Business Context and Reporting Period
Company: Westwood Holdings Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2003
Business Overview: Westwood operates as an independent investment management firm following a spin-off from SWS Group, Inc. in June 2002. It operates through two primary segments: Westwood Management Corp. (investment advisory services) and Westwood Trust (trust and custodial services). Revenue is primarily derived from fees based on assets under management (AUM).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2003 |
Nine Months Ended Sep 30, 2003 |
Nine Months Ended Sep 30, 2002 |
|---|---|---|---|
| Total Revenues | $5,290 | $15,372 | $16,611 |
| Net Income | $1,319 | $3,768 | $3,848 |
| Earnings Per Share (Diluted) | $0.24 | $0.70 | $0.71 |
| Cash and Cash Equivalents | $8,313 | $8,313 (as of Sep 30, 2003) | |
| Total Assets | $30,042 | ||
| Total Liabilities | $9,410 | $9,410 (as of Sep 30, 2003) | |
| Long-Term Debt | $0 | ||
| Dividends Payable | $5,704 | $5,704 (as of Sep 30, 2003) | |
| Working Capital | $17,399 |
Note: Working Capital calculated as Total Current Assets ($26,769) minus Total Current Liabilities ($9,370).
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 4.5% for the quarter and 7.5% for the nine-month period compared to 2002. This was driven primarily by a 16.0% drop in advisory fees due to a 7.0% decrease in total Assets Under Management (AUM) to $3.6 billion, caused by client withdrawals.
- Trust Fee Growth: Trust fees increased 11.8% for the quarter and 1.1% for the nine-month period, offsetting some advisory fee declines due to higher average fees and inflows in the Trust segment.
- Other Revenues Surge: Other revenues increased 108.9% for the quarter and 57.5% for the nine-month period. This was largely due to interest income from the accretion of discounts on notes receivable from stockholders following principal payments by executive officers.
- Expense Management: Total expenses decreased 8.7% for the quarter and 8.3% for the nine-month period. Employee compensation dropped 15.8% (quarter) and 6.2% (nine months) due to lower incentive compensation. Professional services expenses decreased 31.8% for the nine-month period due to the absence of spin-off related legal costs incurred in 2002.
- Net Income: Net income increased 9.6% for the quarter ($1.319M vs $1.204M) but decreased 2.1% for the nine-month period ($3.768M vs $3.848M).
Guidance, Outlook, and Risks
Management Commentary: Management attributes the decline in AUM to client withdrawals, partially offset by market appreciation and new client inflows. The company emphasizes its consistent above-median performance rankings in principal asset classes. The company expects current cash and short-term investment balances to be sufficient to meet operating requirements for at least the next twelve months.
Dividends: The Board approved a special dividend of $1.00 per share and a quarterly dividend of $0.03 per share, totaling $5.7 million payable in October 2003.
Risks and Contingencies:
- Boykin Trust Litigation: Westwood Trust serves as corporate trustee for the Richard A. Boykin, Jr. Family Trust, which filed for bankruptcy. SWS Group has agreed to indemnify Westwood for liabilities exceeding $500,000. Westwood reached this expense ceiling in 2002 and expects SWS to cover future liabilities.
- Market Risk: Revenue is highly sensitive to fluctuations in financial markets and AUM values. The company does not utilize hedging activities.
- Client Concentration: Risks related to a small number of clients accounting for a substantial portion of business and the potential for short-notice terminations.
Investor Verification Checklist
- Dividend Sustainability: Verify the impact of the $5.7 million dividend payable on future liquidity and cash flow, given the decline in operating cash flow.
- AUM Trends: Monitor the trend of client withdrawals versus new inflows to assess the sustainability of the 7.0% AUM decline.
- Indemnification Reliance: Confirm the financial stability of SWS Group, Inc., as Westwood relies on SWS to cover liabilities exceeding $500,000 related to the Boykin Trust bankruptcy.
- One-Time Revenue Items: Analyze the sustainability of "Other Revenues," which spiked due to non-recurring accretion of discounts on executive officer loans that have now been fully repaid.
- Compensation Structure: Review the shift toward equity-based compensation and its impact on future expense recognition and dilution.