Westwood Holdings Group Inc. 10-K Summary (Fiscal Year Ended Dec 31, 2006)
Business Context and Reporting Period
Westwood Holdings Group, Inc. (WHG) is a Delaware corporation and holding company operating through two primary subsidiaries: Westwood Management Corp., which provides investment advisory services, and Westwood Trust, which provides trust and custodial services. The company serves institutional clients, including corporate pension funds, public retirement plans, endowments, and foundations, as well as high net worth individuals. This report covers the fiscal year ended December 31, 2006.
Key Financial Metrics
| Metric | 2006 | 2005 | Change |
|---|---|---|---|
| Total Revenues | $27.4 million | $21.9 million | +24.7% |
| Net Income | $4.5 million | $3.6 million | +24.0% |
| Earnings Per Share (Diluted) | $0.79 | $0.66 | +19.7% |
| Assets Under Management (AUM) | $5.9 billion | $4.9 billion | +20.3% |
| Cash Flow from Operations | $7.2 million | $6.3 million | +14.3% |
| Total Assets | $28.7 million | $27.3 million | +5.2% |
| Stockholders' Equity | $22.7 million | $21.6 million | +5.4% |
| Long-term Debt | $0 | $0 | N/A |
Non-GAAP Cash Earnings: Management reported non-GAAP cash earnings of $9.1 million for 2006, compared to $6.0 million in 2005, primarily due to the addition of non-cash stock-based compensation expenses back to net income.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 24.7% driven by a 26.4% rise in advisory fees and a 17.2% increase in trust fees. This growth was fueled by market appreciation of assets and net inflows from new clients.
- Expense Increases: Total expenses rose 26.5% to $20.1 million. The primary driver was a 29.0% increase in employee compensation and benefits, largely due to a $2.4 million increase in restricted stock expense from new grants and higher salary costs.
- Accounting Change: The company adopted SFAS No. 123(R) on January 1, 2006, resulting in a cumulative effect adjustment of $39,000 (net of tax) to reverse previously recorded compensation expense for unvested securities.
- Client Concentration: The four largest clients accounted for 25.6% of total revenues in 2006, a significant concentration risk.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to grow assets internally by marketing new asset classes, specifically SmallCap Value, to institutional consultants in 2007. The company also plans to launch two additional mutual funds (WHG SmallCap Value and WHG AllCap Value) in 2007. Strategic acquisitions remain a possibility to expand asset classes or distribution capabilities.
Risks and Contingencies:
- Market Dependency: Revenues are highly sensitive to securities market performance; a decline in asset values directly reduces fee income.
- Key Personnel: Success is heavily dependent on the retention of key executives, particularly Chairman Susan M. Byrne and CEO Brian O. Casey.
- Client Concentration: Loss of one or more of the top four clients could materially impact results.
- Regulatory Environment: The company is subject to extensive regulation by the SEC and the Texas Department of Banking, which could impose restrictions or penalties.
- Dividend Policy: As a holding company, WHG relies on dividends from subsidiaries to pay its own dividends. Westwood Trust is limited by Texas law in paying dividends to "undivided profits."
Investor Verification Checklist
- Verify the sustainability of the 20.3% AUM growth rate given the volatility of the equity markets.
- Assess the impact of the 25.6% revenue concentration among the top four clients.
- Review the details of the new SmallCap Value asset class launch and its projected timeline for profitability.
- Confirm the company's ability to maintain its fee structure amidst competitive pressures in the asset management industry.
- Monitor the status of the $50,000 bad debt write-off related to the terminated consulting arrangement with Gabelli Advisers.