Westwood Holdings Group Inc. - 10-Q Summary (Period Ended June 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 report covers the quarterly period ended June 30, 2010, and the six-month period ended June 30, 2010. The company is an accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $26.4 million | $18.2 million |
| Net Income | $5.4 million | $2.9 million |
| Earnings Per Share (Diluted) | $0.74 | $0.38 |
| Operating Cash Flow | $8.6 million | $8.9 million |
| Cash and Cash Equivalents | $4.7 million | $3.5 million (Beginning of period) |
| Total Assets | $61.3 million | $59.9 million (Dec 31, 2009) |
| Long-Term Debt | $0 | $0 |
| Assets Under Management (AUM) | $9.7 billion | $8.2 billion (June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 45% year-over-year for the six-month period, driven by a 52% increase in asset-based advisory fees and a 29% increase in trust fees. This growth correlates with an 18% increase in AUM to $9.7 billion, attributed to market appreciation and net inflows.
- Profitability: Net income surged 90% to $5.4 million. Income before taxes increased 92% to $8.5 million.
- Expense Increases: Total expenses rose 30% to $17.9 million. The primary driver was a 34% increase in employee compensation and benefits ($14.2 million), largely due to higher incentive compensation and increased stock-based compensation expense ($4.5 million) related to performance-based restricted stock grants.
- Other Revenues: Other revenues turned negative (-$6,000) compared to $120,000 in the prior year, primarily due to increased net unrealized losses on investments.
Outlook, Risks, and Management Commentary
- Performance-Based Compensation: Management concluded in Q1 2010 that it was probable they would meet performance goals for CEO and CIO restricted stock grants. Consequently, significant expense was recognized in Q1 and Q2, with further recognition expected in Q3 and Q4 2010.
- Liquidity: The company reported no long-term debt and working capital of $46.4 million. Management believes current cash balances and operating cash flow are sufficient to meet requirements for the next 12 months.
- Dividends: The company declared quarterly cash dividends of $0.33 per share in both Q1 and Q2 2010. Dividends payable totaled $2.5 million as of June 30, 2010.
- Risks: Key risks include concentration of revenue in four major customers, dependence on financial market performance for AUM growth, competitive fee pressures, and the ability to retain qualified personnel.
- Non-GAAP Measures: Management utilizes "Cash Earnings" (Net Income + non-cash stock comp + amortization) as a performance metric. Cash earnings for the six months ended June 30, 2010, were $10.0 million, a 53% increase from the prior year.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the sustainability of net income given the significant non-cash stock compensation expense ($4.5 million) and the timing of performance-based vesting.
- AUM Concentration: Review the specific exposure to the four major customers noted in the risk factors to assess revenue stability.
- Investment Portfolio Performance: Analyze the unrealized losses on trading securities that contributed to the decline in "Other Revenues."
- Deferred Acquisition Liabilities: Confirm the timing and funding source for the $1.7 million in deferred acquisition liabilities due in late 2010 and 2011.
- Dividend Policy: Assess the payout ratio relative to cash earnings to ensure dividend sustainability.