Waddell & Reed Financial, Inc. Reports Third Quarter Results
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OVERLAND PARK, Kan.--(BUSINESS WIRE)-- Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter net income of $33.4 million, or $0.39 per diluted share. This includes a charge of $543 thousand to general and administrative costs for severance charges and tax benefits of $2.2 million related to carry-back of capital losses in connection with the sale of our subsidiary Austin, Calvert & Flavin, Inc. ("ACF") on July 15, 2009. Net income during the second quarter was $23.4 million, or $0.27 per diluted share, including a charge of $548 thousand to general and administrative costs for severance and other costs related to the sale of ACF. Net income during the third quarter of 2008 was $33.4 million, or $0.39 per diluted share.
Excluding the charges related to the sale of ACF in the second and third quarters of 2009 and the tax benefits recognized during the third quarter of 2009, net income and earnings per diluted share would have been $31.8 million, or $0.37 per diluted share, and $23.7 million, or $0.28 per diluted share, for the third and second quarters of 2009, respectively. Management believes adjusting results to exclude these items provides investors with a more comparable basis for evaluating results and financial performance to other periods.
Business Discussion
Management commentary
"Careful cost discipline, combined with strong net inflows and better market conditions, resulted in a second consecutive quarter of operating margin expansion," said Hank Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. "Assets under management have recovered nicely, sitting 8% below their all time high of $70 billion reported at the end of June 2008. We believe our fund complex has had the most rapid recovery among our peer group of publicly traded asset managers."
Advisors channel
The stability of assets in the Advisors channel has been notable through this difficult period. After peaking at 12.2% at the height of the financial crisis, our redemption rate returned to its historical level range of 7.6%. Gross sales of $804 million in our Advisors channel were up 3% during the quarter and declined 8% compared to the same period last year. Net flows of $138 million remain solidly in positive territory. While gross sales are still behind the $1 billion quarterly run rate we targeted at the beginning of 2009, the steady redemption experience supports our belief that clients are satisfied with the service and performance they receive from Waddell & Reed and continue to focus on their long-term investment objectives.
Wholesale channel
We continue to focus on diversifying sales breadth in our Wholesale channel. Gross sales of $4.1 billion were flat compared to the previous quarter and improved 9% compared to the third quarter of 2008. Net flows of $2.6 billion place this channel solidly in the lead of its publicly traded asset manager peers in capturing assets. While the Asset Strategy and Global Natural Resources funds remain sales leaders by capturing approximately three-quarters of total sales, meaningful daily flows continue in five additional funds.
Institutional channel
Gross sales of $277 million fell 47% compared to the second quarter and 51% compared to last year's third quarter. While the pipeline for new mandates remains healthy, investment decisions and mandate reallocations continue to lag. Reallocation activity by clients of Pictet & Cie. continued, accounting for a sizable portion of this channel's redemptions during the quarter.
Management Fee Revenue Analysis
We earn management fee revenues by providing investment management services to our retail funds and institutional clients. These revenues are based on the amount of average assets under management and influenced by asset composition, sales, redemptions and financial market conditions.
Average assets under management increased 13% compared to the second quarter of 2009. The effective fee rate remained relatively unchanged at 62.8 basis points compared to 62.5 basis points in the previous quarter; however, revenues benefited from one additional day this quarter.
Compared to the same quarter last year, average assets under management fell 10% and the effective fee rate was 64.2 basis points. A shift in the mix of assets under management towards lower fee products during the quarter was responsible for the decline in effective fee rate.
Underwriting and Distribution Revenue and Expense Analysis
Advisors channel
Revenues experienced a slight increase on a sequential quarter basis. Higher levels of assets under management resulted in an increase to asset-based service fees and asset allocation product fees. This increase was largely offset by lower commission fee revenues as sales volume fell in our front-load Class A mutual funds and variable annuity products. Direct expenses moved in correlation with changes in asset and sales levels while cost containment and lower sales incentive compensation accruals more than offset the increase in technology and marketing costs.
Compared to last year's third quarter, revenues declined on a combination of lower asset-based fees and lower front-load Class A mutual funds and variable annuity sales volume. This decline was partly offset by an increase in asset allocation product fee revenues. Direct expenses declined in correlation with lower asset and sales levels, partially offset by higher amortization of deferred acquisition costs. Indirect expenses declined on a combination of lower compensation and related costs and lower legal, business travel and sales convention costs.
Wholesale channel
Sequentially, revenues increased on higher asset-based service and distribution fees. Higher sales volume by Legend advisors also positively contributed to revenues. Direct expenses rose on higher asset-based service and distribution fees and were partly offset by lower wholesaler commissions. Indirect expenses were largely unchanged.
Compared to the same period last year, the decline in assets under management led to lower asset-based service and distribution fees and, to a lesser degree, lower asset-based fee revenues at Legend. Lower redemption levels caused contingent deferred sales cost revenues to decline. Direct expenses declined due to lower asset-based service and distribution costs. Lower travel, marketing and promotion costs and, to a lesser degree, lower compensation and related costs at Legend were largely responsible for the decline in indirect costs.
Compensation and Related Expense Analysis
Sequentially, compensation and related costs increased due to higher incentive compensation accrual costs, which were partly offset by lower payroll taxes. Compared to last year's third quarter, cost savings from our voluntary separation program resulted in lower base salaries and related payroll taxes.
General and Administrative Expense Analysis
Sequentially, general and administrative costs rose due mostly to higher fund related costs. Costs were largely unchanged compared to the same period in 2008.
Subadvisory Fees
Subadvisory fees, which are paid on average asset levels in subadvised funds, rose compared to the second quarter of 2009, but fell compared to the third quarter of 2008. These variances are largely due to the fluctuation of assets in the Ivy Global Natural Resources fund and, to a lesser extent, cost savings realized when we brought certain subadvised funds in-house during the second and third quarters of 2009. Subadvised average assets under management during the quarter were $5.8 billion.
Investment and Other Income
Investment and other income was largely unchanged compared to the second quarter. During the third quarter of 2008, our mutual fund trading portfolios experienced a decline in value of $1.9 million compared to gains of $1.7 million in the current quarter. Lower interest rates and cash balances during the quarter also contributed to the variance compared to the same period last year.
Tax Rate
Our effective tax rate during the third quarter of 2009 was 30.4%, significantly lower than our previous guidance, primarily a result of the carry back of capital losses generated in connection with the sale of ACF. Benefits were also realized for capital gains recognized in income during 2009. Also lowering the tax rate this quarter were state tax credits related to renovations of our corporate headquarters and other adjustments to our tax accruals. Future tax rates should range between 36.4% and 38.0%, before the effect of potential capital gains, due to remaining capital loss carry forwards for tax purposes associated with the ACF sale.
Balance Sheet Information
As of September 30, 2009, cash and cash equivalents and investment securities were $279 million (excluding $81 million held for the benefit of customers segregated in compliance with federal and other regulations). We have no short-term borrowings against our $125 million credit facility.
Stockholders' equity was $346 million and there were 85.3 million shares outstanding. During the quarter, we repurchased 666,433 shares on the open market or privately at an aggregate cost of $17.4 million.
Unaudited
Schedule of
Operating Data
(Amounts in
thousands, 2008 2009
except for per
share data)
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th
Qtr.
Operating
Revenues:
Investment
management $ 102,972 $ 112,583 $ 107,911 $ 76,397 $ 70,981 $ 82,566 $ 94,687
fees
Underwriting
and 106,111 114,254 107,054 89,343 80,715 91,105 96,559
distribution
fees
Shareholder 24,986 25,946 26,259 25,304 24,976 25,957 26,730
service fees
Total
operating 234,069 252,783 241,224 191,044 176,672 199,628 217,976
revenues
Operating
Expenses:
Underwriting
and 124,777 132,292 125,589 114,164 98,718 110,781 115,119
distribution
Compensation
and related 34,346 32,870 30,701 21,140 25,699 27,399 29,275
costs
General and 13,833 14,731 14,912 32,894 13,413 14,503 15,106
administrative
Subadvisory 11,834 13,037 10,866 5,385 4,703 5,485 6,129
fees
Depreciation 3,140 3,188 3,389 3,481 3,312 3,444 3,503
Goodwill 0 0 0 7,222 0 0 0
impairment
Total
operating 187,930 196,118 185,457 184,286 145,845 161,612 169,132
expenses
Operating 46,139 56,665 55,767 6,758 30,827 38,016 48,844
Income:
Investment and 2,186 1,817 (530 ) (295 ) (3,092 ) 2,161 2,316
other income
Interest (2,978 ) (2,982 ) (2,984 ) (3,143 ) (3,149 ) (3,150 ) (3,153 )
expense
Income before 45,347 55,500 52,253 3,320 24,586 37,027 48,007
taxes
Provision for 17,006 20,313 18,888 4,050 9,120 13,653 14,594
taxes
Net Income $ 28,341 $ 35,187 $ 33,365 $ (730 ) $ 15,466 $ 23,374 $ 33,413
Net income per 0.33 0.40 0.39 (0.01 ) 0.18 0.27 0.39
share*
Weighted
average shares 84,716
outstanding -
basic
Weighted
average shares 86,807 86,928 86,007 84,910 86,001 85,774
outstanding -
diluted
Operating 19.7 % 22.4 % 23.1 % 3.5 % 17.4 % 19.0 % 22.4 %
margin
* The Company adopted FSP EITF 03-6-1 effective January 1, 2009. Accordingly, basic and diluted earnings per
share for all periods presented have been adjusted.
Underwriting
and
Distribution
(Amounts in 2008 2009
thousands)
Advisors 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th
Channel Qtr.
Revenues $ 61,677 $ 63,812 $ 57,968 $ 51,886 $ 47,413 $ 52,262 $ 53,125
Expenses
Direct 42,712 44,872 40,106 35,493 33,309 36,281 36,367
Indirect 22,616 23,588 23,428 22,752 21,719 20,938 21,336
Total expenses $ 65,328 $ 68,460 $ 63,534 $ 58,245 $ 55,028 $ 57,219 $ 57,703
Margin -5.9 % -7.3 % -9.6 % -12.3 % -16.1 % -9.5 % -8.6 %
Wholesale
Channel
(Third-Party)
Revenues $ 30,345 $ 35,905 $ 36,242 $ 26,156 $ 23,075 $ 27,222 $ 30,989
Expenses
Direct 39,595 43,307 41,520 38,133 28,012 35,915 39,327
Indirect 7,252 7,372 8,539 7,011 6,382 7,214 7,132
Total expenses $ 46,847 $ 50,679 $ 50,059 $ 45,144 $ 34,394 $ 43,129 $ 46,459
Wholesale
Channel
(Legend)
Revenues $ 14,089 $ 14,537 $ 12,844 $ 11,301 $ 10,227 $ 11,621 $ 12,445
Expenses
Direct 9,423 9,695 8,526 7,623 6,466 7,547 7,949
Indirect 3,179 3,458 3,470 3,152 2,830 2,886 3,008
Total expenses $ 12,602 $ 13,153 $ 11,996 $ 10,775 $ 9,296 $ 10,433 $ 10,957
Consolidated
Total
Revenues $ 106,111 $ 114,254 $ 107,054 $ 89,343 $ 80,715 $ 91,105 $ 96,559
Expenses
Direct 91,730 97,874 90,152 81,249 67,787 79,743 83,643
Indirect 33,047 34,418 35,437 32,915 30,931 31,038 31,476
Total expenses $ 124,777 $ 132,292 $ 125,589 $ 114,164 $ 98,718 $ 110,781 $ 115,119
Changes in
Assets Under
Management
(Amounts in 2008 2009
millions)
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th
Qtr.
Advisors
Channel
Beginning $ 34,562 $ 32,075 $ 32,687 $ 28,505 $ 23,472 $ 22,643 $ 25,205
assets
Sales (net of 1,048 1,100 871 705 695 783 804
commissions)
Redemptions (917 ) (914 ) (904 ) (1,036 ) (823 ) (724 ) (719 )
Net sales 131 186 (33 ) (331 ) (128 ) 59 85
Net exchanges (67 ) (36 ) (27 ) (20 ) (27 ) (26 ) (25 )
Reinvested
dividends & 69 93 66 97 73 107 78
capital gains
Net flows 133 243 6 (254 ) (82 ) 140 138
Market action (2,620 ) 369 (4,188 ) (4,779 ) (747 ) 2,422 3,008
Ending assets $ 32,075 $ 32,687 $ 28,505 $ 23,472 $ 22,643 $ 25,205 $ 28,351
Wholesale
Channel
Beginning $ 21,537 $ 24,532 $ 28,948 $ 23,353 $ 17,489 $ 18,635 $ 23,213
assets
Sales (net of 5,413 4,574 3,743 1,869 2,389 4,104 4,064
commissions)
Redemptions (1,171 ) (1,243 ) (2,714 ) (3,413 ) (1,467 ) (1,249 ) (1,524 )
Net sales 4,242 3,331 1,029 (1,544 ) 922 2,855 2,540
Net exchanges 65 35 24 21 26 (1 ) 24
Reinvested
dividends & 6 31 (9 ) (299 ) 6 78 29
capital gains
Net flows 4,313 3,397 1,044 (1,822 ) 954 2,932 2,593
Market action (1,318 ) 1,019 (6,639 ) (4,042 ) 192 1,646 3,169
Ending assets $ 24,532 $ 28,948 $ 23,353 $ 17,489 $ 18,635 $ 23,213 $ 28,975
Institutional
Channel
Beginning $ 8,769 $ 8,285 $ 8,489 $ 7,926 $ 6,523 $ 6,298 $ 7,193
assets
Disposition 0 0 0 0 0 0 (488 )
of assets
Sales (net of 696 664 560 439 395 526 277
commissions)
Redemptions (365 ) (497 ) (303 ) (396 ) (301 ) (488 ) (608 )
Net sales 331 167 257 43 94 38 (331 )
Net exchanges 0 0 0 0 0 26 0
Reinvested
dividends & 27 29 26 37 24 28 30
capital gains
Net flows 358 196 283 80 118 92 (301 )
Market action (842 ) 8 (846 ) (1,483 ) (343 ) 803 759
Ending assets $ 8,285 $ 8,489 $ 7,926 $ 6,523 $ 6,298 $ 7,193 $ 7,163
Consolidated
Total
Beginning $ 64,868 $ 64,892 $ 70,124 $ 59,784 $ 47,484 $ 47,576 $ 55,611
assets
Disposition 0 0 0 0 0 0 (488 )
of assets
Sales (net of 7,157 6,338 5,174 3,013 3,479 5,413 5,145
commissions)
Redemptions (2,453 ) (2,654 ) (3,921 ) (4,845 ) (2,591 ) (2,461 ) (2,851 )
Net sales 4,704 3,684 1,253 (1,832 ) 888 2,952 2,294
Net exchanges (2 ) (1 ) (3 ) 1 (1 ) (1 ) (1 )
Reinvested
dividends & 102 153 83 (165 ) 103 213 137
capital gains
Net flows 4,804 3,836 1,333 (1,996 ) 990 3,164 2,430
Market action (4,780 ) 1,396 (11,673 ) (10,304 ) (898 ) 4,871 6,936
Ending assets $ 64,892 $ 70,124 $ 59,784 $ 47,484 $ 47,576 $ 55,611 $ 64,489
Supplemental 2008 2009
Information
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
Redemption
rates - long
term assets
Advisors 8.4 % 7.7 % 8.2 % 12.2 % 10.5 % 8.2 % 7.6 %
Wholesale 20.6 % 18.0 % 39.3 % 75.2 % 33.3 % 22.4 % 22.5 %
Institutional 17.5 % 23.4 % 14.3 % 22.9 % 19.6 % 28.2 % 34.4 %
Total 14.0 % 13.8 % 21.9 % 37.7 % 20.6 % 16.8 % 17.4 %
Sales per
advisor
(000s)
Total 351 357 272 199 169 249 233
2+ Years 548 538 412 309 312 346 341
0 to 2 Years 100 105 84 56 55 73 73
Gross
production 17.2 17.4 15.0 14.6 13.9 15.1 14.2
per advisor
(000s)
Number of 2,235 2,285 2,357 2,366 2,277 2,328 2,404
advisors
Number of
shareholder 3,432 3,638 3,736 3,662 3,666 3,683 3,805
accounts
(000s)
Number of
shareholders 757 850 878 863 869 850 875
(000s)
Fund Rankings Lipper Equity funds 1 Year 3 Years 5 Years Top quartile 37 % 63 % 64 % Top half 57 % 84 % 86 % Equity assets Top quartile 55 % 77 % 79 % Top half 78 % 86 % 86 % Fixed income funds Top quartile 20 % 50 % 36 % Top half 33 % 57 % 64 % Fixed income assets Top quartile 23 % 60 % 42 % Top half 33 % 66 % 75 % All funds Top quartile 33 % 60 % 57 % Top half 52 % 78 % 81 % All assets Top quartile 51 % 75 % 74 % Top half 72 % 84 % 85 % MorningStar % of funds with 4 or 5 stars Equity funds 71 % 68 % 71 % All funds 58 % 58 % 58 % % of assets with 4 or 5 stars Equity funds 89 % 88 % 89 % All funds 80 % 79 % 80 %
Earnings Conference Call
Stockholders, members of the investment community and the general public are invited to listen to a live webcast of our earnings release conference call today, October 27, 2009, at 10:00 a.m. Eastern. During this call, Henry J. Herrmann, CEO, will review our quarterly results. Live access to the teleconference will be available on the "Corporate" section of our Web site at www.waddell.com. A Web cast replay will be made available shortly after the conclusion of the call and accessible for 7 days.
Web site Resources
We invite you to visit the "Corporate" section of our Web site at www.waddell.com under the caption "Data Tables" to review supplemental information schedules.
Past performance is no guarantee of future results. Please invest carefully.
About the Company
Waddell & Reed, Inc., founded in 1937, is one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors Group of Mutual Funds in 1940. Today, we distribute our investment products through the Waddell & Reed Advisors channel (our network of financial advisors), our Wholesale channel (encompassing broker/dealer, retirement, registered investment advisors as well as the activities of our Legend subsidiary), and our Institutional channel (including defined benefit plans, pension plans and endowments and our subadvisory partnership with Mackenzie in Canada).
Through its subsidiaries, Waddell & Reed Financial, Inc. provides investment management and financial planning services to clients throughout the United States. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Investment Management Company serves as investment advisor to Ivy Funds, Inc. and the Ivy Funds portfolios. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolio, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Funds Distributor, Inc. serves as principal underwriter and distributor to Ivy Funds, Inc. and the Ivy Funds portfolios.
Forward-Looking Statements
This press release contains "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, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of such words as "may," "could," "should," "would," "believe," "anticipate," "forecast," "estimate," "expect," "intend," "plan," "project," "outlook," "will," "potential" and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2008, which include, without limitation:
-- A decline in the securities markets or in the relative investment
performance of our Funds and other investment portfolios and products as
compared to competing funds;
-- A decrease in, or the elimination of, any future quarterly dividend paid
to stockholders;
-- The loss of existing distribution channels or inability to access new
distribution channels;
-- A reduction in assets under our management on short notice, through
increased redemptions in our distribution channels or our Funds,
particularly those Funds with a high concentration of assets, or
investors terminating their relationship with us or shifting their funds
to other types of accounts with different rate structures;
-- The introduction of legislative, judicial or regulatory proposals that
change the independent contractor classification of our financial
advisors;
-- Our inability to hire and retain senior executive management and other
key personnel;
-- The impairment of goodwill or other intangible assets on our balance
sheet; and
-- Investors' failure to renew our investment management or subadvisory
agreements, or the terms of any such renewals being on unfavorable
terms.
The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission, including the information in Item 1 "Business" and Item 1A "Risk Factors" of Part I and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part II to our Annual Report on Form 10-K for the year ended December 31, 2008 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2009. All forward-looking statements speak only as the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Source: Waddell & Reed Financial, Inc.
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