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WHG > SEC Filings for WHG > Form 10-Q on 18-Oct-2012All Recent SEC Filings

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Form 10-Q for WESTWOOD HOLDINGS GROUP INC


18-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements in this report and the Annual Report to Stockholders that are not purely historical facts, including, without limitation, statements about our expected future financial position, results of operations or cash flows, as well as other statements including, without limitation, words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should," "could," "goal," "may," "target," "designed," "on track," "comfortable with," "optimistic" and other similar expressions, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, the risks described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC, and those set forth below:

• our ability to identify and market services that appeal to our customers;

• the significant concentration of our revenues in four of our customers;

• our relationships with investment consulting firms;

• our relationships with current and potential customers;

• our ability to retain qualified personnel;

• our ability to develop and market new investment strategies successfully;

• our ability to maintain our fee structure in light of competitive fee pressures;

• competition in the marketplace;

• downturns in financial markets;

• new legislation adversely affecting the financial services industries;

• interest rates;

• changes in our effective tax rate;

• our ability to maintain an effective system of internal controls; and

• other risks as detailed from time to time in our SEC reports.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We are not obligated and do not undertake an obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events or otherwise.

Overview

We manage investment assets and provide services for our clients through our subsidiaries, Westwood Management, Westwood Trust and Westwood International. Westwood Management provides investment advisory services to corporate and public retirement plans, endowments and foundations, the Westwood Funds™, other mutual funds, individuals and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals. Westwood International was established in the second quarter of 2012 and provides Global and Emerging Markets investment advisory services to institutional clients. Our revenues are generally derived from fees based on a percentage of assets under management. We have been providing investment advisory services since 1983 and, according to recognized industry sources including Morningstar, Inc., our principal asset classes have consistently ranked above the median in performance within their peer groups when measured over ten years and longer. Percentages stated in this section are rounded to the nearest whole percent.

Revenues

We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management and Westwood International, which manage client accounts under investment advisory and subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of


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assets under management for the stated period. We recognize advisory fee revenues as services are rendered. A limited number of our clients have a contractual performance-based fee component in their contract, which generates additional revenues if we outperform a specified index over a specific period of time. We record revenue from performance-based fees at the end of the measurement periods. Since our advance paying clients' billing periods coincide with the calendar quarter to which such payments relate, revenue is fully recognized within the quarter and our consolidated financial statements contain no deferred advisory fee revenues.

Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Most trust fees are paid quarterly in advance and are recognized as services are rendered. Since billing periods for most of Westwood Trust's advance paying clients coincide with the calendar quarter, revenue is fully recognized within the quarter and our consolidated financial statements do not contain a significant amount of deferred revenue.

Our other revenues generally consist of interest and investment income. Although we generally invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds.

Assets Under Management

Assets under management increased $2.4 billion to $14.1 billion at September 30, 2012 compared with $11.7 billion at September 30, 2011. The average of beginning and ending assets under management for the third quarter of 2012 was $13.6 billion compared to $12.8 billion for the third quarter of 2011, an increase of 6%.

The following table displays assets under management as of September 30, 2012 and 2011:

                                                                      % Change
                                      As of September 30,        September 30, 2012
                                         (in millions)                   vs.
                                       2012           2011       September 30, 2011
    Institutional                   $     9,208     $  7,769                      19 %
    Private Wealth                        3,270        2,796                      17
    Mutual Funds                          1,594        1,089                      46

    Total Assets Under Management   $    14,072     $ 11,654                      21 %

• Institutional includes separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; and managed account relationships with brokerage firms and other registered investment advisors which offer Westwood products to their customers.

• Private Wealth includes assets for which Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals pursuant to trust or agency agreements. Investment subadvisory services are provided for the common trust funds by Westwood Management, Westwood International and external, unaffiliated subadvisors. Also included are assets acquired in the McCarthy transaction representing institutional and high net worth clients for which Westwood provides investment management and advisory services.

• Mutual Funds include the Westwood Funds™, a family of U.S.-registered mutual funds for which Westwood Management serves as advisor.

• Westwood Trust had assets under management of $2.5 billion at September 30, 2012 compared with $1.9 billion at September 30, 2011. Westwood Trust assets under management are included in "Private Wealth" in the table above.


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• Westwood International, which began providing investment advisory services in the third quarter of 2012, had assets under management for external clients of $486 million as of September 30, 2012. These assets are included in "Institutional" in the above table. In addition, Westwood International subadvised $254 million in Westwood Trust common trust fund assets as of September 30, 2012, for total assets under management of $740 million. The Westwood Trust common trust fund assets are included in "Private Wealth" in the table above.

Roll-Forward of Assets Under Management



                                         Three Months Ended           Nine months Ended
  ($ millions)                              September 30,               September 30,
                                         2012           2011          2012          2011
  Institutional
  Beginning of period assets           $   8,511      $  9,432      $  8,735      $  8,359
  Inflows                                     95           278         1,055         1,429
  Outflows                                  (321 )        (245 )      (1,619 )        (894 )

  Net flows                                  174            33          (564 )         535
  Market appreciation/(depreciation)         523        (1,696 )       1,037        (1,125 )
  Net change                                 697        (1,663 )         473          (590 )

  End of period assets                     9,208         7,769         9,208         7,769

  Private Wealth
  Beginning of period assets               3,166         3,203         3,051         3,148
  Inflows                                     62           127           290           238
  Outflows                                   (91 )         (82 )        (347 )        (329 )

  Net flows                                  (29 )          45           (57 )         (91 )
  Market appreciation/(depreciation)         133          (452 )         276          (261 )
  Net change                                 104          (407 )         219          (352 )

  End of period assets                     3,270         2,796         3,270         2,796

  Mutual Funds
  Beginning of period assets               1,476         1,288         1,293           970
  Inflows                                    100            99           352           448
  Outflows                                   (55 )        (106 )        (190 )        (200 )

  Net flows                                   45            (7 )         162           248
  Market appreciation/(depreciation)          73          (192 )         139          (129 )
  Net change                                 118          (199 )         301           119

  End of period assets                     1,594         1,089         1,594         1,089

  Total
  Beginning of period assets              13,153        13,923        13,079        12,477
  Inflows                                    657           504         1,697         2,115
  Outflows                                  (467 )        (433 )      (2,156 )      (1,423 )

  Net flows                                  190            71          (459 )         692
  Market appreciation/(depreciation)         729        (2,340 )       1,452        (1,515 )
  Net change                                 919        (2,269 )         993          (823 )

  End of period assets                 $  14,072      $ 11,654      $ 14,072      $ 11,654

Three months ended September 30, 2012 and 2011

The $919 million increase in assets under management for the three months ended September 30, 2012 was due to market appreciation of $729 million and inflows of $657 million partially offset by outflows of $467 million. Inflows were primarily driven by new institutional accounts in our Emerging Markets strategy managed by Westwood International and inflows into the Westwood Income Opportunity mutual fund. Outflows were primarily related to rebalancing by clients across multiple products.

The $2.3 billion decrease in assets under management for the three months ended September 30, 2011 was due primarily to market depreciation of $2.3 billion


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Nine months ended September 30, 2012 and 2011

The $993 million increase in assets under management for the nine months ended September 30, 2012 was due to inflows of $1.7 billion and market appreciation of $1.5 billion, partially offset by outflows of $2.2 billion. Inflows were primarily driven by new institutional accounts in our Emerging Markets strategy managed by Westwood International, inflows into the Westwood Income Opportunity mutual fund and inflows into new and existing accounts in our Income Opportunity and LargeCap Value strategies. Outflows were primarily related to rebalancing by LargeCap Value institutional accounts.

The $823 million decrease in assets under management for the nine months ended September 30, 2011 was due to market depreciation of $1.5 billion and outflows of $1.4 billion, partially offset by inflows of $2.1 billion. Inflows were driven primarily by additional inflows into institutional separate accounts, the WHG Funds and private wealth accounts. Outflows were primarily related to account closings and outflows from institutional separate accounts, subadvisory and private wealth clients.

Results of Operations

In the second quarter of 2012, as part of our long-standing strategy to expand our research capabilities and product offerings, we established Westwood International Advisors, based in Toronto, to manage Global and Emerging Markets Equity strategies. Westwood International began providing investment management services during the third quarter of 2012 and ended the quarter with assets under management from external clients of $486 million. In addition, Westwood International Subadvised $254 million in Westwood Trust common trust fund assets as of September 30, 2012, for total assets under management of $740 million. Westwood International had 11 full-time employees as of September 30, 2012. As Westwood International has only recently commenced operations, our Consolidated Statement of Comprehensive Income for the nine months ended September 30, 2012 includes minimal revenues and significant costs related to Westwood International's operations.

The following table (dollars in thousands) and discussion of our results of operations for the three and nine months ended September 30, 2012 is based upon data derived from the consolidated statements of comprehensive income contained in our consolidated financial statements and should be read in conjunction with those statements, included elsewhere in this report.

                                                                                                                             % Change
                                                                                                         Three months ended            Nine months ended
                                          Three months ended               Nine months ended             September 30, 2012           September 30, 2012
                                             September 30,                   September 30,                      vs.                           vs.
                                          2012            2011            2012            2011           September 30, 2011           September 30, 2011
Revenues
Advisory fees
Asset-based                            $   14,485       $ 13,376        $  42,677       $ 41,034                           8 %                           4 %
Performance-based                              69             -             1,251            991                          NM                            26
Trust fees                                  3,715          3,468           10,943         10,297                           7                             6
Other revenues                                672           (796 )          2,000           (406 )                       184                           593

Total revenues                             18,941         16,048           56,871         51,916                          18                            10

Expenses
Employee compensation and benefits         11,397          8,295           32,196         27,084                          37                            19
Sales and marketing                           350            221              823            666                          58                            24
Westwood mutual funds                         292             34              776            523                         759                            48
Information technology                        649            503            1,874          1,503                          29                            25
Professional services                         739            710            3,681          2,438                           4                            51
General and administrative                  1,183            988            3,354          2,870                          20                            17

Total expenses                             14,610         10,751           42,704         35,084                          36                            22

Income before income taxes                  4,331          5,297           14,167         16,832                         (18 )                         (16 )
Provision for income taxes                  1,827          2,014            5,680          6,263                          (9 )                          (9 )

Net income                             $    2,504       $  3,283        $   8,487       $ 10,569                         (24 )%                        (20 )%


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Three months ended September 30, 2012 compared to three months ended September 30, 2011

Total Revenues. Our total revenues increased by 18% to $18.9 million for the three months ended September 30, 2012 compared with $16.0 million for the three months ended September 30, 2011. Asset-based advisory fees increased by 8% to $14.5 million for the three months ended September 30, 2012 compared with $13.4 million for the three months ended September 30, 2011 as a result of increased average assets under management due to market appreciation and asset inflows from new and existing clients, partially offset by the withdrawal of assets by certain clients. Performance-based advisory fees increased $69,000 due to an adjustment to the performance fee we earned in the second quarter of 2012. Trust fees increased by 7% to $3.7 million for the three months ended September 30, 2012 compared with $3.5 million for the three months ended September 30, 2011 as a result of increased assets under management at Westwood Trust primarily due to market appreciation. Other revenues, which generally consist of interest and investment income, increased by 184% to $672,000 for the three months ended September 30, 2012 compared with $(796,000) for the three months ended September 30, 2011. Other revenues are presented on a net basis and increased primarily due to increases of $1.2 million in unrealized gains on investments, $134,000 in dividend income and $133,000 in net realized gains on investments.

Employee Compensation and Benefits. Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity-based compensation expense and benefits. Employee compensation and benefits costs increased by 37% to $11.4 million for the three months ended September 30, 2012 compared with $8.3 million for the three months ended September 30, 2011. The increase was primarily due to increases of $1.6 million in expense related to amortization of multi-year bonus agreements, $709,000 in salary expense due primarily to increased average headcount and salary increases, $405,000 in performance-based restricted stock expense and $224,000 in incentive compensation expense. During the second quarter of 2012, we concluded that it was probable that we would meet the performance goal required in order for the applicable percentage of performance-based restricted shares to vest. We had 97 full-time employees as of September 30, 2012 compared to 81 full-time employees as of September 30, 2011.

Sales and Marketing. Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing and advertising costs. Sales and marketing costs increased by 58% to $350,000 for the three months ended September 30, 2012 compared with $221,000 for the three months ended September 30, 2011. The increase was primarily the result of increased direct marketing and travel expenses.

Westwood Mutual Funds. Westwood Mutual Funds expenses relate to our marketing, distribution, administration and acquisition efforts related to the Westwood Funds™. Westwood Mutual Funds expenses increased to $292,000 for the three months ended September 30, 2012 compared with $34,000 for the three months ended September 30, 2011. In the third quarter of 2011, we recorded a $166,000 reduction in the Contingent liability related to the 2009 acquisition of the Philadelphia Fund. Excluding this adjustment, Westwood Matual Funds expenses for the three months ended September 30, 2011 were $200,000. The remainder of the year-over-year increase was due to an increase in shareholder servicing costs as well as subadvisory expenses related to a new fund launched in the fourth quarter of 2011.

Information Technology. Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs. Information technology costs increased by 29% to $649,000 for the three months ended September 30, 2012 compared with $503,000 for the three months ended September 30, 2011. The increase was primarily due to software and software implementation costs related to upgraded client reporting and portfolio accounting systems, increased research expenses and increased equipment expenses.

Professional Services. Professional services expenses generally consist of costs associated with subadvisory fees, audit, legal and other professional services. Professional services expenses increased by 4% to $739,000 for the three months ended September 30, 2012 compared with $710,000 for the three months ended September 30, 2011 primarily due to legal fees. These increases were partially offset by decreased financial advisory expense due to the termination of subadvisors on International common trust funds in the fourth quarter of 2011 and the second quarter of 2012. Financial advisory expense related to the terminated International subadvisors was $0 and $175,000 for the three months ended September 30, 2012 and 2011, respectively.


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General and Administrative. General and administrative expenses generally consist of costs associated with the lease of our office space, investor relations, licenses and fees, depreciation, insurance, office supplies and other miscellaneous expenses. General and administrative expenses increased by 20% to $1.2 million for the three months ended September 30, 2012 compared with $1.0 million for the three months ended September 30, 2011. The increase was primarily due to rent expense for our new Toronto office, non-marketing travel expenses related to Westwood International and increased custody expense.

Provision for Income Tax Expense. Provision for income tax expenses decreased by 9% to $1.8 million for the three months ended September 30, 2012 compared with $2.0 million for the three months ended September 30, 2011. The effective tax rate increased to 42.2% for the three months ended September 30, 2012 from 38.0% for the three months ended September 30, 2011 primarily due to operating losses from Westwood International, which is taxed at a lower Canadian tax rate.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Total Revenues. Our total revenues increased by 10% to $56.9 million for the nine months ended September 30, 2012 compared with $51.9 million for the nine months ended September 30, 2011. Asset-based advisory fees increased by 4% to $42.7 million for the nine months ended September 30, 2012 compared with $41.0 million for the nine months ended September 30, 2011 as a result of increased average assets under management due to market appreciation and inflows from new and existing clients, partially offset by the withdrawal of assets by certain clients. Performance-based advisory fees increased 26% to $1.3 million for the nine months ended September 30, 2012 compared with $1.0 million for the nine months ended September 30, 2011. Trust fees increased by 6% to $10.9 million for the nine months ended September 30, 2012 compared with $10.3 million for the nine months ended September 30, 2011 as a result of increased assets under management by Westwood Trust due to market appreciation and inflows from new accounts, partially offset by the withdrawal of assets by certain clients. Other revenues, which generally consist of interest and investment income, increased 593% to $2.0 million for the nine months ended September 30, 2012 compared with $(406,000) for the nine months ended September 30, 2011. Other revenues are presented on a net basis and increased primarily due to increases of $1.2 million in net realized gains on investments, which included a gain of $803,000 from the sale of 100,000 Teton shares, $942,000 in unrealized gains and $307,000 in dividend income.

Employee Compensation and Benefits. Employee compensation and benefits costs increased by 19% to $32.2 million for the nine months ended September 30, 2012 compared with $27.1 million for the nine months ended September 30, 2011. The increase was primarily due to increases of $2.8 million in expense related to amortization of multi-year bonus agreements, $1.6 million in salary expense due primarily to increased average headcount and salary increases and $418,000 in incentive compensation expense. In the second quarter of 2012, we concluded that it was probable that we would meet the performance goal required in order for the applicable percentage of performance-based restricted shares to vest. We had 97 full-time employees as of September 30, 2012 compared to 81 full-time employees as of September 30, 2011.

Sales and Marketing. Sales and marketing costs increased by 24% to $823,000 for the nine months ended September 30, 2012 compared with $666,000 for the nine months ended September 30, 2011. The increase is primarily the result of increased direct marketing, travel and entertainment expenses partially offset by decreased referral fee expenses.

Westwood Mutual Funds. Westwood Mutual Funds expenses increased by 48% to $776,000 for the nine months ended September 30, 2012 compared with $523,000 for the nine months ended September 30, 2011 due to increased shareholder servicing costs, a prior year decrease in expense related to the acquisition liability recorded as part of the mutual fund acquisition completed in 2009 and subadvisory expenses related to a new fund launched in the fourth quarter of 2011. These increases were partially offset by decreases in fund related legal expenses and fund expense reimbursements.

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