WHG

Westwood Holdings Group Inc. - 10-Q Summary (Period Ended Sep 30, 2009)

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 September 30, 2009. The company manages assets for corporate and public retirement plans, endowments, foundations, and a family of mutual funds (WHG Funds).

Key Financial Metrics

Note: The filing does not explicitly state a net profit margin percentage; however, net income represented approximately 19.9% of total revenues for the nine-month period.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15% ($1.55 million) for the three months ended September 30, 2009, compared to the same period in 2008. For the nine-month period, revenues increased 3% ($0.96 million).
• Asset-Based Fees: Asset-based advisory fees rose 19% in the quarter and 9% year-to-date, driven by increased average assets under management (AUM) due to net inflows, partially offset by market depreciation.
• Trust Fees: Trust fees declined 7% in the quarter and 11% year-to-date due to lower average AUM at Westwood Trust caused by market depreciation and client withdrawals.
• Net Income: Net income increased 33% ($0.58 million) for the quarter but decreased 5% ($0.25 million) for the nine-month period compared to 2008.
• Expenses: Employee compensation and benefits increased 16% in the quarter and 9% year-to-date, primarily due to higher incentive compensation and restricted stock expense. Sales and marketing expenses decreased 41% in the quarter.
• Assets Under Management: Total AUM increased 15% to $9.51 billion as of September 30, 2009, from $8.28 billion in the prior year.

Outlook, Risks, and Unusual Items

• Acquisition Activity: Westwood has entered into 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. Legal costs related to this transaction contributed to an 81% increase in WHG Mutual Funds expenses year-to-date.
• Dividends: The company declared a quarterly cash dividend of $0.30 per share on July 23, 2009, payable October 1, 2009. Total dividends declared for the nine months ended September 30, 2009, were $6.44 million.
• Stock-Based Compensation: Significant non-cash expenses related to restricted stock were recorded ($5.69 million for the nine months). Management utilizes "Cash Earnings" (a non-GAAP measure) to evaluate performance, which added back restricted stock expense to net income.
• Risks: Key risks include the concentration of revenue in four major customers, dependence on financial market performance for AUM valuation, competitive fee pressures, and the ability to retain qualified personnel.
• Liquidity: The company has no long-term debt and maintains a strong liquidity position with $37.9 million in cash and investments. Management believes current resources are sufficient for the next 12 months.

Investor Verification Checklist

• Verify the status and closing conditions of the Philadelphia Fund (PHILX) acquisition and its impact on future fee revenue.
• Monitor the composition of Assets Under Management (AUM) to assess exposure to market volatility and client withdrawal trends.
• Review the concentration risk associated with the top four customers mentioned in the risk factors.
• Assess the sustainability of the dividend policy given the cash outflows for dividends ($6.39 million paid in the nine-month period) versus operating cash flow.
• Confirm the vesting conditions and performance goals for executive restricted stock, as these impact future compensation expenses.