WHG

Westwood Holdings Group Inc. 10-K Summary (Fiscal Year Ended Dec 31, 2010)

Business Context and Reporting Period

Company: Westwood Holdings Group, Inc. (NYSE: WHG)
Reporting Period: Fiscal year ended December 31, 2010
Business Model: A holding company operating through two primary subsidiaries: Westwood Management Corp. (investment advisory services) and Westwood Trust (trust and custodial services). The company generates revenue primarily through fees based on a percentage of assets under management (AUM).
Key Metric: As of December 31, 2010, the company managed approximately $12.5 billion in assets.

Key Financial Metrics

Liquidity: The company held $45.0 million in cash and investments as of December 31, 2010, with no long-term debt. Working capital was $44.1 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 30% to $55.3 million in 2010 compared to 2009. This was driven by a 33% increase in asset-based advisory fees and a 17% increase in trust fees, primarily due to higher average AUM resulting from market appreciation.
• Profitability: Net income rose 43% to $11.3 million. Income before taxes increased 44% to $17.7 million.
• Expense Increases: Total expenses increased 24% to $37.6 million. Notable increases included employee compensation (up 22% due to higher incentives and headcount) and professional services (up 92% due to acquisition-related fees and external subadvisor costs).
• Acquisition: In November 2010, the company acquired McCarthy Group Advisors, L.L.C., adding approximately $1.1 billion in AUM. This acquisition contributed to the growth in Private Wealth and Mutual Fund segments.
• Performance Fees: Unlike 2008, the company earned no performance-based fees in 2010 or 2009.

Guidance, Outlook, and Risks

Outlook and Strategy: Management focuses on growing AUM through new client relationships, expanding distribution via mutual funds (WHG Funds), and strategic acquisitions. The company launched the SMidCap Plus+ product in July 2010 and reorganized the McCarthy Multi-Cap Stock Fund into the WHG Dividend Growth Fund in February 2011. Management believes current cash balances and operating cash flow are sufficient for the next 12 months.

Risks and Contingencies:

• Market Dependence: Revenues are highly sensitive to securities market performance; declines in asset values directly reduce fee income.
• Client Concentration: The four largest clients accounted for 12.2% of fee revenues in 2010. Loss of these clients could materially impact results.
• Key Personnel: Success depends heavily on the retention of key investment professionals, particularly the Chief Investment Officer and CEO.
• Regulatory: The company is subject to extensive regulation by the SEC and the Texas Department of Banking (for Westwood Trust).
• Acquisition Integration: Risks associated with integrating McCarthy Group Advisors and realizing forecasted benefits.

Investor Verification Checklist

• AUM Flows: Verify the sustainability of net inflows given the $1.9 billion in outflows reported in 2010, which were partially offset by market appreciation and the McCarthy acquisition.
• Expense Ratios: Monitor the trend in professional services and compensation expenses relative to revenue growth to ensure margin expansion continues.
• Acquisition Synergies: Track the integration progress of McCarthy Group Advisors and the transition of its assets to Westwood Trust products.
• Performance Fees: Assess the likelihood of earning performance fees in future periods, as these were absent in 2009 and 2010 but contributed significantly in 2008.
• Dividend Policy: Confirm the company's ability to maintain its quarterly dividend policy, which totaled $1.65 per share in 2010, given its reliance on subsidiary dividends.