) Regulation 2011 (as amended) (“the UCITS Fund”),
individuals and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in self-
sponsored common trust funds (“CTFs”) to institutions and high net worth individuals. Revenue is largely dependent on the
total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the
composition of AUM impact our revenues and results of operations.
Westwood Management is a registered investment adviser under the Investment Advisers Act of 1940. Westwood
Trust is chartered and regulated by the Texas Department of Banking. Westwood International Advisors is registered as a
portfolio manager and exempt market dealer with the Ontario Securities Commission and the Autorité des marchés financiers in
Québec.
Divestiture of our Omaha Operations
On September 6, 2017, we entered into an agreement to sell the Omaha-based component of our Wealth
Management business. The sale closed on January 12, 2018. We received proceeds of $10.0 million, net of working capital
requirements, and recorded a $524,000 gain on the sale, which is included as “Gain on sale of operations” on our Consolidated
Statement of Comprehensive Income. The sale reduced our goodwill and intangible assets, but did not have a material impact
on our Consolidated Balance Sheets. The following table presents cash proceeds received and net assets sold (in thousands):
Cash Proceeds ..................................................................
Net assets sold:
$
10,013
Accounts receivable ..................................................
Other current assets ...................................................
Goodwill....................................................................
Intangible assets, net .................................................
Property and equipment, net .....................................
Accounts payable and accrued liabilities ..................
Other liabilities..........................................................
Gain on sale of operations ................................................
$
99
112
7,340
2,170
18
(241)
(9)
524
The component is reported within both our Advisory and Trust segments. The sale did not represent a major
strategic shift in our business and did not qualify for discontinued operations reporting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Westwood and its subsidiaries. All
intercompany accounts and transactions have been eliminated upon consolidation. In the current year, we created a new
expense item on the Consolidated Statements of Comprehensive Income for (Gain) loss on foreign currency transactions, which
was previously included in "General and Administrative" expense. Prior year financial statements were reclassified to conform
to this presentation. These reclassifications had no impact on net income, stockholders’ equity or cash flows as previously
reported.
F-7
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We assess each legal entity that we manage to determine whether consolidation is appropriate at the onset of the
relationship. We first determine whether the entity is a variable interest entity (“VIE”), or a voting interest entity (“VOE”),
under U.S. generally accepted accounting principles (“GAAP”) and whether we have a controlling financial interest in the
entity. Assessing whether or not an entity is a VOE or VIE and if it requires consolidation involves judgment and analysis.
Factors considered in this assessment include, but are not limited to, the legal organization of the entity, our equity ownership
and contractual involvement with the entity and any related party or de facto agent implications of our involvement with the
entity. We reconsider whether entities are a VIE or VOE whenever contractual arrangements change, the entity receives
additional equity or returns equity to its investors or changes in facts and circumstances occur that change the investors’
abilities to direct the activities of the entity.
A VIE is an entity in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its
activities without subordinated financial support, (ii) the at-risk equity holders, as a group, lack the characteristics of a
controlling financial interest or (iii) the entity is structured with disproportionate voting rights, and substantially all of the
activities are conducted on behalf of an investor with disproportionately few voting rights. That is, the at-risk equity holders do
not have the obligation to absorb significant losses, the right to receive residual returns and the right to direct the activities of
the entity that most significantly impact the entity’s economic performance. An enterprise must consolidate all VIEs of which it
is the primary beneficiary. We determine if a sponsored investment meets the definition of a VIE by considering whether the
fund’s equity investment at risk is sufficient to finance its activities without additional subordinated financial support and
whether the fund’s at-risk equity holders absorb any losses, have the right to receive residual returns and have the right to direct
the activities of the entity most responsible for the entity’s economic performance. The primary beneficiary of a VIE is defined
as the party that, considering the involvement of related parties and de facto agents, has (i) the power to direct the activities of
the VIE that most significantly affect its economic performance and (ii) the obligation to absorb losses of the entity or the right
to receive benefits from the entity that could potentially be significant to the VIE. This evaluation is updated continuously.
A VOE is an entity that is outside the scope of the guidance for VIEs. Consolidation of a VOE is required when a
reporting entity owns a controlling financial interest in a VOE. Ownership of a majority of the voting interests is the usual
condition for a controlling financial interest.
We have evaluated (i) our advisory relationships with Westwood Investment Funds PLC (the “UCITS Fund”) and
the Westwood Funds®, (ii) 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 Fund LP (collectively the “Private Equity
Funds”) and (iii) the private company discussed in Note 3 “Investments” (“Private Equity”) 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
CTFs and Private Equity Funds 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. Prior to the sale of our
Omaha-based operations, we also considered our advisory relationship with ten limited liability companies (“LLCs”) as VIEs,
but as of December 31, 2018, we no longer serve as the managing member of the funds and do not control the activities that
most significantly impact the entities' economic performance. Therefore these LLCs are no longer considered VIEs. Although
we have related parties on the UCITS Fund board of directors, the shareholders have rights to remove the current directors by a
simple majority vote and so we determined that the UCITS Fund is not a VIE. As the Company and its representatives do not
have representation on the Westwood Funds® or the Private Equity independent boards of directors, which direct the activities
that most significantly impact the entities' economic performance, we determined that the Westwood Funds® and the Private
Equity were not VIEs. Therefore, the UCITS Fund, Westwood Funds® and Private Equity should be analyzed under the VOE
consolidation method.
Based on our analysis of our investments in these entities for the periods ending December 31, 2018 and 2017, we
have not consolidated the CTFs, Private Equity Funds or LLCs under the VIE method or the UCITS Fund, Westwood Funds®
or Private Equity under the VOE method, and therefore the financial results of these entities are not included in the Company’s
consolidated financial results. We have included the disclosures related to VIEs and VOEs in Note 12 “Variable Interest
Entities.”
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
F-8
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of money market accounts and other short-term, highly liquid investments with
maturities of three months or less, other than pooled investment vehicles that are considered investments. We maintain some
cash and cash equivalents balances with financial institutions that are in excess of Federal Deposit Insurance Corporation
insurance limits. The Company has not experienced losses on uninsured cash accounts.
Accounts Receivable
Accounts receivable represents balances arising from services provided to customers and are recorded on an
accrual basis, net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be
uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical amounts written off, existing
conditions in the industry, and the financial stability of the customer. The majority of our accounts receivable balances consist
of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectible. Accordingly,
our Consolidated Financial Statements do not include an allowance for bad debt nor any bad debt expense.
Investments
Investments measured at fair market value are classified as trading securities and are carried at quoted market
values on the accompanying Consolidated Balance Sheets. Net unrealized holding gains or losses on investments classified as
trading securities are reflected as a component of other revenues. We measure realized gains and losses on investments using
the specific identification method.
For an investment without a readily determinable fair value, the Company has elected to apply the measurement
alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes. The Company will
reassess whether such an investment qualifies for the measurement alternative at each reporting period. In evaluating an
investment for impairment or observable price changes, we will use inputs including recent financing events, as well as other
available information regarding the investee's historical and forecasted performance.
Fair Value of Financial Instruments
We determined the estimated fair values of our financial instruments using available information. The fair value
amounts discussed in Notes 3 “Investments” and 4 “Fair Value of Financial Instruments” are not necessarily indicative of either
the amounts realizable upon disposition of these instruments or of our intent or ability to dispose of these assets. The estimated
fair value of cash and cash equivalents, accounts receivable, prepaid income taxes, other current assets, accounts payable and
accrued liabilities, dividends payable, compensation and benefits payable and income taxes payable approximates their carrying
value due to their short-term maturities. The carrying amount of investments designated as “trading” securities, primarily U.S.
Government and Government agency obligations, money market funds, Westwood Funds® mutual funds, the UCITS Fund and
Westwood Trust common trust fund shares, equals fair value based on prices quoted in active markets and, with respect to
funds, the reported net asset value (“NAV”) of the shares held. Market values of our money market holdings generally do not
fluctuate.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable
assets at the date of acquisition. Goodwill is not amortized but is tested at least annually for impairment.
F-9
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We test more frequently if indicators are present or changes in circumstances suggest that impairment may exist.
These indicators include declines in revenues, earnings or cash flows, or the development of a material adverse change in the
business climate. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one
level below an operating segment, referred to as a component. We have identified two reporting units, which are consistent with
our reporting segments: Advisory and Trust. The Company is not required to calculate the fair value of a reporting unit unless
we determine that it is more likely than not that its fair value is less than the carrying amount. We assess goodwill for
impairment using either a qualitative or quantitative assessment. The qualitative assessment includes consideration of the
current trends in the industry in which we operate, macroeconomic conditions, recent financial performance of our reporting
units and a market multiple approach valuation. In performing the annual impairment test during the third quarter, or more
frequently when impairment indicators exist, and after assessing the qualitative factors, we may be required to utilize the two-
step approach prescribed by ASC 350, Goodwill and Other Intangible Assets. We may also elect to skip the qualitative
assessment and proceed directly to the quantitative analysis. The quantitative analysis requires a comparison of each reporting
unit’s carrying value to the fair value of the respective unit. If the carrying value exceeds the fair value, an impairment loss is
measured by reducing the goodwill to the fair market value. The fair value of each reporting unit is estimated, entirely or
predominantly, using a market multiple approach. During the third quarter of 2018 we completed our annual goodwill
impairment assessment and determined that no impairment loss was required. No impairments were recorded during any of the
periods presented.
Our intangible assets represent the acquisition date fair value of the acquired client relationships, trade names and
non-compete agreements, as well as the cost of internally-developed software, each of which is reflected net of amortization. In
valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. We
periodically review our intangible assets for events or circumstances that would indicate impairment. See Note 5 “Goodwill and
Other Intangible Assets.”
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of furniture and equipment
is provided over the estimated useful lives of the assets (from 3 to 7 years), and depreciation on leasehold improvements is
provided over the lesser of the estimated useful life or lease term using the straight-line method. We capitalize leasehold
improvements, furniture and fixtures, computer hardware and most office equipment purchases.
Revenue Recognition
Revenues are recognized when the performance obligation (the investment management and advisory or trust
services provided to the client) defined by the investment advisory or sub-advisory agreement is satisfied. For each
performance obligation, we determine at contract inception whether the revenue satisfies over time or at a point in time. We
derive our revenues from investment advisory fees, trust fees and other sources of revenues. Advisory and Trust fees are
calculated based on a percentage of assets under management and the performance obligation is realized over the then-current
calendar quarter. Once clients receive our investment advisory services we have an enforceable right to payment.
Incremental costs to obtain a contract under the new guidance is eligible to be capitalized if the cost is expected to
be recovered over the service period. We incur certain incremental costs in obtaining new Trust business and continually
evaluate whether costs should be capitalized and amortized over the expected period of benefit of the asset. Certain costs used
to fulfill a contract such as the distribution services utilized to sell our Westwood Funds® are expensed as incurred. We have
elected the practical expedient that allows an entity to recognize the incremental costs of obtaining a contract as an expense
when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Stock-Based Compensation
We have issued restricted stock to our U.S. employees and Board of Directors in accordance with our Fifth
Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”). We account for stock-based
compensation in accordance with ASC 718, Compensation-Stock Compensation and adopted Accounting Standards Update
(“ASU”) 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting effective
January 1, 2017.
F-10
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under ASC 718, stock-based compensation expense reflects the fair value of stock-based awards measured at
grant date and is recognized over the relevant service period. We expense the fair value of stock-based compensation awards
granted to our employees and directors in our Consolidated Financial Statements on a straight-line basis over the period that
services are required to be provided in exchange for the award (“requisite service period”), which is typically the period over
which the award vests. Stock-based compensation is recognized only for awards that vest. We measure the fair value of
compensation cost related to restricted stock awards based on the closing market price of our common stock on the grant date.
For performance-based share awards, we assess actual performance versus the predetermined performance goals and record
compensation expense once we conclude it is probable that we will meet the performance goals required to vest the applicable
performance-based awards.
The following summarizes the effects of the adoption of ASU 2016-09 on our Consolidated Financial Statements:
Income Taxes - Upon adoption of this standard, all excess tax benefits and tax deficiencies, including tax benefits
of dividends on share-based payment awards, are recognized as income tax expense or benefit in the Consolidated
Statement of Comprehensive Income. The tax effects of exercised or vested awards are treated as discrete items in
the reporting period in which they occur. As a result, the Company recognized discrete adjustments to income tax
expense of $1.0 million in 2017 related to excess tax benefits, decreasing our effective tax rate for 2017 by 2.9%.
Without the adjustment, our effective tax rate would have been 43.9%. The Company did not have any
unrecognized excess tax benefits as of December 31, 2016 and therefore there was no cumulative-effect
adjustment to retained earnings related to income taxes. The Company adopted the amendments related to the
recognition of excess tax benefits and tax shortfalls prospectively, with no adjustments made to prior periods.
Forfeitures - Prior to adoption, stock-based compensation expense was recognized on a straight-line basis, net of
estimated forfeitures, such that expense was recognized for stock-based awards that were expected to vest. A
forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed
from initial estimates. Upon adoption of this standard, the Company no longer applies an estimated forfeiture rate
and instead accounts for forfeitures as they occur. The Company applied the modified retrospective adoption
approach, resulting in a $711,000 cumulative-effect reduction to “Retained earnings” with the offset to
“Additional paid-in-capital” on January 1, 2017.
Statements of Cash Flows - The Company historically accounted for excess tax benefits on the Consolidated
Statements of Cash Flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified
along with other income tax cash flows as an operating activity. The change in cash flow classification associated
with excess tax benefits was adopted prospectively, resulting in the classification of the $1.0 million excess tax
benefit as an operating activity during the twelve months ended December 31, 2017. No change in classification
was necessary for the presentation of restricted stock returned for payment of taxes, as the Company has
historically presented such payments as a financing activity. The Company adopted this portion of the standard on
a prospective basis, with no adjustments made to prior periods.
Earnings Per Share - The Company uses the treasury stock method to compute diluted earnings per share, unless
the effect would be anti-dilutive. Under the new standard, the Company is no longer required to estimate the tax
effect of anticipated windfall benefits or shortfalls when projecting proceeds available for share repurchases in
calculating dilutive shares. The Company utilized the modified retrospective adoption approach, with no
adjustments made to prior periods.
The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the
“Canadian Plan”) provides compensation in the form of common stock for services performed by employees of Westwood
International Advisors. We record compensation costs for these awards on a straight-line basis over the vesting period once we
determine it is probable that the award will be earned. Awards expected to be settled in shares are funded into a trust pursuant
to an established Canadian employee benefit plan. Generally, the Canadian trust subsequently acquires Westwood common
shares in market transactions and holds such shares until the shares are vested and distributed, or forfeited. Shares held in the
trust are shown on our Consolidated Balance Sheet as treasury shares. Until shares are acquired by the trust, we record
compensation costs and measure the liability as a cash-based award, which is included in “Compensation and benefits payable”
on our Consolidated Balance Sheets. For the years ended December 31, 2018, 2017 and 2016, the compensation expense
recorded for these awards was $147,000, $232,000 and $524,000, respectively. When the number of shares related to an award
is determinable, the award becomes an equity award accounted for in a manner similar to restricted stock, which is described in
Note 10 “Employee Benefits.”
F-11
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Currency Translation and Re-measurement
Assets and liabilities of Westwood International Advisors, our 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.
Revenue and expense transactions are recorded at the rates of exchange prevailing on the dates of the transactions.
Gains and losses resulting from transactions in foreign currencies are included in “(Gain) loss on foreign currency transactions”
in our Consolidated Statements of Comprehensive Income. For the years ended December 31, 2018 and 2016, we recorded a
gain of $2.8 million and $362,000, respectively. For the year ended December 31, 2017, we recorded a loss of $1.6 million.
Income Taxes
We file a United States federal income tax return as a consolidated group for Westwood and its subsidiaries based
in the United States. We file a Canadian income tax return for Westwood International Advisors. Deferred income tax assets and
liabilities are determined based on temporary differences between the financial statements and income tax bases of assets and
liabilities as measured at enacted income tax rates. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”)
was signed into law. Further information on the tax impacts of the Tax Reform Act is included in Note 7 “Income Taxes.”
Deferred income tax expense is generally the result of changes in deferred tax assets and liabilities. Deferred taxes
relate primarily to incentive compensation and stock-based compensation expense. We record net deferred tax assets to the
extent we believe such assets will more likely than not be realized. In making such a determination, we consider all available
positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations. In the event we were to determine that we would not be able to
realize our deferred income tax assets in the future, we would record a valuation allowance. No such valuation allowance has
been recorded in our Consolidated Financial Statements.
We account for uncertain tax positions by recognizing the impact of a tax position in our Consolidated Financial
Statements when we believe it is more likely than not that the tax position would not be sustained upon examination by the
appropriate tax authority based on the merits of the position. We include penalties and interest on income-based taxes, if any, in
the “General and administrative” line on our Consolidated Statements of Comprehensive Income. See Note 7 “Income Taxes.”
Business Combinations
In allocating the purchase price of a business combination, the Company records all assets acquired and liabilities
assumed at fair value, with the excess of the purchase price over the aggregate fair values recorded as goodwill. ASC 820, Fair
Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The purchase price of an acquisition is allocated to the
underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. To the
extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities
assumed, such excess is allocated to goodwill. The Company determines the estimated fair values after review and
consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by
management. The fair value assigned to identifiable intangible assets acquired is based on estimates and assumptions made by
management at the time of the acquisition. The Company adjusts the preliminary purchase price allocation, as necessary,
during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and
circumstances existing as of the acquisition date. Acquisition-related costs are recognized separately from the acquisition and
are expensed as incurred.
The acquired customer accounts, trade names and non-compete agreements are subject to fair value measurements
based primarily on significant inputs not observable in the market and thus represent level 3 measurements. The valuation of an
acquired customer list utilizes an income approach, which provides an estimate of the fair value of an asset based on discounted
cash flows and management estimates, including the estimated growth associated with existing clients, market growth and
client attrition. The valuation of acquired trade names uses a relief-from-royalty method in which the fair value of the intangible
asset is estimated to be the present value of royalties saved because the Company owns the intangible asset. Revenue
projections and estimated useful lives are used in estimating the fair value of the trade names. The non-compete agreements are
calculated using the with-or-without method, which utilizes the probability of these employees competing with the Company
and revenue projections to calculate the valuation of non-compete agreements.
F-12
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
When an acquisition includes future contingent consideration on achieving certain annualized revenue from the
post-closing acquired business over a specified time period, the Company estimates the fair value of the earn-out using overall
revenue growth projections combined with lost revenue projections from existing customer base, both discounted and
probability-weighted. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date,
and the fair value of the contingent consideration is remeasured at each subsequent reporting period, with any change in fair
value recognized as income or expense within the Consolidated Statement of Comprehensive Income.
Recent Accounting Pronouncements
Recently Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606), which resulted from a joint project by the FASB and the
International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue
standard for GAAP and International Financial Reporting Standards (“IFRS”). The ASU is effective for annual reporting
periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Retrospective
application is required, with the entity either applying the change to each prior reporting period presented or applying the
cumulative effect of each prior reporting period presented at the date of initial application. On January 1, 2018, we adopted
Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018.
Results for reporting periods beginning after January 1, 2018 are presented under Topic 606 while prior period amounts
continue to be reported in accordance with our historic accounting under Topic 605. We analyzed the revenue from prior
periods and determined no material adjustments to opening retained earnings were necessary as the updated guidance is
consistent with our historical revenue recognition methodology. See further discussion in Note 9 “Revenue.”
In March 2018, the FASB issued ASU 2018-05, Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118, to address the application of U.S. GAAP in situations when a registrant does not have the
necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). See further discussion in Note 7 “Income
Taxes.”
Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize a lease
liability and a right-of-use asset for all leases at the commencement date, excluding short-term leases. Leases will be classified
as either financing or operating, with classification impacting the pattern of expense recognition in the income statement. The
amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
We will adopt the standard as of January 1, 2019 under the modified retrospective approach, which allows for recording the
cumulative effect of the adoption of the standard as an adjustment to beginning retained earnings. We will elect the package of
practical expedients permitted under the transition guidance, which among other things, allows us to carry forward the historical
lease classification and elect hindsight to determine certain lease terms for existing leases. We have evaluated our population of
contracts subject to balance sheet recognition and estimate adoption will result in recognition of additional lease assets and net
lease liabilities of approximately $9 million as of January 1, 2019 primarily related to the future minimum payments required
under operating leases as disclosed in Note 14 “Commitments and Contingencies”. The insignificant difference in the
additional lease assets and net lease liabilities will be recorded as an adjustment to beginning retained earnings. We do not
believe the standard will materially impact our Consolidated Statements of Comprehensive Income or Consolidated Statements
of Cash Flows. Beginning with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, we will add
disclosures surrounding our leases, including lease cost disaggregation, weighted average remaining lease terms and weighted
average discount rate used to determine our lease assets and liabilities. We have also analyzed our current business process and
internal controls and anticipate implementing new procedures to successfully adopt the standard, particularly for identification
of leases and evaluation of the discount rate.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting. The purpose of this amendment is to simplify the accounting for share-based
payments granted to nonemployees for goods and services by aligning it with the accounting used for arrangements with
employees. The amendments in this update are effective for public business entities for fiscal years beginning after December
15, 2018, including interim periods within that fiscal year. We do not expect the amendment to have a material impact on our
Consolidated Financial Statements, and we plan to adopt the standard within the required time frame.
F-13
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-
Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of this amendment is to modify, remove and
add certain disclosure requirements for fair value measurements. Under ASU 2018-13, entities are required to disclose the
amount of total gains or losses recognized in other comprehensive income attributable to assets and liabilities categorized
within Level 3 of the fair value hierarchy. The ASU also adds an incremental requirement about significant unobservable inputs
for Level 3 fair value measurements. The requirement to disclose reasons for transfers between Level 1 and Level 2 was
removed. Various requirements for Level 3 disclosure were also modified. The amendments in this ASU are effective for all
entities for fiscal years and interim periods beginning after December 15, 2019. We do not expect the amendment to have a
material impact on our Consolidated Financial Statements, and we plan to adopt this amendment within the required time
frame.
In August 2018, the FASB issued ASU 2018-15, Intangibles- Goodwill and Other - Internal-Use Software (Topic
350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. The purpose of this amendment is to align the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in this
update are effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within
that fiscal year. We do not expect the amendment to have a material impact on our Consolidated Financial Statements, and we
plan to adopt the standard within the required time frame.
3. INVESTMENTS:
In May 2018, we entered into a strategic agreement to invest $5.0 million in an equity position of a private company and
committed to purchase an additional $5.0 million of equity securities. We offered this investment opportunity to our current and
prospective clients, members of our Board of Directors and employees and agreed to cover any shortfall if these parties did not
invest the full $5.0 million, which led to our investing an additional $425,000 in August 2018. Our $5.4 million investment is
included in “Investments” on our Consolidated Balance Sheets.
This investment represents a private company without a readily determinable fair value. The Company has elected to
apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price
changes. As of December 31, 2018, there were no observable price changes or indicators of impairment for this investment.
All other investments are carried at fair value on a recurring basis and are accounted for as trading securities. Trading
securities are presented in the table below (in thousands):
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Cost
December 31, 2018:
U.S. Government and Government agency obligations ........................
Money market funds..............................................................................
Equity funds...........................................................................................
Total trading securities ...................................................................
$
$
48,177
10,354
7,344
$
232
—
—
$
65,875
$
232
$
— $
—
(326)
(326) $
48,409
10,354
7,018
65,781
December 31, 2017:
U.S. Government and Government agency obligations ........................
Money market funds..............................................................................
Equity funds...........................................................................................
Total trading securities ...................................................................
$
29,367
$
9,736
11,578
$
50,681
$
21
—
657
678
$
$
(15) $
—
(20)
(35) $
29,373
9,736
12,215
51,324
F-14
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following amounts, except for income tax amounts, are included in our Consolidated Statements of
Comprehensive Income under the heading “Other revenues” for the years indicated (in thousands):
Realized gains................................................................................................................
Realized losses...............................................................................................................
Net realized gains (losses) .............................................................................................
Income tax expense (benefit) from gains (losses) .........................................................
Interest income – trading ...............................................................................................
Dividend income ...........................................................................................................
Unrealized gains/(losses)...............................................................................................
$
$
$
$
$
$
920
(121)
799
168
620
$
$
$
$
290
$
(737) $
395
(96)
299
105
334
302
617
$
$
$
$
$
$
113
(220)
(107)
(37)
282
265
510
2018
2017
2016
As of December 31, 2018 and 2017, $6.1 million and $10.7 million in corporate funds, respectively, were
invested in the Westwood Funds®, Westwood Common Trust Funds and the UCITS fund, which are included in “Investments,
at fair value” on our Consolidated Balance Sheets. See Note 12 “Variable Interest Entities.”
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and
requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for
measuring fair value, as follows:
• Level 1 – quoted market prices in active markets for identical assets and liabilities
• Level 2 – inputs other than quoted prices that are directly or indirectly observable
• Level 3 – unobservable inputs where there is little or no market activity
Our strategic investment in a private company discussed in Note 3 “Investments” is excluded from the recurring
fair value table shown below, as we have elected to apply the measurement alternative for this investment.
The following table summarizes the values of our assets and liabilities as of the dates indicated within the fair
value hierarchy (in thousands):
Level 1
Level 2
Level 3
Investments
Measured at
NAV (1)
Total
As of December 31, 2018
Investments in trading securities ............................
Total assets measured at fair value ..................
As of December 31, 2017
Investments in trading securities ............................
Total assets measured at fair value ..................
$
$
$
$
65,781
65,781
48,998
48,998
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
65,781
65,781
— $
— $
2,326
2,326
$
$
51,324
51,324
(1) Comprised of certain investments measured at fair value using NAV as a practical expedient. These investments were recategorized and
are no longer included within Level 2 of the valuation hierarchy. The fair value amounts presented in this table are intended to permit
reconciliation of the fair value hierarchy to the amounts presented in our Consolidated Balance Sheets.
F-15
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. 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. Changes in goodwill are as follows (in thousands):
Beginning balance ......................................................................................................................
Omaha divestiture ................................................................................................................
Ending balance ...........................................................................................................................
As of December 31,
2018
2017
$
$
27,144
$
27,144
(7,340)
—
19,804
$
27,144
Goodwill is not amortized but is tested for impairment at least annually. We completed our annual goodwill
impairment assessment during the third quarter of 2018 and determined that no impairment loss was required. No impairments
were recorded during the years ended December 31, 2018, 2017 or 2016.
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.
The sale of the Omaha-based component of our wealth management business closed in the first quarter of 2018.
The following table represents the reduction in our intangible assets related to the sale (in thousands):
Client relationships .............................................................................................
Trade names........................................................................................................
Non-compete agreements ...................................................................................
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount Sold
$
$
3,965
$
(1,795) $
2,170
234
24
(234)
(24)
—
—
4,223
$
(2,053) $
2,170
The following is a summary of intangible assets at December 31, 2018 and 2017 (in thousands, except years):
2018
Client relationships........................................................
Trade names...................................................................
Non-compete agreements ..............................................
Internally developed software .......................................
2017
Client relationships........................................................
Trade names...................................................................
Non-compete agreements ..............................................
Internally developed software .......................................
Weighted Average
Amortization
Period (years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
14.8
4.9
3.0
7.0
14.8
4.2
2.9
7.0
$
21,431
$
(5,960) $
15,471
708
259
418
(537)
(259)
(99)
171
—
319
$
22,816
$
(6,855) $
15,961
$
25,396
$
(6,302) $
19,094
942
283
418
(633)
(262)
(38)
309
21
380
$
27,039
$
(7,235) $
19,804
Amortization expense, which is included in “General and administrative” expense on our Consolidated
Statements of Comprehensive Income, was $1.7 million, $1.9 million and $2.0 million for the years ended December 31, 2018,
2017 and 2016, respectively.
F-16
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated amortization expense for intangible assets over the next five years is as follows (in thousands):
For the year ending December 31,
2019 ....................................................................................................................................................................
2020 ....................................................................................................................................................................
2021 ....................................................................................................................................................................
2022 ....................................................................................................................................................................
2023 ....................................................................................................................................................................
$
$
$
$
$
1,651
1,530
1,419
1,419
1,400
Estimated
Amortization
Expense
6. BALANCE SHEET COMPONENTS:
Property and Equipment
The following table reflects information about our property and equipment as of December 31, 2018 and 2017 (in
thousands):
Leasehold improvements...............................................................................................................
$
4,714
$
Furniture and fixtures ....................................................................................................................
Computer hardware and office equipment ....................................................................................
Construction in progress................................................................................................................
Accumulated depreciation .............................................................................................................
2,716
2,996
490
(6,462)
Property and equipment, net...................................................................................................
$
4,454
$
4,170
2,243
2,745
705
(5,673)
4,190
As of December 31,
2018
2017
Stockholders' Equity
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
Foreign currency translation adjustment, net of tax of $(43) and $46 ..........................................
Accumulated other comprehensive loss ........................................................................................
As of December 31,
2018
2017
$
$
(4,883) $
(4,883) $
(1,764)
(1,764)
7. INCOME TAXES:
Tax Reform Act
On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax
law by, among other things, lowering corporate income tax rates and creating a territorial tax system with a one-time mandatory
deemed repatriation tax on previously deferred earnings of foreign subsidiaries. The Tax Reform Act reduces the U.S. corporate
income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the
corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017 and recognized an incremental
$1.6 million income tax expense in 2017.
F-17
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We had an estimated $33 million of undistributed earnings and profits (“E&P”) in our foreign subsidiary,
Westwood International Advisors, subject to the one-time mandatory deemed repatriation, for which we recognized an
incremental $1.8 million income tax expense in 2017. Of this amount, we originally expected $1.1 million to be payable over
eight years, of which $1.0 million was included in “Noncurrent income taxes payable” on our Consolidated Balance Sheets for
the year ended December 31, 2017. The remaining $88,000 was netted in our “Prepaid income taxes” on our Consolidated
Balance Sheets for the year ended December 31, 2017, as our U.S. federal tax balance was in a receivable position. In the
second quarter of 2018, additional guidance on the Tax Reform Act required any 2017 federal tax overpayments be applied to
mandatory repatriation liabilities before applying to 2018 estimated tax payments. Accordingly, the Company utilized the
overpayment of federal estimated taxes to pay the additional U.S. federal cash taxes of $1.8 million during the year ended
December 31, 2018.
We completed the accounting for our 2017 U.S. corporate income tax return in the third quarter of 2018 and made
no significant changes to the amounts provisionally recognized.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax
base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax
(“BEAT”) provisions. The GILTI provisions require the Company to include in its U.S. income tax return any foreign
subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We had no U.S. tax liability on
GILTI for the year ended December 31, 2018. We have elected to account for GILTI tax expense in the period in which it is
incurred, and therefore have not provided any deferred tax impacts of GILTI in our Consolidated Financial Statements for the
years ended December 31, 2018 and 2017.
The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to
related foreign corporations and impose a minimum tax if the re-calculated taxable income under BEAT is greater than regular
taxable income. We do not expect to be subject to this tax and therefore have not included any tax impacts of BEAT in our
Consolidated Financial Statements for the years ended December 31, 2018 and 2017.
Income Tax Provision
Income before income taxes by jurisdiction is as follows (in thousands):
Years ended December 31,
2018
2017
2016
United States ................................................................................................
Canada..........................................................................................................
Total .............................................................................................................
$
$
21,250
15,212
36,462
$
$
17,531
16,362
33,893
$
$
21,539
12,471
34,010
Income tax expense differs from the amount that would otherwise have been calculated by applying the U.S.
Federal corporate tax rate of 21% to income before income taxes for the year ended December 31, 2018 and 35% to income
before income taxes for the years ended December 31, 2017 and 2016.
F-18
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The difference between the Federal corporate tax rate and the effective tax rate is comprised of the following (in
thousands):
Years ended December 31,
2018
2017
2016
Income tax provision computed at US federal statutory
rate ......................................................................................
Canadian rate differential ...................................................
Change in uncertain tax positions, net of federal income
taxes....................................................................................
Global Intangible Low Taxed Income, net deductions.......
US Tax Credits ...................................................................
State and local income taxes, net of federal income taxes .
Rate changes.......................................................................
Tax on repatriation..............................................................
Other, net ............................................................................
Total income tax expense ...................................................
Effective income tax rate....................................................
$
7,657
895
19
1,573
(1,528)
916
—
118
61
$
9,711
26.6%
21.0% $ 11,859
(1,398)
2.4
35.0% $ 11,893
(1,050)
(4.1)
35.0%
(3.1)
0.1
4.3
(4.2)
2.5
—
(3)
—
—
626
1,578
—
—
—
1.9
4.6
542
—
—
230
—
1.6
—
—
0.6
—
0.3
1,767
(525)
26.6% $ 13,904
0.2
—
5.2
(252)
(1.6)
41.0% $ 11,363
—
(0.7)
33.4%
41.0%
33.4%
We include penalties and interest on income-based taxes in the “General and administrative” line on our
Consolidated Statements of Comprehensive Income. We recorded $140,000, $181,000 and $101,000 of penalties and interest in
2018, 2017 and 2016, respectively.
Income tax provision (benefit) as set forth in the Consolidated Statements of Comprehensive Income consisted of
the following components (in thousands):
Years ended December 31,
2018
2017
2016
$
5,949
$
1,122
$
662
4,578
6,362
7,569
22
(49)
7,542
6,765
1,136
3,313
11,214
314
36
(201)
149
$
13,904
$
11,363
1,477
4,034
11,460
(1,853)
(169)
273
(1,749)
9,711
Current taxes:
US Federal...................................................................................................
State and local .............................................................................................
Foreign ........................................................................................................
Total current taxes ..............................................................................................
Deferred taxes:
US Federal...................................................................................................
State and local .............................................................................................
Foreign ........................................................................................................
Total deferred taxes ............................................................................................
Total income tax expense .................................................................................
$
F-19
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Income Taxes
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
As of December 31,
2018
2017
Deferred tax assets:
Share-based compensation expense ............................................................................................
$
3,137
$
3,851
Deferred rent................................................................................................................................
Compensation and benefits payable ............................................................................................
Federal unrecognized tax benefit.................................................................................................
Other ............................................................................................................................................
Total deferred tax assets........................................................................................................................
Deferred tax liabilities:
Property and equipment...............................................................................................................
Intangibles ...................................................................................................................................
Unrealized gains on investments .................................................................................................
Total deferred tax liabilities ..................................................................................................................
Net deferred tax assets ........................................................................................................................
$
389
2,606
51
4
441
719
46
140
6,187
5,197
(620)
(448)
(17)
(1,085)
5,102
$
(586)
(1,029)
(175)
(1,790)
3,407
The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of
December 31, 2018, the Company’s 2015, 2016 and 2017 tax years are open for examination by the Internal Revenue Service,
and various state and foreign jurisdiction tax years remain open to examination. Our 2015, 2016 and 2017 tax returns are
currently under audit in a state jurisdiction in which we operate. It is reasonably possible that the audits may be completed
during the next twelve months, and we do not expect the result of the audits to have a material impact on our Consolidated
Financial Statements.
We have not provided foreign withholding taxes on the undistributed earnings of our foreign subsidiary,
Westwood International Advisors. If these funds were needed for our U.S. operations, we would be required to accrue and pay
incremental foreign withholding taxes to repatriate a portion of these funds. Our current intent is to permanently reinvest the
funds subject to withholding taxes outside of the U.S., and our current plans do not demonstrate a need to repatriate them to
fund our U.S. operations. As of December 31, 2018, the cumulative amount of earnings upon which foreign withholding taxes
have not been provided is approximately $33 million, and the unrecognized deferred tax liability related to these earnings is
approximately $1.7 million.
As of December 31, 2018 and 2017, the Company's gross liability related to uncertain tax positions was $184,000
and $160,000, 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 the related interest and penalties,
would be reversed as a reduction of income tax expense, net of federal tax effects, in the period such determination is made. A
reconciliation of the change in recorded uncertain tax positions during the years ended December 31, 2018 and 2017 is as
follows (in thousands):
Balance at January 1, 2017...................................................................................................................................
Additions for tax positions related to the current year....................................................................................
Reductions for tax positions related to prior years .........................................................................................
Payments for tax positions related to prior years ............................................................................................
Balance at December 31, 2017.............................................................................................................................
Additions for tax positions related to the current year....................................................................................
Reductions for tax positions related to prior years .........................................................................................
Balance at December 31, 2018.............................................................................................................................
$
$
$
2,462
67
(776)
(1,593)
160
28
(4)
184
F-20
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
It is reasonably possible that the liability for uncertain tax positions could decrease by as much as $184,000 within
the next twelve months as a result of settlements with certain taxing authorities that, if recognized, would decrease our
provision for income taxes by $154,000.
8. REGULATORY CAPITAL REQUIREMENTS:
Westwood Trust must maintain cash and investments in an amount equal to the required minimum restricted
capital of $4.0 million as required by the Texas Finance Code. Restricted capital is included in Investments in the
accompanying Consolidated Balance Sheets. At December 31, 2018, Westwood Trust had approximately $18.6 million in
excess of its minimum capital requirement.
Westwood Trust is limited under applicable Texas law in the payment of dividends of undivided profits, which is
that part of equity capital equal to the balance of net profits, income, gains and losses since formation minus subsequent
distributions to stockholders and transfers to surplus or capital under share dividends or appropriate Board resolutions. At the
discretion of its Board of Directors, Westwood Trust may make quarterly and special dividend payments to us out of its
undivided profits. No dividend payments were made to us in 2018, 2017 or 2016.
Westwood International Advisors is subject to the working capital requirements of the Ontario Securities
Commission, which requires that combined cash and receivables exceed current liabilities by at least $100,000 CDN. At
December 31, 2018 Westwood International Advisors had combined cash and receivables that were $51.8 million CDN (or
$38.0 million in U.S. dollars using the exchange rate on December 31, 2018) in excess of its current liabilities, which satisfies
this requirement.
9. REVENUE
Advisory Fee Revenues
Our advisory fees are generated by Westwood Management and Westwood International, which manage client
accounts under investment advisory and sub-advisory agreements. Advisory fees are typically calculated based on a percentage
of assets under management and are paid in accordance with the terms of the agreements. 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 quarter just ended or are based on a daily or monthly analysis of assets under management
for the stated period. We recognize advisory fee revenues as services are rendered. Since our advance paying clients' billing
periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter and our
consolidated financial statements contain no deferred advisory fee revenues. Advisory clients typically consist of institutional
and mutual fund accounts.
Institutional investors include separate accounts of (i) corporate pension and profit sharing plans, public employee
retirement funds, Taft Hartley plans, endowments, foundations and individuals; (ii) subadvisory relationships where Westwood
provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles,
including 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.
Mutual funds include the Westwood Funds®, a family of mutual funds for which Westwood Management serves
as advisor. These funds are available to individual investors, as well as offered as part of our investment strategies for
institutional investors and wealth management accounts.
Arrangements with Performance Based Obligations
A limited number of our advisory 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. The revenue is based on
future market performance and is subject to factors outside our control. We cannot conclude that a significant reversal in the
cumulative amount of revenue recognized will not occur during the measurement period, and therefore the revenue is recorded
at the end of the measurement period when the performance obligation has been satisfied.
F-21
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Trust Fee Revenues
Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately
negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides
trust services to a small number of clients on a fixed fee basis. The fees for most of our trust clients are calculated quarterly in
arrears, based on a daily average of assets under management for the quarter, or monthly, based on the month-end value of
assets under management. Since billing periods for most of Westwood Trust’s clients coincide with the calendar quarter,
revenue is fully recognized within the quarter and our Consolidated Financial Statements do not contain a significant amount of
deferred trust fee revenues.
Revenue Disaggregated
Sales taxes are excluded from revenues. The following table presents our revenue disaggregated by account type
(in thousands):
Advisory Fees:
Year Ended December 31,
2018
2017
2016
Institutional .........................................................................................................
Mutual Funds ......................................................................................................
Wealth Management ...........................................................................................
Performance-based .............................................................................................
Trust Fees...................................................................................................................
Other ..........................................................................................................................
Total revenues .....................................................................................................
$
59,345
$
69,029
$
29,792
230
2,984
28,953
996
30,172
—
1,411
31,621
1,552
64,665
26,827
—
635
30,313
581
$
122,300
$
133,785
$
123,021
We have clients in various locations around the world. The following table presents our revenue disaggregated by
our clients' geographical locations (in thousands):
Year Ended December 31, 2018
Asia...........................................................................
Australia ...................................................................
Canada ......................................................................
Europe ......................................................................
United States ............................................................
Total..........................................................................
Advisory
Trust
Performance
-based
Other
Total
$
4,305
$
— $
— $
— $
3,783
6,605
4,860
—
—
—
—
—
—
69,814
28,953
2,984
$
89,367
$
28,953
$
2,984
$
—
163
—
833
996
4,305
3,783
6,768
4,860
102,584
$
122,300
Year Ended December 31, 2017
Asia...........................................................................
Australia ...................................................................
Canada ......................................................................
Europe ......................................................................
United States ............................................................
Total..........................................................................
Advisory
Trust
Performance
-based
Other
Total
$
6,312
$
— $
— $
— $
3,334
8,737
3,873
—
—
—
—
—
—
—
432
—
6,312
3,334
9,169
3,873
76,945
31,621
1,411
1,120
111,097
$
99,201
$
31,621
$
1,411
$
1,552
$
133,785
F-22
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advisory
Trust
Performance
-based
Other
Total
$
4,872
$
— $
— $
— $
1,758
7,528
5,416
—
—
—
71,918
30,313
$
91,492
$
30,313
$
—
—
—
635
635
$
—
186
—
395
581
4,872
1,758
7,714
5,416
103,261
$
123,021
Year Ended December 31, 2016
Asia...........................................................................
Australia ...................................................................
Canada ......................................................................
Europe ......................................................................
United States ............................................................
Total..........................................................................
10. EMPLOYEE BENEFITS:
Restricted Stock Awards
We have issued restricted shares to our employees and non-employee directors. The Plan reserves shares of
Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the
form of restricted stock and stock options. In April 2018, stockholders approved an additional 200,000 shares to be authorized
under the Plan, increasing the total number of shares issuable under the Plan (including predecessor plans to the Plan) to
4,848,100 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 December 31, 2018, approximately 452,000 shares remain available for issuance under the
Plan.
The following table presents the total stock-based compensation expense recorded and the total income tax benefit
recognized for stock-based compensation arrangements for the years indicated (in thousands):
Service condition restricted stock expense...................................................................
Performance-based restricted stock expense................................................................
Restricted stock expense under the Plan ......................................................................
Canadian Plan restricted stock expense .......................................................................
Total stock-based compensation expense.....................................................................
Total income tax benefit recognized related to stock-based compensation .................
For the years ended December 31,
2018
2017
2016
$
9,941
$
10,334
$
10,377
4,760
14,701
582
5,387
15,721
709
$
$
15,283
3,592
$
$
16,430
6,168
$
$
4,927
15,304
650
15,954
4,749
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. We accrue
dividends on unvested restricted stock, which are due and payable upon vesting of restricted stock. Accrued dividends coming
due within the next twelve months are included in “Dividends payable” on the Consolidated Balance Sheets, with the remaining
noncurrent portion of accrued dividends included in “Accrued dividends” on the Consolidated Balance Sheets. At December
31, 2018, we had recorded $7.7 million and $1.6 million in Dividends payable and Accrued dividends, respectively. At
December 31, 2017, we had recorded $7.4 million and $1.7 million in Dividends payable and Accrued dividends, respectively.
As of December 31, 2018, there was approximately $19.5 million of unrecognized compensation cost for
restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 1.9 years. In order to
satisfy tax liabilities that employees will owe on their shares that vest, we may withhold a sufficient number of vested shares
from employees on the date vesting occurs to cover minimum tax withholding requirements. We withheld 85,448 shares in
2018 for this purpose. Our two types of restricted stock grants under the Plan are discussed below.
F-23
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Subject Only to a Service Condition
For the years ended December 31, 2018, 2017 and 2016, we granted restricted stock to employees and non-
employee directors. Employee shares generally vest over four years and Director shares vest over one year. We calculate
compensation cost for restricted stock grants using the fair market value of our common stock at the date of grant, the number
of shares issued and an adjustment for restrictions on dividends. This compensation cost is amortized on a straight-line basis
over the applicable vesting period.
The following table details the status and changes in our restricted stock grants that are subject only to a service
condition for the year ended December 31, 2018:
Number of
Shares
Weighted Average
Grant Date Fair
Value
Non-vested, January 1, 2018 .......................................................................................................
Granted .................................................................................................................................
Vested ...................................................................................................................................
Forfeited ...............................................................................................................................
Non-vested, December 31, 2018 .................................................................................................
519,375
$
172,366
(208,715)
(42,953)
440,073
$
55.44
55.92
53.61
56.46
56.40
The following table shows the weighted-average grant date fair value for shares granted and the total fair value of
shares vested during the years indicated:
Years ended December 31,
2018
2017
2016
Weighted-average grant date fair value........................................................................
Fair value of shares vested (in thousands) ...................................................................
$
$
55.92
11,189
$
$
61.20
10,764
$
$
47.97
9,497
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 specific goals for that year’s vesting of the
restricted shares. The date that the Compensation Committee establishes the annual goal is considered to be the grant date and
the fair value measurement date to determine expense on the shares that are likely to vest. The final shares earned are
determined when the Compensation Committee formally approves the performance-based restricted stock vesting based on the
specific performance goals from the Company’s audited consolidated financial statements, and the service vesting period ranges
from one to three years. If a portion of the performance-based restricted shares is not earned or does not vest, no compensation
expense is recognized for that portion and any previously recognized compensation expense related to shares that are not earned
or do not vest is reversed.
In March 2018, the Compensation Committee established the 2018 goal for our Chief Executive Officer and Chief
Investment Officer as Income before income taxes of $20.0 million for 50% of their respective awards and an Income before
income taxes target of $36.0 million (ranging from 25% of target for threshold performance of $32.0 million to 185% of target
for maximum performance of $44.5 million) for the remaining 50% of their respective awards. For certain other key employees,
the Compensation Committee established the fiscal 2018 goals based on various departmental and company-wide performance
goals, including Income before income taxes of at least $20.0 million. These performance grants allow the Compensation
Committee to exclude certain items, including legal settlements, from the Income before income taxes target. Throughout 2018,
we recorded expense related to the applicable percentage of the performance-based restricted shares expected to meet or exceed
the performance goals needed to earn the shares.
F-24
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table details the status and changes in our restricted stock grants subject to service and performance
conditions for the year ended December 31, 2018:
Number of
Shares
Weighted Average
Grant Date Fair
Value
Non-vested, January 1, 2018.......................................................................................................
Granted.................................................................................................................................
Vested...................................................................................................................................
Forfeited...............................................................................................................................
Non-vested, December 31, 2018.................................................................................................
165,918
$
88,656
(98,281)
—
156,293
$
55.85
51.85
55.81
—
55.66
The following table shows the weighted-average grant date fair value for shares granted and the total fair value of
shares vested during the years indicated:
Weighted-average grant date fair value.......................................................................
Fair value of shares vested (in thousands) ..................................................................
$
$
51.85
5,485
$
$
54.86
5,792
$
$
55.90
6,209
Years ended December 31,
2018
2017
2016
Canadian Plan
As discussed in Note 2, the Canadian Plan provides compensation in the form of common stock for services
performed by employees of Westwood International Advisors. Under the Canadian Plan, no more than $10 million CDN (or
$7.3 million in U.S. Dollars using the exchange rate on December 31, 2018) may be funded to the Plan Trustee to fund
purchases of common stock with respect to awards granted under the Canadian Plan. At December 31, 2018, approximately
$2.6 million remains available for issuance under the Canadian Plan, or approximately 75,000 shares based on the closing share
price of our stock of $34.00 as of the last business day of 2018. During 2018, the trust formed pursuant to the Canadian Plan
purchased in the open market 13,031 Westwood common shares for approximately $726,000. On December 3, 2018, 10,327
shares vested at a total fair value of approximately $409,000. As of December 31, 2018, the trust holds 36,031 shares of
Westwood common stock. As of December 31, 2018, unrecognized compensation cost related to restricted stock grants under
the Canadian Plan totaled $655,000, which we expect to recognize over a weighted-average period of 1.6 years.
Mutual Fund Share Incentive Awards
We grant annually to certain employees mutual fund incentive awards, which are bonus awards based on our
mutual funds achieving specific performance goals. 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 closing value of a fund share
on the date the amount is credited to the account.
For awards earned prior to 2017, the award vested after approximately one year of service following the year in
which the participant earned the award. Beginning in 2017, the award vests after 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. For the years ended December 31, 2018, 2017, and 2016, we recorded expense of $302,000, $1.2
million and $1.3 million, respectively, related to mutual fund share incentive awards. As of December 31, 2018 and 2017, we
had an accrued liability of $635,000 and $1.8 million, respectively, related to mutual fund incentive awards.
F-25
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Share Units
We have a deferred share unit (“DSU”) plan for employees of Westwood International Advisors. A DSU is an
award linked to the value of Westwood’s common stock and is represented by a notional credit to a participant account. The
value of a DSU is initially equal to the value of a share of our common stock. For awards granted prior to 2018, DSUs vest
20%, 40%, 60%, and 80% after two, three, four and five years of service, respectively, and become fully vested after six years
of service. Beginning in 2018, DSUs vest 50%, 25% and 25% after two, three and four years of service, respectively, and
become fully vested after four years of service. The liability for these units is settled in cash upon termination of the
participant’s service. We record expense for DSUs based on the number of units vested on a straight line basis, which may
increase or decrease based on changes in the price of our common shares, and will increase for additional units received from
dividends declared on our shares. As of December 31, 2018, we had an accrued liability of $439,000 for 13,544 deferred share
units related to the 2012 to 2017 awards issued from 2013 to 2018, which is based on the $34.00 per share closing price of our
common stock on the last trading day of the year ended December 31, 2018. As of December 31, 2017, we had an accrued
liability of $632,000 for 10,796 deferred share units related to the 2012 to 2016 awards issued from 2013 to 2017, which was
based on the $66.21 per share closing price of our common stock on the last trading day of the year ended December 31, 2017.
Benefit Plans
Westwood has a defined contribution and profit-sharing plan that was adopted in July 2002 and covers
substantially all of our employees. Beginning with the 2017 contribution, discretionary employer profit-sharing contributions
become fully vested after four years of service by the participant. Contributions prior to 2017 vest after six years of service by
the participant. For U.S. employees, Westwood provides a 401(k) match of up to 6% of eligible compensation. For Westwood
International Advisors employees, Westwood provides a Registered Retirement Savings Plan match of up to 6% of eligible
compensation. These retirement plan matching contributions vest immediately.
The following table displays our profit-sharing and retirement plan contributions for the periods presented (in
thousands):
Years ended December 31,
2018
2017
2016
Profit-sharing contributions .............................................................................................
Retirement plan matching contributions..........................................................................
$
926
$
1,613
$
1,604
1,602
1,001
1,518
11. EARNINGS PER SHARE:
Basic earnings per common share (“EPS”) is computed by dividing net income available to common stockholders
by the weighted average number of shares outstanding. Diluted EPS is computed based on the weighted average shares of
common stock outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee
directors. There were approximately 7,300, 6,614 and 984 anti-dilutive restricted shares as of December 31, 2018, 2017 and
2016, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per
share and share amounts):
Years ended December 31,
2018
2017
2016
Net income..............................................................................................................
$
26,751
$
19,989
$
22,647
Weighted average shares outstanding – basic.....................................................
Dilutive potential shares from unvested restricted shares ................................
Dilutive potential shares from contingent consideration..................................
Weighted average shares outstanding – diluted..................................................
Earnings per share:
8,365,360
8,147,742
7,961,891
182,010
—
252,280
—
182,979
20,605
8,547,370
8,400,022
8,165,475
Basic .................................................................................................................
Diluted..............................................................................................................
$
$
3.20
3.13
$
$
2.45
2.38
$
$
2.84
2.77
F-26
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. VARIABLE INTEREST ENTITIES:
As discussed in Note 2 “Summary of Significant Accounting Policies,” the CTFs and Private Equity Funds
(together the “Westwood VIEs”) are considered VIEs, and the Westwood Funds®, UCITS Fund and Private Equity are
considered VOEs (together the “Westwood VOEs”). We receive fees for managing assets in these entities commensurate with
market rates. As of December 31, 2018 and 2017, we evaluated all of the Westwood VIEs and Westwood VOEs to determine
whether or not we should consolidate the entities into our Consolidated Financial Statements. For the Westwood VIEs, we
evaluated whether or not we qualify as the primary beneficiary based on whether we have the obligation to absorb significant
losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the
entity’s economic performance. For the Westwood VOEs, we evaluated whether or not we own a controlling financial interest
in the entities. Based on our analysis, we have not consolidated the Westwood VIEs or Westwood VOEs into our Consolidated
Financial Statements for the years ended December 31, 2018 or 2017.
As of December 31, 2018 and 2017, the Company had seed investments totaling $6.1 million and $10.7 million,
respectively, in the CTFs, the Westwood Funds® and the UCITS Fund. These seed investments were provided for the sole
purpose of showing 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 Consolidated Balance Sheets.
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 CTFs, Westwood Funds® and the UCITS Fund are accounted for as investments in
accordance with our other investments described in Note 3 “Investments.” We recognized fee revenue from the Westwood VIEs
and Westwood VOEs of approximately $46.1 million, $51.9 million and $52.2 million for the twelve months ended
December 31, 2018, 2017 and 2016, respectively.
The following table displays the assets under management, the amount of our seed investments that are included
in “Investments” and “Investments, at fair value” on the Consolidated Balance Sheets, and the financial risk of loss in each
vehicle (in millions):
As of December 31, 2018
Assets
Under
Management
Corporate
Investment
Amount at
Risk
VIEs/VOEs:
Westwood Funds®................................................................................
Common Trust Funds ...........................................................................
UCITS Fund..........................................................................................
Private Equity Funds.............................................................................
Private Equity .......................................................................................
All other assets:
Wealth Management .............................................................................
Institutional ...........................................................................................
Total AUM.....................................................................................
$
3,236
$
1,559
293
9
—
2,475
9,034
$
16,606
13. RELATED PARTY TRANSACTIONS:
$
6
—
—
—
5
6
—
—
—
5
Some of our directors, executive officers and their affiliates invest personal funds directly in trust accounts that
we manage. There was approximately $84,000 and $98,000 in fees due from these accounts as of December 31, 2018 and 2017,
respectively. For the years ended December 31, 2018, 2017 and 2016, we recorded trust fees from these accounts of $360,000,
$375,000, and $409,000, respectively.
F-27
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company engages in transactions with its affiliates as part of our operations. Westwood International
Advisors and Westwood Management provide investment advisory services to the UCITS Fund and the Westwood Funds®.
Certain members of our management serve on the board of directors of the UCITS Fund, and we have capital invested in three
of the Westwood Funds®. Under the terms of the investment advisory agreements, the Company earns fees paid by either
clients of the fund or directly by the funds. The fees are based on negotiated fee schedules applied to AUM. For the years ended
December 31, 2018, 2017 and 2016, we recorded fees from the affiliated Funds of $4.2 million, $4.0 million and $3.1 million,
respectively, which are included in “Asset-based advisory fees” on our Consolidated Statement of Comprehensive Income. As
of December 31, 2018 and 2017, $295,000 and $423,000 of these fees were unpaid and included in “Accounts receivable” on
our Consolidated Balance Sheets, respectively.
As discussed in Note 3 “Investments,” the Company made a strategic investment in an equity position of a private
company during 2018. We previously entered into a separate agreement with this private company to implement a portfolio
management product. For the years ended December 31, 2018 and 2017, we incurred approximately $1.1 million and $140,000,
respectively, in expenses to this company, which are included in “Information technology” expenses on our Consolidated
Statements of Comprehensive Income. The Company did not incur any similar expenses during the year ended December 31,
2016.
14. COMMITMENTS AND CONTINGENCIES:
Leases
We lease our offices under non-cancelable operating lease agreements with expiration dates that run through
2026. Rental expense for facilities and equipment leases for years ended December 31, 2018, 2017 and 2016 aggregated
approximately $2.3 million, $2.4 million and $2.4 million, respectively, and is included in general and administrative and
information technology expenses in the accompanying Consolidated Statements of Comprehensive Income.
At December 31, 2018, the future contractual rental payments for noncancelable operating leases for each of the
following five years and thereafter are as follows (in thousands):
Year ending:
2019...................................................... $
2020......................................................
2021......................................................
2022......................................................
2023......................................................
Thereafter .............................................
2,110
2,131
2,094
1,718
1,725
3,403
Total payments due ........................................ $ 13,181
Litigation
On August 3, 2012, AGF Management Limited and AGF Investments Inc. (together “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 emerging markets investment
team previously employed by AGF. On November 5, 2012, Westwood responded to AGF’s lawsuit with a counterclaim against
AGF, and on November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a
Westwood subsidiary.
On October 13, 2017, we reached a settlement with AGF that provided for the dismissal of all claims, with
prejudice and without any admission of liability. We agreed to pay AGF a one-time payment of $10 million CDN, half of which
was covered by our insurance. We recorded a net $4.0 million ($5 million CDN) charge related to the settlement and associated
insurance coverage, with a $4.0 million ($5 million CDN) receivable from our insurance provider included in “Other current
assets” on our Consolidated Balance Sheets at December 31, 2017. We received the insurance proceeds of $4.0 million during
2018 and had no receivable related to the settlement on our Consolidated Balance Sheets as of December 31, 2018.
F-28
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our policy is to not accrue legal fees and directly related costs as part of potential loss contingencies. Our
Directors & Officers insurance provider covered 50% of the defense costs related to both AGF claims, excluding Westwood’s
counterclaim against AGF. We expense legal fees and directly-related costs as incurred. We received insurance proceeds of
$233,000, $276,000 and $430,000 during 2018, 2017 and 2016, respectively, and had no receivable at year-end. We had a
receivable of $212,000 as of December 31, 2017, which represented our then-current minimum estimate of expenses that we
expected to recover under our insurance policies. This receivable is included in “Other current assets” on our Consolidated
Balance Sheets.
15. 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 uses to review 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 Advisors, which
provide investment advisory services to clients of similar type, are included in our Advisory segment, along with Westwood
Advisors, L.L.C.
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 Trust is included in our Trust segment.
F-29
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands)
Year Ended December 31, 2018
Revenues:
Advisory
Trust
Westwood
Holdings
Eliminations
Consolidated
Net fee revenues from external sources .........................
Net intersegment revenues.............................................
Net interest and dividend revenue..................................
Other revenue.................................................................
Total revenues ........................................................
$
92,351
$
28,953
$
— $
— $
121,304
6,973
708
53
238
202
33
100,085
29,426
—
—
—
—
(7,211)
—
—
—
910
86
(7,211)
122,300
Expenses:
Depreciation and amortization.......................................
Other operating expenses...............................................
Total expenses...........................................................
Gain (loss) on sale of operations............................................
Income (loss) before income taxes ........................................
Income tax expense (benefit) .................................................
Net income (loss) ...................................................................
Add: Restricted stock expense .............................................
Intangible amortization ...............................................
Deferred taxes on goodwill .........................................
Economic Earnings (Loss).....................................................
Segment assets .......................................................................
Segment goodwill ..................................................................
Expenditures for long-lived assets .........................................
276
48,970
49,246
(1)
50,838
12,032
38,806
8,673
95
—
47,574
226,270
3,403
314
$
$
$
$
$
$
$
$
$
$
$
$
1,764
25,467
27,231
(16)
2,179
572
1,607
2,356
1,537
237
5,737
61,056
16,401
295
$
$
$
$
$
$
499
16,597
17,096
541
(16,555)
(2,893)
(13,662) $
4,254
$
40
—
—
(7,211)
(7,211)
—
—
—
— $
— $
—
—
2,539
83,823
86,362
524
36,462
9,711
26,751
15,283
1,672
237
(9,368) $
— $
43,943
17,977
$
(114,818) $
190,485
— $
382
$
— $
— $
19,804
991
Year Ended December 31, 2017
Revenues:
Net fee revenues from external sources .........................
Net intersegment revenues.............................................
Net interest and dividend revenue..................................
Other revenue.................................................................
Total revenues...........................................................
$
100,612
$
31,621
$
— $
— $
132,233
8,120
546
911
218
90
5
110,189
31,934
—
—
—
—
(8,338)
—
—
—
636
916
(8,338)
133,785
Expenses:
Depreciation and amortization.......................................
Other operating expenses...............................................
Total expenses...........................................................
Income (loss) before income taxes ........................................
Income tax expense (benefit) .................................................
Net income .............................................................................
Add: Restricted stock expense .............................................
Intangible amortization ...............................................
Deferred taxes on goodwill .........................................
Economic Earnings (Loss).....................................................
Segment assets .......................................................................
Segment goodwill ..................................................................
Expenditures for long-lived assets .........................................
548
58,950
59,498
50,691
17,120
33,571
9,140
138
38
42,887
207,792
5,219
151
F-30
$
$
$
$
$
$
$
$
$
$
$
$
1,900
28,580
30,480
1,454
(47)
1,501
2,641
1,734
588
6,464
69,174
21,925
530
$
$
$
$
$
$
468
17,784
18,252
(18,252)
(3,169)
(15,083) $
4,649
$
—
—
—
(8,338)
(8,338)
—
—
— $
— $
—
—
2,916
96,976
99,892
33,893
13,904
19,989
16,430
1,872
626
(10,434) $
— $
38,917
18,437
$
(102,744) $
192,659
— $
203
$
— $
— $
27,144
884
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands)
Year Ended December 31, 2016
Revenues:
Advisory
Trust
Westwood
Holdings
Eliminations
Consolidated
Net fee revenues from external sources............................
Net intersegment revenues................................................
Net interest and dividend revenue ....................................
Other revenue ...................................................................
Total revenues .............................................................
$
92,127
$
30,313
$
— $
— $
122,440
7,533
534
294
130
13
(260)
100,488
30,196
—
—
—
—
(7,663)
—
—
—
547
34
(7,663)
123,021
Expenses:
Depreciation and amortization..........................................
Other operating expenses..................................................
Total expenses .............................................................
Income (loss) before income taxes ........................................
Income tax expense (benefit) .................................................
Net income (loss) ...................................................................
Add: Restricted stock expense .............................................
Intangible amortization ...............................................
Deferred taxes on goodwill .........................................
Economic Earnings (Loss).....................................................
Segment assets .......................................................................
Segment goodwill ..................................................................
Expenditures for long-lived assets .........................................
575
50,824
51,399
49,089
16,331
32,758
9,632
160
38
42,588
174,951
5,219
705
$
$
$
$
$
$
$
$
$
$
$
$
1,975
27,348
29,323
873
426
447
3,026
1,800
509
5,782
67,330
21,925
530
$
$
$
$
$
$
379
15,573
15,952
(15,952)
(5,394)
(10,558) $
3,296
$
—
—
—
(7,663)
(7,663)
—
—
— $
— $
—
—
2,929
86,082
89,011
34,010
11,363
22,647
15,954
1,960
547
(7,262) $
— $
41,108
13,985
$
(76,588) $
179,678
— $
584
$
— $
— $
27,144
1,819
We provide a performance measure that we refer to as Economic Earnings. Our management and Board of
Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and determine our dividend
policy. We believe that this performance measure is useful for management and investors when evaluating our underlying
operating and financial performance and our available resources.
In calculating Economic Earnings, we add to Net income the non-cash expense associated with equity-based
compensation awards of restricted stock, amortization of intangible assets and the deferred taxes related to the tax-basis
amortization of goodwill. Although depreciation on property and equipment is a non-cash expense, we do not add it back when
calculating Economic Earnings because depreciation charges represent a decline in the value of the related assets that will
ultimately require replacement.
The following table provides a reconciliation of Net income to Economic Earnings (in thousands):
Net Income...............................................................................................................
Add: Restricted stock expense..................................................................................
Add: Intangible amortization....................................................................................
Add: Tax benefit from goodwill amortization ..........................................................
Economic Earnings.................................................................................................
$
26,751
$
19,989
$
15,283
1,672
237
16,430
1,872
626
22,647
15,954
1,960
547
$
43,943
$
38,917
$
41,108
For the years ended December 31,
2018
2017
2016
F-31
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographical information
Refer to Note 9, “Revenue” for our revenue disaggregated by our clients' geographical location.
(in thousands)
Property and equipment, net, by geographic area:
As of December 31,
2018
2017
U.S. ............................................................................................................................................
Canada .......................................................................................................................................
Total Property and equipment, net ......................................................................................................
$
$
4,381
$
4,107
73
83
4,454
$
4,190
16. CONCENTRATION:
For the years ended December 31, 2018, 2017 and 2016, our ten largest clients accounted for approximately 24%,
20% and 20% of our fee revenue, respectively. No single customer accounted for 10% or more of our fee revenues in any of
these years. The following table presents advisory fee revenue received from our single largest client in each year (in
thousands):
Advisory fees from our largest client:
Asset-based fees...................................................................................................
Performance-based fees .......................................................................................
Percent of fee revenue..........................................................................................
$
1,868
2,984
4.0%
$
6,312
$
4,872
—
4.8%
—
4.0%
Years ended December 31,
2018
2017
2016
17. SUBSEQUENT EVENTS:
Dividends Declared
On February 6, 2019, the Board of Directors declared a quarterly cash dividend of $0.72 per share on common
stock payable on April 1, 2019 to stockholders of record on March 8, 2019.
Restricted Stock Grants
On February 22, 2019, we expect to issue approximately $7.2 million of restricted stock to employees, or
approximately 185,000 shares based on the closing price of our stock on February 21, 2019. The shares are subject to vesting
conditions described in Note 10 “Employee Benefits” of our Consolidated Financial Statements in this Report.
F-32
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. QUARTERLY FINANCIAL DATA (Unaudited):
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2018
and 2017 (in thousands, except per share amounts):
Quarter
First
Second
Third
Fourth
2018
Revenues ....................................................................................................
Income before income taxes.......................................................................
Net income .................................................................................................
Basic earnings per common share ..............................................................
Diluted earnings per common share...........................................................
$
33,567
$
32,760
$
29,854
$
26,119
10,487
7,978
0.96
0.93
10,936
7,992
0.95
0.94
7,151
5,368
0.64
0.62
7,888
5,413
0.65
0.64
2017
Revenues ....................................................................................................
Income before income taxes.......................................................................
Net income .................................................................................................
Basic earnings per common share ..............................................................
Diluted earnings per common share...........................................................
$
32,623
$
33,756
$
33,492
$
33,914
7,770
6,064
0.75
0.73
10,583
6,896
0.84
0.83
5,752
4,132
0.51
0.49
9,788
2,897
0.35
0.34
F-33
WESTWOOD HOLDINGS GROUP, INC. Corporate Information
BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT
Brian O. Casey
President & Chief Executive Officer,
Westwood Holdings Group, Inc.
Susan M. Byrne
Founder & Vice Chairman of the Board,
Westwood Holdings Group, Inc.
Richard M. Frank(1)(2)(3)
Chairman of the Board
Former Executive Chairman, CEC Entertainment, Inc.
Raymond E. Wooldridge(1)(2)(3)
Private Investor
Ellen H. Masterson(1)(3)
Former Partner, PricewaterhouseCoopers
Robert D. McTeer(3)
Former President, Federal Reserve Bank of Dallas
Geoffrey R. Norman(1)(3)
Former Executive Vice President, GE Asset Management
Martin J. Weiland(2)(3)
Former Chairman, President & Chief Executive Officer,
Northern Trust Bank of Texas
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Governance/Nominating Committee Member
CERTIFICATIONS REGARDING PUBLIC DISCLOSURES
& LISTINGS STANDARDS
Westwood Holdings Group, Inc. has filed with the Securities and
Exchange Commission as exhibits 31.1 and 31.2 to its Form 10-K for the
year ended December 31, 2018, the certifications required by Section 302
of the Sarbanes-Oxley Act regarding the quality of the company’s public
disclosure. In addition, the annual certification of the Chief Executive
Officer regarding compliance by Westwood Holdings Group, Inc. with
the corporate governance listing standards of the New York Stock
Exchange will be submitted without qualification to the New York Stock
Exchange following the April 2019 annual stockholder meeting.
FORWARD-LOOKING STATEMENT
Brian O. Casey
President & Chief Executive Officer
Murray Forbes III, CPA
Senior Vice President, Chief Financial Officer & Treasurer
STOCKHOLDER INFORMATION
Corporate Headquarters
Westwood Holdings Group, Inc.
200 Crescent Court, Suite 1200
Dallas, Texas 75201
214.756.6900
Stock Exchange Listing
New York Stock Exchange
Common Stock
Ticker Symbol: WHG
Transfer Agent & Registrar
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
800.937.5449
Independent Auditors
Deloitte & Touche LLP
Dallas, Texas
Corporate Counsel
Norton Rose Fulbright US LLP
Dallas, Texas
Annual Meeting of Stockholders
Wednesday, April 24, 2019, 10:00 am CDT
The Crescent Club
200 Crescent Court, 17th Floor
Dallas, Texas 75201
For more information about Westwood Holdings Group, Inc.,
visit our website at westwoodgroup.com or email
info@westwoodgroup.com. You may obtain information
about Westwood Funds by visiting westwoodfunds.com
or by calling 877.FUND.WHG.
Statements in this Annual Report to Stockholders that are not purely historical facts 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 composition and market value
of our assets under management; regulations adversely affecting the financial services industry; competition in the investment management industry; our assets under
management including investments in foreign companies; our ability to develop and market new investment strategies successfully; 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 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; the significant concentration of our
revenues in a small number of customers; and the other risks detailed from time to time in our SEC filings, including, but not limited to, those set forth under the “Forward-
Looking Statements” and “Risk Factors” sections in the Annual Report on Form 10-K included herein. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report to Stockholders. Except as required by law, we are not obligated to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of this Annual Report to Stockholders or to reflect the occurrence of unanticipated events.
Past performance is not indicative of future results. Nothing in this Annual Report is intended to offer any investment advisory service or any investment or financial product.
This Annual Report should not be relied on to decide whether to use any investment advisory service from, or to purchase any investment or financial product managed or
advised by, Westwood Holdings Group, Inc. or any of its affiliates.
200 Crescent Court
Suite 1200
Dallas, Texas 75201
214.756.6900
westwoodgroup.com
D A L L A S | TO R O N TO | B O S TO N | H O U S TO N