Westwood Holdings Group Inc. - 10-Q Summary (Period Ended Sept 30, 2002)
Business Context and Reporting Period
Westwood Holdings Group, Inc. (Westwood) is an independent public company following a spin-off from SWS Group, Inc. completed on June 28, 2002. The company operates through two segments: Westwood Management Corp., providing investment advisory services, and Westwood Trust, providing trust and custodial services. This report covers the three and nine months ended September 30, 2002. As of October 21, 2002, there were 5,394,522 shares of common stock outstanding.
Key Financial Metrics
| Metric | 9 Months Ended Sept 30, 2002 | 9 Months Ended Sept 30, 2001 |
|---|---|---|
| Total Revenues | $16.6 million | $14.5 million |
| Net Income | $3.8 million | $3.7 million |
| Earnings Per Share (Diluted) | $0.71 | $0.69 |
| Operating Cash Flow | $1.4 million | $4.9 million |
| Cash and Cash Equivalents | $3.5 million | $0.1 million (Dec 31, 2001) |
| Total Assets | $22.4 million | $21.1 million (Dec 31, 2001) |
| Total Liabilities | $4.6 million | $7.0 million (Dec 31, 2001) |
| Long-Term Debt | $0 | $0 |
| Assets Under Management (AUM) | $3.9 billion | $3.4 billion |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.7% year-over-year for the nine-month period, driven by a 12.8% increase in advisory fees and a 24.2% increase in trust fees, largely due to a 14.3% growth in Assets Under Management (AUM).
- Expense Increases: Total expenses rose 24.1% to $10.1 million. Professional services expenses surged 185.6% due to costs associated with the spin-off, public company compliance, and the Boykin Trust litigation. Employee compensation increased 16.4% due to higher incentive compensation and the new adoption of stock option expensing.
- Cash Flow: Net cash provided by operating activities decreased significantly to $1.4 million from $4.9 million in the prior year, primarily due to a $1.5 million decrease in compensation and benefits payable and a $1.3 million decrease in income taxes payable.
- Liquidity: Cash and cash equivalents increased from $149,000 at year-end 2001 to $3.5 million at September 30, 2002, supported by net cash provided by investing activities of $2.0 million.
Outlook, Risks, and Unusual Items
- Spin-Off Costs: Management estimates that operating as an independent public company increases annual expenses by approximately $800,000 compared to prior years, covering compliance, insurance, and legal costs.
- Accounting Changes: The company adopted SFAS No. 142, discontinuing goodwill amortization effective January 1, 2002. Additionally, the company began expensing stock-based compensation under SFAS No. 123, resulting in a $74,000 expense for the nine-month period.
- Legal Contingency (Boykin Trust): Westwood Trust filed a voluntary bankruptcy petition for the Richard A. Boykin, Jr. Family Trust. SWS has agreed to indemnify Westwood for liabilities exceeding $500,000. As of September 30, 2002, Westwood has reached this $500,000 expense ceiling.
- Risks: Key risks include the company's limited operating history as a standalone entity, dependence on a small number of clients, market volatility affecting AUM, and the potential inability to raise capital if needed.
Investor Verification Checklist
- Verify the sustainability of the 14.3% AUM growth rate and its impact on future fee revenue.
- Confirm the status of the Boykin Trust litigation and the enforceability of the SWS indemnification agreement beyond the $500,000 threshold.
- Assess the impact of increased fixed costs associated with public company status on future profit margins.
- Review the composition of the $13.3 million in investments (money market, equity, bonds) to understand market risk exposure.
- Monitor cash flow trends, specifically the timing of incentive compensation payments and tax liabilities.