WESTWOOD HOLDINGS GROUP INC quarterly report, Q2 FY2012

Westwood Holdings Group, Inc. — Form 10-Q Summary

Business context and reporting period

Westwood manages investment assets and provides advisory, trust and custodial services through Westwood Management, Westwood Trust and Westwood International Advisors Inc. Revenue is primarily based on assets under management (AUM). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods.

AUM was $13.2 billion at June 30, 2012, down 6% from $13.9 billion at June 30, 2011.
Westwood International Advisors Inc. was launched in the second quarter with a Toronto-based Global and Emerging Markets team. Management expected advisory fees to begin in the third quarter of 2012.
The company had 93 full-time employees at June 30, 2012, compared with 76 one year earlier.

Financial performance and key metrics

Metric	Three months ended June 30, 2012	Three months ended June 30, 2011	Six months ended June 30, 2012	Six months ended June 30, 2011
Total revenue	$20.1 million	$18.9 million	$37.9 million	$35.9 million
Income before taxes	$3.8 million	$5.9 million	$9.8 million	$11.5 million
Net income	$2.2 million	$3.7 million	$6.0 million	$7.3 million
Diluted EPS	$0.30	$0.52	$0.82	$1.01
Net cash from operating activities	Not separately provided	Not separately provided	$7.0 million	$8.7 million

Quarterly revenue increased 6%, while six-month revenue increased 6%.
Quarterly net income declined 41% and six-month net income declined 18%, primarily because expenses grew faster than revenue.
Approximate net margin was 11.0% for the quarter and 15.8% for the six months, compared with 19.8% and 20.3%, respectively, in the comparable 2011 periods.
Quarterly total expenses increased 26% to $16.3 million; six-month expenses increased 15% to $28.1 million.
Employee compensation and benefits increased 17% for the quarter and 11% for the six months. Professional services increased 160% for the quarter and 70% for the six months, principally due to recruiting and legal costs associated with WIA.
Other revenue increased to $1.0 million in the quarter and $1.3 million for the six months, including an $803,000 gain from the sale of 100,000 Teton shares.
Economic Earnings, a non-GAAP measure, decreased 22% to $5.3 million for the quarter and 14% to $11.1 million for the six months.

Financial position, cash flow and liquidity

Cash and cash equivalents were $7.1 million at June 30, 2012, versus $5.3 million at December 31, 2011.
Investments were $44.5 million, down from $54.9 million at December 31, 2011. Cash plus investments totaled $51.6 million, compared with $60.1 million at year-end.
Total assets were $86.1 million and total liabilities were $14.7 million. Working capital was $55.5 million.
The company reported no long-term debt or liabilities for borrowed money.
Operating cash flow was $7.0 million. Investing activities provided $756,000, primarily from the sale of an available-for-sale investment. Financing activities used $5.9 million, primarily for dividends and treasury-stock purchases.
Cash dividends paid were $2.9 million during the six months; dividends declared were $0.37 per share for each of the first two quarters.
The company believed existing cash, short-term investments and operating cash flow would meet ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could be required depending on future conditions.

Material changes versus the prior comparable period

AUM decreased $770 million year over year, driven by institutional outflows and market depreciation. Mutual fund AUM increased 15%, while institutional AUM decreased 10%.
Quarterly asset-based advisory fees declined 2%, but performance-based fees increased 19% and trust fees increased 8%. Six-month asset-based fees increased 2%, performance-based fees increased 19% and trust fees increased 6%.
WIA generated no revenue in the second quarter but added compensation, bonus amortization, office, recruiting and legal costs.
Accumulated other comprehensive income declined to $613,000 from $1.9 million, primarily reflecting unrealized investment losses.
The company repurchased approximately 97,724 shares during the first six months for $3.8 million and had approximately $6.5 million remaining under its authorized repurchase program as of June 30, 2012. The program was scheduled to expire August 9, 2012.
Performance-based restricted-stock expense began being recorded in the second quarter after management determined that the applicable performance goals were probable of achievement.

Guidance, outlook, risks and unusual items

Management expected WIA to begin earning advisory fees in the third quarter of 2012 and viewed global and emerging markets offerings as a potential growth opportunity. No quantified revenue or earnings guidance was provided.
Revenue remains sensitive to financial-market performance, AUM levels, client composition and net flows. Second-quarter 2012 AUM declined because of $746 million of outflows and $526 million of market depreciation, partly offset by $552 million of inflows.
Key disclosed risks include customer concentration, client retention, relationships with investment consultants, competition and fee pressure, personnel retention, development of new strategies, financial-market downturns, interest rates, tax-rate changes and internal-control effectiveness.
Legal proceedings arising in the ordinary course were not expected to have a material effect on financial position, operations or cash flow.
Westwood disclosed corporate exposure of $12.4 million to Westwood Funds and $4.1 million to common trust funds; these entities were not consolidated because Westwood was not their primary beneficiary.
Management concluded that disclosure controls and procedures were effective and that no material changes in internal control over financial reporting occurred during the quarter.

Most important facts for investors to verify

Whether WIA began generating advisory fees in the third quarter and whether its start-up costs and hiring plan produced the expected growth.
Subsequent AUM levels, institutional client flows and market performance, given the company’s dependence on fee revenue tied to AUM.
The sustainability of the higher expense base, especially compensation, WIA bonuses, professional services and technology spending.
Cash generation after dividends, treasury-stock purchases and investment activity, as well as the company’s continued absence of debt.
The effect of investment gains and losses, including Teton share transactions, on reported revenue and comprehensive income.
The status and expiration or renewal of the $10.0 million share-repurchase authorization.