Westwood Holdings Group Inc. - Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. Westwood Holdings Group, Inc. operates through two primary subsidiaries: Westwood Management Corp., which provides investment advisory services, and Westwood Trust, which offers trust and custodial services. The company's revenue is primarily derived from fees based on a percentage of assets under management (AUM).
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $17.0 million | $13.2 million |
| Net Income | $3.5 million | $2.9 million |
| Earnings Per Share (Diluted) | $0.50 | $0.40 |
| Operating Cash Flow | $5.2 million | $2.7 million |
| Cash and Cash Equivalents | $4.7 million | $1.7 million (Dec 31, 2010) |
| Investments (at fair value) | $39.2 million | $43.3 million (Dec 31, 2010) |
| Long-Term Debt | $0 | $0 |
| Assets Under Management (AUM) | $13.3 billion | $10.6 billion |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 29% year-over-year, driven by a 32% increase in asset-based advisory fees and a 12% increase in trust fees. This growth correlates with a 25% increase in AUM to $13.3 billion.
- Expense Increases: Total expenses rose 31% to $11.4 million. The primary driver was a 27% increase in employee compensation and benefits ($8.7 million), attributed to higher incentive compensation, increased headcount (75 employees vs. 65), and higher equity-based compensation expense.
- Profitability: Net income grew 21% to $3.5 million. The effective tax rate increased to 36.8% from 35.6% due to higher federal tax brackets and state tax liabilities related to a 2010 acquisition.
- Balance Sheet: Cash and cash equivalents increased significantly from $1.7 million to $4.7 million, aided by operating cash flows and the sale of trading securities. Total assets remained relatively stable at $72.0 million.
Outlook, Risks, and Management Commentary
- Performance-Based Compensation: Management concluded in Q1 2011 that it was probable they would meet performance goals for restricted stock grants to the CEO and CIO, resulting in the recognition of approximately $584,000 in expense. Additional expense related to these grants is expected in subsequent quarters of 2011.
- Liquidity: The company has no long-term debt and maintains working capital of $46.9 million. Management believes current cash and short-term investments are sufficient to meet operating requirements for the next 12 months.
- Dividends: A quarterly cash dividend of $0.35 per share was declared, payable April 1, 2011. Dividends payable on the balance sheet totaled $2.7 million.
- Risks: Key risks include revenue concentration (significant concentration in four customers), dependence on financial market performance, competitive fee pressures, and the ability to retain qualified personnel.
- Non-GAAP Measures: Management reported "Economic Earnings" of $6.1 million (up 26%), which adds back non-cash equity compensation and intangible amortization to net income.
Investor Verification Checklist
- Verify the sustainability of the 25% AUM growth, specifically the mix of market appreciation ($771 million) versus net client inflows ($35 million).
- Monitor the impact of performance-based restricted stock vesting on future quarterly expenses, as $584,000 was recognized in Q1 with more expected later in the year.
- Review the concentration risk regarding the four major customers that account for a significant portion of revenues.
- Confirm the timing and funding source for the deferred acquisition liability of $0.9 million due in Q4 2011.
- Assess the trend in the effective tax rate, which rose to 36.8% due to acquisition-related state tax liabilities.