Westwood Holdings Group, Inc. 2011 Form 10-K Summary
Business Context and Reporting Period
Westwood Holdings Group manages investment assets through Westwood Management Corp. and Westwood Trust. Services include investment advisory, subadvisory, trust, custodial and common-trust-fund services. Revenue is primarily based on fees tied to assets under management (AUM). The filing covers the fiscal year ended December 31, 2011, with quarterly data for the fourth quarter of 2011.
- AUM was $13.1 billion at year-end, up 5% from $12.5 billion at December 31, 2010.
- Average AUM was $12.9 billion, up 20% year over year.
- Net client inflows were $665 million, including $309 million of net inflows to Westwood Funds.
- The company had 80 full-time employees at year-end.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $68.9 million | $55.3 million | +25% |
| Asset-based advisory fees | $54.2 million | $42.2 million | +29% |
| Performance-based advisory fees | $1.0 million | None | New in 2011 |
| Trust fees | $13.5 million | $12.1 million | +12% |
| Total expenses | $45.8 million | $37.6 million | +22% |
| Income before taxes | $23.1 million | $17.7 million | +30% |
| Net income | $14.7 million | $11.3 million | +30% |
| Diluted EPS | $2.04 | $1.58 | +29% |
| Operating cash flow | $18.5 million | $18.3 million | +1% |
Calculated margins were approximately 33.5% before tax and 21.3% after tax in 2011, compared with approximately 32.0% and 20.4%, respectively, in 2010. The effective tax rate was 36.4%, compared with 36.3% in 2010.
- Cash and investments were $60.1 million at December 31, 2011, including $5.3 million of cash and cash equivalents and $54.9 million of investments.
- Working capital was $54.9 million, compared with $44.1 million at year-end 2010.
- The company had no long-term debt or other liabilities for borrowed money.
- Total assets were $90.6 million and stockholders’ equity was $70.8 million.
- Investing cash flow was negative $2.2 million, primarily due to capital expenditures and acquisition-related payments. Financing cash flow was negative $12.8 million, primarily due to dividends and share repurchases.
- Management stated that existing cash, short-term investments and operating cash flow should fund ordinary operating and capital requirements for at least the next twelve months.
Fourth-Quarter 2011 Results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $17.0 million | $15.4 million |
| Income before taxes | $6.3 million | $5.1 million |
| Net income | $4.1 million | $3.3 million |
| Basic EPS | $0.59 | $0.48 |
| Diluted EPS | $0.57 | $0.46 |
Material Changes Versus the Prior Comparable Period
- Revenue and net income reached records, increasing 25% and 30%, respectively, versus 2010.
- Growth was driven by higher average AUM, net inflows, the full-year contribution from the 2010 McCarthy acquisition and a $991,000 performance fee.
- Westwood Funds AUM increased 33% to $1.3 billion. Income Opportunity AUM more than doubled to over $900 million, while SMidCap Plus+ exceeded $500 million in its first full year.
- Private Wealth AUM declined 3% to $3.1 billion, while institutional AUM increased 4% to $8.7 billion.
- Expenses rose 22%. Employee compensation increased 21% to $35.1 million, information technology expense increased 52% to $2.1 million, and general and administrative expense increased 39% to $3.9 million.
- Other revenue declined 80% to $219,000 because of lower unrealized investment gains.
- Economic Earnings, a non-GAAP measure, increased 22% to $25.3 million. Restricted stock expense was $10.0 million, a significant non-cash expense added back in that measure.
- The quarterly regular dividend increased to $0.37 per share from $0.33 per share. Annual dividends declared were $1.42 per share in 2011 versus $1.65 in 2010 because the 2010 amount included a special dividend.
- The company repurchased 90,540 shares during 2011 and had approximately $6.9 million remaining under its $10.0 million repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects growth from existing and new client relationships, consultant relationships, mutual-fund distribution, Westwood Trust, new investment strategies and potential strategic acquisitions. Management also stated that the company has the liquidity to meet ordinary requirements through at least the next twelve months.
- Results are highly sensitive to securities-market performance because most revenue is based on AUM. Market declines, client withdrawals or shifts away from the company’s large-cap equity strategies could reduce revenue and margins.
- Investment advisory, subadvisory and trust agreements generally may be terminated on short notice, often 30 days.
- The four largest clients represented 14.3% of 2011 fee revenue; loss of a significant client could materially affect results.
- The business faces intense competition, fee pressure, passive-investment substitution and competition for investment professionals.
- Regulatory, fiduciary, ERISA, litigation, cybersecurity and systems-failure risks could result in sanctions, liability or business disruption.
- Westwood Trust is subject to Texas capital and dividend restrictions. Its minimum required capital was $1.0 million, compared with approximately $12.7 million of stockholders’ equity at year-end.
- Contractual operating-lease obligations totaled $9.2 million, including $1.0 million due within one year.
- No goodwill impairment was recorded. The company held $11.3 million of goodwill and $4.6 million of net intangible assets at year-end.
- The company earned a performance fee in 2011 but none in 2009 or 2010, making this revenue potentially volatile.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Most Important Facts for Investors to Verify
- Whether AUM growth and the $665 million of 2011 net inflows are sustained, particularly in institutional and mutual-fund channels.
- The sensitivity of revenue and earnings to equity-market performance, client retention and large-cap value investment performance.
- The recurring versus non-recurring nature of the $991,000 performance fee and investment-related revenue.
- The effect of compensation, restricted-stock expense, technology spending and other relatively fixed costs on future margins.
- Dividend sustainability and the interaction among dividends, share repurchases, subsidiary dividend restrictions and liquidity.
- Client concentration, short-notice termination rights and retention of key investment and management personnel.
- Potential obligations or risks associated with acquisitions, goodwill, intangible assets and the company’s operating leases.