Westwood Holdings Group Inc. 10-K Summary (Fiscal Year Ended Dec 31, 2008)
Business Context and Reporting Period
Westwood Holdings Group, Inc. (WHG) is a Delaware holding company operating through two primary subsidiaries: Westwood Management Corp., which provides investment advisory services, and Westwood Trust, which offers trust and custodial services. The company manages assets for corporate and public retirement plans, endowments, foundations, and high-net-worth individuals. As of December 31, 2008, the firm managed approximately $7.2 billion in assets. The reporting period covers the fiscal year ended December 31, 2008.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $46.5 million | $36.3 million |
| Net Income | $10.5 million | $7.9 million |
| Earnings Per Share (Diluted) | $1.63 | $1.28 |
| Assets Under Management (AUM) | $7.2 billion | $7.9 billion |
| Total Assets | $50.8 million | $39.0 million |
| Stockholders' Equity | $38.8 million | $29.3 million |
| Long-Term Debt | $0 | $0 |
| Cash and Investments | $31.7 million | $26.7 million |
| Working Capital | $35.2 million | $26.4 million |
Revenue Composition (2008): Asset-based advisory fees ($27.0M), Performance-based fees ($8.7M), Trust fees ($11.0M), and Other revenues (-$0.3M).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 28% to $46.5 million, driven primarily by a 189% surge in performance-based fees ($8.7M vs. $3.0M) and a 24% increase in asset-based fees.
- Profitability: Net income rose 33% to $10.5 million. Income before taxes increased 35% to $16.5 million.
- Assets Under Management: AUM declined 9% to $7.2 billion, primarily due to market depreciation, partially offset by net inflows. However, quarterly average AUM increased 12% to $7.7 billion.
- Expense Increases: Total expenses rose 24% to $29.9 million. Employee compensation increased 26% due to higher incentive compensation and restricted stock grants. Sales and marketing expenses rose 38%.
- Cash Flow: Operating cash flow turned negative at -$6.3 million (compared to +$11.7 million in 2007), largely due to net purchases of U.S. Treasury Bills and a significant increase in accounts receivable.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the revenue increase to strong investment performance generating significant performance fees and net inflows from new and existing clients. The company continues to focus on expanding its SMidCap Value and SmallCap Value products and growing its mutual fund platform (WHG Funds).
Risks and Contingencies:
- Client Concentration: The largest client accounted for 19.5% of fee revenues in 2008, and the top four clients accounted for 31.0%. Loss of these clients would materially impact results.
- Market Volatility: Revenues are highly sensitive to securities market performance. A decline in asset values directly reduces fee income.
- Performance Fee Volatility: A significant portion of 2008 revenue was performance-based. Future revenues may fluctuate significantly depending on market outperformance.
- Regulatory Environment: The company is subject to extensive regulation by the SEC and the Texas Department of Banking, which could impose restrictions or penalties.
Dividends: The company declared a quarterly dividend of $0.30 per share in each quarter of 2008. A subsequent dividend of $0.30 per share was declared on February 5, 2009.
Investor Verification Checklist
- Verify the sustainability of the 189% increase in performance-based fees and the likelihood of similar outperformance in 2009.
- Assess the impact of the 9% decline in year-end AUM on future asset-based fee revenue.
- Review the concentration risk associated with the top four clients representing 31% of fee revenue.
- Monitor the negative operating cash flow of $6.3 million and its drivers (investment purchases and receivables).
- Confirm the company's ability to maintain its dividend policy given the holding company structure and reliance on subsidiary dividends.