Westwood Holdings Group, Inc. — Q1 2012 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Westwood manages investment assets through Westwood Management and provides trust and custodial services through Westwood Trust. Revenue is primarily based on assets under management (AUM), making results sensitive to market performance, client flows, fee pressure and customer concentration.
Financial Performance and Key Metrics
- AUM: $13.873 billion at March 31, 2012, up 4% from $13.283 billion a year earlier. The increase reflected $1.251 billion of market appreciation and $487 million of inflows, offset by $944 million of outflows.
- Revenue: $17.864 million, up 5%; asset-based advisory fees were $14.090 million, up 6%, and trust fees were $3.471 million, up 3%. Other revenue declined 8% to $303,000.
- Profitability: Income before taxes was $6.084 million, up 8%, and net income was $3.785 million, up 7%. Basic and diluted EPS were $0.53 and $0.52, respectively, compared with $0.51 and $0.50.
- Margins: Pretax margin was approximately 34.1%, compared with 33.0% in the prior-year quarter. Net margin was approximately 21.2%, compared with 20.9%.
- Cash flow: Operating cash flow was $4.841 million, compared with $5.168 million. Investing cash flow used $48,000, primarily for fixed assets, while financing cash flow used $5.552 million for dividends and treasury-stock purchases, partially offset by tax benefits.
- Liquidity: Cash and cash equivalents were $4.505 million; cash and investments totaled $51.7 million. Working capital was $54.8 million.
- Debt and liabilities: The company reported no long-term debt and no liabilities for borrowed money. Total liabilities were $11.016 million, compared with $19.840 million at December 31, 2011, primarily because compensation and benefits payable declined.
- Capital returns: The quarterly dividend was $0.37 per share, compared with $0.35 in the prior-year quarter. The company repurchased 86,453 shares for $3.403 million, primarily to satisfy employee tax-withholding obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher average AUM, market appreciation and client inflows, although institutional outflows increased and total first-quarter net flows were negative $457 million versus positive $35 million in 2011.
- Employee compensation and benefits increased 3% to $8.914 million. Higher incentive compensation, salaries, headcount and service-based restricted-stock expense were partly offset by a $584,000 reduction in performance-based restricted-stock expense.
- Information technology expense increased 30% to $596,000 because of upgraded client reporting and portfolio-accounting systems, research expenses and equipment costs.
- Economic Expenses, a non-GAAP measure, increased 10% to $9.793 million, while Economic Earnings declined 5% to $5.819 million despite GAAP net income growth.
- The effective tax rate increased to 37.8% from 36.8%, primarily due to provision-to-return adjustments related to the 2011 federal tax return.
- Investment securities declined to $47.238 million from $54.868 million at December 31, 2011. The company recorded a $435,000 after-tax unrealized loss in other comprehensive income, compared with a $536,000 gain in the prior-year quarter.
- Total assets declined to $81.274 million from $90.597 million at December 31, 2011, while stockholders’ equity declined modestly to $70.258 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that existing cash, short-term investments and operating cash generation should be sufficient for ordinary operating and capital requirements through at least the next twelve months, while noting that additional financing could be required.
- The 2012 performance-based restricted-stock goal requires adjusted pretax income of at least $26.661 million. Management had not concluded that the current-year performance shares would vest and had recorded no related expense.
- Management identified key risks including financial-market downturns, client and revenue concentration in four customers, customer retention, relationships with consultants, competition, fee pressure, personnel retention, new investment strategies, interest rates, tax-rate changes and internal-control effectiveness.
- Westwood sponsors and manages unconsolidated variable-interest entities. At March 31, 2012, Westwood Funds had $1.475 billion of AUM and $12.3 million of corporate investment and stated risk of loss; the company reported no required additional financial support arrangements.
- The company reported no material legal proceedings, no significant changes in contractual obligations or market-risk disclosures, and effective disclosure controls and procedures.
Investor Verification Checklist
- Verify whether AUM growth is sustainable given the $457 million of first-quarter net outflows, particularly the $579 million institutional net outflow.
- Review customer concentration and the effect of any significant mandate loss on advisory-fee revenue.
- Assess the recurring versus nonrecurring components of compensation, technology spending and other expenses.
- Reconcile GAAP net income growth with the 5% decline in non-GAAP Economic Earnings.
- Monitor the effective tax rate and future provision-to-return adjustments.
- Review the valuation and liquidity of the $2.325 million Level 3 available-for-sale investment and the broader securities portfolio.
- Confirm the company’s ability to sustain dividends and share repurchases while maintaining adequate liquidity and no borrowed-money liabilities.