Westwood Holdings Group Inc. 10-Q Summary
Business Context and Reporting Period
Company: Westwood Holdings Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: Westwood manages investment assets and provides services through two subsidiaries: Westwood Management (investment advisory) and Westwood Trust (trust and custodial services). Revenue is primarily derived from fees based on a percentage of Assets Under Management (AUM).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $9.97 million | $18.19 million |
| Net Income | $1.63 million | $2.86 million |
| Diluted EPS | $0.25 | $0.43 |
| Cash Flow from Operations | N/A | $8.85 million |
| Cash and Cash Equivalents | $5.11 million | $5.11 million |
| Total Investments (at market) | $29.75 million | $29.75 million |
| Working Capital | $37.8 million | $37.8 million |
| Long-Term Debt | $0 | $0 |
Assets Under Management (AUM): Total AUM increased to $8.2 billion as of June 30, 2009, up from $7.7 billion in the prior year period. Westwood Management AUM grew 9% to $6.52 billion, while Westwood Trust AUM declined 6% to $1.68 billion.
Material Changes vs. Prior Period
- Revenue: Total revenue increased 3% for the quarter but decreased 3% for the six-month period compared to 2008. Asset-based advisory fees rose due to net inflows, partially offset by market depreciation. Trust fees declined due to lower average AUM and asset withdrawals.
- Expenses: Total expenses increased 6% for the quarter and 4% for the six months. Employee compensation and benefits rose 10% (quarter) and 6% (six months), driven by increased restricted stock expense and headcount growth (63 employees vs. 57 in 2008).
- Profitability: Net income decreased 6% for the quarter and 22% for the six months ended June 30, 2009, compared to the prior year periods.
- Cash Flow: Net cash provided by operating activities increased significantly to $8.85 million for the six months ended June 30, 2009, compared to $5.69 million in the prior year, largely due to a $7.4 million collection of accounts receivable.
Guidance, Outlook, and Risks
Management Commentary: Management utilizes non-GAAP "cash earnings" to evaluate performance. Cash earnings increased 5% for the quarter to $3.9 million but decreased 4% for the six months to $6.6 million. The company expects to recognize approximately $470,000 in performance-based restricted stock expense in the third and fourth quarters of 2009.
Strategic Initiatives: Westwood has entered an asset purchase agreement to acquire the Philadelphia Fund (PHILX) from Baxter Financial Corporation. The fund is expected to be reorganized into the WHG LargeCap Value Fund. Shareholder approval is anticipated in the third or fourth quarter of 2009.
Risks and Contingencies:
- Market Risk: Revenue is highly dependent on AUM, which fluctuates with financial markets and interest rates.
- Concentration Risk: Significant concentration of revenues in four major customers.
- Competition: Pressure to maintain fee structures in a competitive marketplace.
- Legal: No material legal proceedings currently pending.
Investor Verification Checklist
- AUM Flows: Verify the sustainability of net inflows in Westwood Management given the offsetting market depreciation.
- Compensation Costs: Monitor the impact of restricted stock grants and performance-based vesting on future expense ratios.
- Acquisition Status: Track the regulatory and shareholder approval timeline for the Philadelphia Fund acquisition.
- Client Concentration: Assess the risk exposure related to the top four customers representing a significant portion of revenue.
- Liquidity: Confirm that operating cash flows remain sufficient to support the quarterly dividend policy ($0.30 per share) without external financing.