WHG

Westwood Holdings Group Inc. - 10-Q Summary (Period Ended Sept 30, 2010)

Business Context and Reporting Period

Westwood Holdings Group, Inc. (Westwood) is an investment management firm operating through two primary subsidiaries: Westwood Management (investment advisory services) and Westwood Trust (trust and custodial services). This Form 10-Q covers the quarterly period ended September 30, 2010. The company manages assets for corporate and public retirement plans, endowments, foundations, and high-net-worth individuals. As of September 30, 2010, the company had 7,462,917 shares of common stock outstanding.

Key Financial Metrics

Note: The company reported no long-term debt as of September 30, 2010. Working capital was approximately $48.7 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16% for the quarter and 34% for the nine-month period compared to the same periods in 2009. This was driven by a 16% increase in asset-based advisory fees and a 7% increase in trust fees, largely due to market appreciation and net inflows.
• Profitability: Net income rose 12% for the quarter and 55% for the nine-month period. Income before taxes increased 14% (quarter) and 57% (nine months).
• Expense Increases: Employee compensation and benefits increased 14% (quarter) and 26% (nine months), primarily due to higher incentive compensation and restricted stock expense. Professional services expenses surged 117% (quarter) and 70% (nine months), largely attributed to legal fees for the pending acquisition of McCarthy Group Advisors, LLC.
• AUM Growth: Assets under management grew 12% year-over-year to $10.64 billion, driven by $1.06 billion in market appreciation and $117 million in net inflows during the quarter.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted strong performance in the third quarter, with AUM growth driven by market appreciation and inflows into the WHG Funds and Separate Accounts. The company announced a definitive agreement to acquire McCarthy Group Advisors, LLC, expected to close in the fourth quarter of 2010.

Dividends: The company declared a quarterly cash dividend of $0.33 per share on July 22, 2010, payable October 1, 2010. Total dividends declared for the nine months ended September 30, 2010, were $7.33 million.

Risks and Contingencies:

• Market Risk: Revenue is highly dependent on the value of assets under management, making the company susceptible to financial market downturns.
• Concentration Risk: A significant concentration of revenues comes from four major customers.
• Regulatory Risk: Potential impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
• Acquisition Risk: Integration risks and costs associated with the pending McCarthy Group Advisors acquisition.

Unusual Items: The company recognized significant non-cash equity-based compensation expense ($6.93 million for the nine months), which is added back in their non-GAAP "Economic Earnings" measure. There were no material legal proceedings expected to impact financial position.

Investor Verification Checklist

• Acquisition Status: Verify the closing date and final terms of the McCarthy Group Advisors, LLC acquisition.
• AUM Flows: Monitor net inflows/outflows trends, as the nine-month period showed net outflows of $36 million despite strong market appreciation.
• Compensation Structure: Review the impact of performance-based restricted stock grants on future expense volatility.
• Customer Concentration: Assess the stability of the four major clients that represent a significant portion of revenue.
• Dividend Sustainability: Confirm that operating cash flows remain sufficient to support the declared dividend policy amidst potential market volatility.