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October 25, 2016 6:53 AM EDT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported):

October 25, 2016

 

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

001-13913

 

51-0261715

(State or Other
Jurisdiction of
Incorporation)

 

(Commission
File Number)

 

(IRS Employer
Identification No.)

 

6300 Lamar Avenue

Overland Park, Kansas 66202

(Address of Principal Executive Offices) (Zip Code)

 

(913) 236-2000

(Registrant’s Telephone Number, including Area Code)

 

 

(Registrant’s Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

o

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

 

o

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

 

o

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

 

o

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


 

ITEM 2.02                                  RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

 

On October 25, 2016, Waddell & Reed Financial, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the fiscal quarter ended September 30, 2016.  A copy of the Company’s press release is furnished as Exhibit 99.1 and incorporated herein by reference.

 

ITEM 9.01                                  FINANCIAL STATEMENTS AND EXHIBITS.

 

(d)                                 Exhibits.

 

99.1                        Press Release dated October 25, 2016

 

2


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

WADDELL & REED FINANCIAL, INC.

 

 

 

 

Date: October 25, 2016

By:

/s/ Brent K. Bloss

 

 

Brent K. Bloss

 

 

Senior Vice President, Chief Financial Officer and Treasurer

 

3


 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press Release dated October 25, 2016

 

4

Exhibit 99.1

 

GRAPHIC

 

News Release

 

Waddell & Reed Financial, Inc. Reports Third Quarter Results

 

Overland Park, KS, Oct. 25, 2016 — Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter 2016 net income1 of $53.8 million, or $0.65 per diluted share, compared to net income of $33.7 million, or $0.41 per diluted share, during the prior quarter and net income of $48.1 million, or $0.58 per diluted share, during the third quarter of 2015. Operating income was $73.8 million during the current quarter and the operating margin was 24.3%, compared to $53.8 million and 16.8%, respectively, during the prior quarter and $109.0 million and 29.0%, respectively, during the same quarter in 2015.

 

The third quarter of 2016 included a curtailment gain of $8.5 million associated with an amendment to our post-retirement medical benefit plan that discontinues coverage for individuals who retire after December 31, 2016, a charge of $5.7 million for the impairment of an intangible asset related to a sub-advisory relationship, implementation costs of $1.3 million related to Project E and costs of $0.7 million related to the Department of Labor’s fiduciary rule. The second quarter of 2016 included charges related to severance, the accelerated amortization of deferred acquisition costs (“DAC”) and the implementation of Project E. A schedule of how each of these items impacted our financial statements can be found in the financial tables at the end of this release.

 

Business Discussion

 

Assets under management were $85 billion at September 30, 2016, declining less than 2% from the prior quarter. Outflows of $4.9 billion were partially offset by market appreciation of $3.5 billion. Despite improvement in investment performance year-to-date, sales volume remains weak.

 

The impact of our cost reduction initiative is becoming more visible. The current quarter included the full benefit of our recent workforce reductions, and we continue to carefully manage costs. Additionally, the amendment of our post-retirement medical benefit plan is expected to lower future medical claims costs.

 

“Our industry is undergoing a period of transformational change and we understand that in order to remain competitive our business needs to evolve,” said Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc. “While we have made progress in addressing the areas of our business that require attention, we realize a lot of work still remains to be done.”

 

Management Fee Revenue Analysis

 

Management fees declined 2% sequentially, while average assets under management declined 4%. Fees declined at a lesser rate than average assets under management due to an increase in the effective fee rate, which resulted from the combination of lower institutional assets and a mix-shift within the retail asset

 

1 Net income represents net income attributable to Waddell & Reed Financial, Inc.

 

1


 

base. Compared to the same quarter last year, management fees declined 21% due to a 24% decline in average assets under management, which was partly offset by a mix-shift within the asset base that increased the average fee rate.

 

Average assets under management were $87 billion during the current quarter, compared to $91 billion during the prior quarter and $115 billion during the third quarter of 2015.  The effective fee rate for the current quarter was 63.6 basis points compared to 62.4 basis points and 60.5 basis points during the second quarter of 2016 and third quarter of 2015, respectively.

 

Underwriting and Distribution Analysis

 

Underwriting and Distribution Revenues

 

Revenues declined 7% sequentially due in large part to a share class conversion in our retail broker-dealer channel. Revenues also declined due to lower asset-based Rule 12b-1 service and distribution fees in our retail unaffiliated channel resulting from the decline in asset levels. Compared to the same period last year, revenues declined 18% due to lower asset-based Rule 12b-1 fees in our retail unaffiliated channel as well as the impact of a share class conversion in our retail broker-dealer channel.

 

Underwriting and Distribution Costs

 

Direct costs declined 14% compared to the second quarter of 2016. Several items contributed to the decrease, including a charge recorded in the prior quarter for the accelerated amortization of DAC, a share-class conversion affecting our retail broker-dealer in July that reduced asset-based Rule 12b-1 service and distribution fee payouts to financial advisors, and lower Rule 12b-1 service and distribution fee payments in our retail unaffiliated channel. Indirect costs declined 19% due to charges for severance recorded during the prior period, a gain due to the amendment to our post-retirement medical plan during the current quarter, and to a lesser degree, lower compensation, incentive award and marketing costs during the current quarter.

 

Compared to the third quarter of 2015, costs declined 19%. Direct costs declined due to lower asset levels, which resulted in lower asset-based Rule 12b-1 service and distribution fees and to a lesser degree, lower sales commissions and lower wholesaler commissions. Indirect costs in our retail broker-dealer declined primarily as a result of the gain due to the amendment to our post-retirement medical plan, which was partly offset by higher costs associated with the implementation of Project E.

 

Compensation and Related Expense Analysis

 

Costs declined 31% sequentially, with the majority of the change due to a severance charge recorded in the previous quarter and a gain due to the amendment of our post-retirement medical benefit plan during the current quarter. The remainder of the decrease was due to lower salaries and benefits due to workforce reductions. Compared to the same period in 2015, the 13% decline is due to a combination of the gain resulting from the amendment of our post-retirement medical plan and lower headcount.

 

General and Administrative Expense Analysis

 

Costs rose 21% compared to the prior quarter due in part to the planned transition to contractor labor in our IT department and higher costs related to our preparation for the implementation of the Department of Labor’s new fiduciary rule. Compared to the same quarter in 2015, costs declined 9% due to lower dealer service costs, and to a lesser degree, a decline in advertising costs.

 

2


 

Investment and Other Income

 

Compared to the second quarter of 2016, investment and other income rose due to a combination of realized gains across our trading portfolios, available for sale securities and our sponsored funds. Last year’s third quarter included sizable losses on investments compared to gains in the current year from the sale of available for sale securities and net mark-to-market gains from our investments in sponsored funds.

 

3


 

Unaudited Consolidated Statement of Income

(Amounts in thousands, except for per share data)

 

 

 

2015

 

2016

 

 

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

182,105

 

$

185,914

 

$

175,218

 

$

166,325

 

$

144,778

 

$

140,880

 

$

138,745

 

 

 

Underwriting and distribution fees

 

166,978

 

171,508

 

165,130

 

160,382

 

146,658

 

146,312

 

135,778

 

 

 

Shareholder service fees

 

36,375

 

36,568

 

35,761

 

34,367

 

32,380

 

32,016

 

28,563

 

 

 

Total operating revenues

 

385,458

 

393,990

 

376,109

 

361,074

 

323,816

 

319,208

 

303,086

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

195,420

 

195,762

 

189,065

 

189,534

 

173,836

 

181,245

 

152,999

 

 

 

Compensation and related costs

 

53,495

 

52,829

 

46,157

 

48,271

 

52,940

 

58,341

 

40,214

 

 

 

General and administrative

 

25,678

 

27,897

 

25,458

 

26,033

 

19,152

 

19,276

 

23,280

 

 

 

Subadvisory fees

 

2,387

 

2,394

 

2,305

 

2,048

 

2,093

 

2,325

 

2,566

 

 

 

Depreciation

 

4,034

 

4,064

 

4,117

 

3,831

 

4,362

 

4,260

 

4,541

 

 

 

Goodwill impairment

 

—

 

—

 

—

 

—

 

—

 

—

 

5,700

 

 

 

Total operating expenses

 

281,014

 

282,946

 

267,102

 

269,717

 

252,383

 

265,447

 

229,300

 

 

 

Operating Income

 

104,444

 

111,044

 

109,007

 

91,357

 

71,433

 

53,761

 

73,786

 

 

 

Investment and other income/(loss)

 

3,972

 

9

 

(16,872

)

7,647

 

(10,218

)

687

 

7,878

 

 

 

Interest expense

 

(2,766

)

(2,765

)

(2,765

)

(2,772

)

(2,768

)

(2,776

)

(2,792

)

 

 

Income before taxes

 

105,650

 

108,288

 

89,370

 

96,232

 

58,447

 

51,672

 

78,872

 

 

 

Provision for taxes

 

38,537

 

40,843

 

41,312

 

33,312

 

20,978

 

18,101

 

24,067

 

 

 

Net Income

 

$

67,113

 

$

67,445

 

$

48,058

 

$

62,920

 

$

37,469

 

$

33,571

 

$

54,805

 

 

 

Noncontrolling interests

 

—

 

—

 

—

 

—

 

501

 

(124

)

978

 

 

 

Net Income Attributable to Waddell & Reed Financial, Inc.

 

$

67,113

 

$

67,445

 

$

48,058

 

$

62,920

 

$

36,968

 

$

33,695

 

$

53,827

 

 

 

Net income per share, basic and diluted:

 

0.80

 

0.80

 

0.58

 

0.76

 

0.45

 

0.41

 

0.65

 

 

 

Weighted average shares outstanding - basic and diluted

 

83,581

 

84,079

 

83,469

 

82,873

 

82,104

 

82,947

 

82,834

 

 

 

Operating margin

 

27.1

%

28.2

%

29.0

%

25.3

%

22.1

%

16.8

%

24.3

%

 

 

 

Net Distribution Cost Analysis

(Amounts in thousands)

 

 

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

Retail Unaffiliated Distribution1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

52,142

 

$

51,768

 

$

47,040

 

$

43,091

 

$

35,923

 

$

32,510

 

$

29,991

 

 

 

U&D Expenses - Direct

 

(68,595

)

(66,947

)

(62,117

)

(57,119

)

(46,846

)

(42,452

)

(39,489

)

 

 

U&D Expenses - Indirect

 

(14,029

)

(13,972

)

(13,329

)

(14,614

)

(13,349

)

(14,939

)

(10,643

)

 

 

Net Distribution (Costs)

 

$

(30,482

)

$

(29,151

)

$

(28,406

)

$

(28,642

)

$

(24,272

)

$

(24,881

)

$

(20,141

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Broker-Dealer2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

114,836

 

$

119,740

 

$

118,090

 

$

117,291

 

$

110,735

 

$

113,802

 

$

105,787

 

 

 

U&D Expenses - Direct

 

(82,022

)

(85,177

)

(84,420

)

(83,413

)

(80,277

)

(87,740

)

(72,276

)

 

 

U&D Expenses - Indirect

 

(30,774

)

(29,666

)

(29,199

)

(34,388

)

(33,364

)

(36,114

)

(30,591

)

 

 

Net Distribution Excess/(Costs)

 

$

2,040

 

$

4,897

 

$

4,471

 

$

(510

)

$

(2,906

)

$

(10,052

)

$

2,920

 

 

 

 

1 Retail Unaffiliated Distribution was previously referred to as the “Wholesale channel”

 

2 Retail Broker-Dealer was previously referred to as the “Advisors channel”

 

4


 

Changes in Assets Under Management

(Amounts in millions)

 

 

 

2015

 

2016

 

 

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

Retail Unaffiliated Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

60,335

 

$

59,412

 

$

57,545

 

$

49,320

 

$

45,641

 

$

38,623

 

$

35,197

 

 

 

Sales*

 

3,870

 

3,239

 

2,768

 

2,341

 

2,144

 

1,526

 

1,320

 

 

 

Redemptions

 

(6,259

)

(4,558

)

(5,569

)

(7,300

)

(7,680

)

(5,543

)

(4,824

)

 

 

Net Exchanges

 

224

 

144

 

265

 

176

 

158

 

127

 

161

 

 

 

Net flows

 

(2,165

)

(1,175

)

(2,536

)

(4,783

)

(5,378

)

(3,890

)

(3,343

)

 

 

Market action

 

1,242

 

(692

)

(5,689

)

1,104

 

(1,640

)

464

 

1,436

 

 

 

Ending assets

 

$

59,412

 

$

57,545

 

$

49,320

 

$

45,641

 

$

38,623

 

$

35,197

 

$

33,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Broker-Dealer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

45,517

 

$

46,385

 

$

45,947

 

$

42,215

 

$

43,344

 

$

42,142

 

$

42,261

 

 

 

Sales*

 

1,270

 

1,347

 

1,238

 

1,218

 

1,068

 

1,094

 

1,024

 

 

 

Redemptions

 

(1,279

)

(1,279

)

(1,242

)

(1,245

)

(1,197

)

(1,329

)

(1,542

)

 

 

Net Exchanges

 

(224

)

(144

)

(265

)

(176

)

(172

)

(163

)

(194

)

 

 

Net flows

 

(233

)

(76

)

(269

)

(203

)

(301

)

(398

)

(712

)

 

 

Market action

 

1,101

 

(362

)

(3,463

)

1,332

 

(901

)

517

 

1,621

 

 

 

Ending assets

 

$

46,385

 

$

45,947

 

$

42,215

 

$

43,344

 

$

42,142

 

$

42,261

 

$

43,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

17,798

 

$

17,097

 

$

17,214

 

$

14,657

 

$

15,414

 

$

14,426

 

$

8,993

 

 

 

Sales*

 

300

 

1,203

 

465

 

773

 

453

 

190

 

180

 

 

 

Redemptions

 

(1,460

)

(1,003

)

(1,817

)

(799

)

(1,068

)

(5,699

)

(1,051

)

 

 

Net Exchanges

 

—

 

—

 

—

 

—

 

14

 

36

 

33

 

 

 

Net flows

 

(1,160

)

200

 

(1,352

)

(26

)

(601

)

(5,473

)

(838

)

 

 

Market action

 

459

 

(83

)

(1,205

)

783

 

(387

)

40

 

440

 

 

 

Ending assets

 

$

17,097

 

$

17,214

 

$

14,657

 

$

15,414

 

$

14,426

 

$

8,993

 

$

8,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

123,650

 

$

122,894

 

$

120,706

 

$

106,192

 

$

104,399

 

$

95,191

 

$

86,451

 

 

 

Sales*

 

5,440

 

5,789

 

4,471

 

4,332

 

3,665

 

2,810

 

2,524

 

 

 

Redemptions

 

(8,998

)

(6,840

)

(8,628

)

(9,344

)

(9,945

)

(12,571

)

(7,417

)

 

 

Net Exchanges

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

Net flows

 

(3,558

)

(1,051

)

(4,157

)

(5,012

)

(6,280

)

(9,761

)

(4,893

)

 

 

Market action

 

2,802

 

(1,137

)

(10,357

)

3,219

 

(2,928

)

1,021

 

3,497

 

 

 

Ending assets

 

$

122,894

 

$

120,706

 

$

106,192

 

$

104,399

 

$

95,191

 

$

86,451

 

$

85,055

 

 

 

 

* Sales is primarily gross sales (net of sales commissions).  This amount also includes net reinvested dividends & capital gains and investment income.

 

5


 

Supplemental Information

 

Asset Manager

 

2015

 

2016

 

(S in millions)

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

Retail Unaffiliated Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

$

59,412

 

$

57,545

 

$

49,320

 

$

45,641

 

$

38,623

 

$

35,197

 

$

33,290

 

 

 

Net flows

 

$

(2,165

)

$

(1,175

)

$

(2,536

)

$

(4,783

)

$

(5,378

)

$

(3,890

)

$

(3,343

)

 

 

Organic growth

 

-14.4

%

-7.9

%

-17.6

%

-38.8

%

-47.1

%

-40.3

%

-38.0

%

 

 

Redemption Rate

 

42.9

%

31.0

%

41.2

%

59.3

%

77.7

%

61.3

%

56.2

%

 

 

Retail Broker-Dealer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

$

46,385

 

$

45,947

 

$

42,215

 

$

43,344

 

$

42,142

 

$

42,261

 

$

43,170

 

 

 

Net flows

 

$

(233

)

$

(76

)

$

(269

)

$

(203

)

$

(301

)

$

(398

)

$

(712

)

 

 

Organic growth

 

-2.0

%

-0.7

%

-2.3

%

-1.9

%

-2.8

%

-3.8

%

-6.7

%

 

 

Redemption Rate

 

9.0

%

9.0

%

8.9

%

9.3

%

9.3

%

10.5

%

12.1

%

 

 

Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

$

17,097

 

$

17,214

 

$

14,657

 

$

15,414

 

$

14,426

 

$

8,993

 

$

8,595

 

 

 

Net flows

 

$

(1,160

)

$

200

 

$

(1,352

)

$

(26

)

$

(601

)

$

(5,473

)

$

(838

)

 

 

Organic growth

 

-26.1

%

4.7

%

-31.4

%

-0.7

%

-15.6

%

-151.8

%

-37.3

%

 

 

Redemption Rate

 

33.7

%

23.2

%

45.4

%

20.5

%

29.9

%

198.9

%

46.4

%

 

 

 

 

 

1 Year

 

3 Years

 

5 Years

 

Fund Rankings

 

 

 

 

 

 

 

Lipper

 

 

 

 

 

 

 

Funds ranked in top half

 

36

%

38

%

42

%

Assets ranked in top half

 

28

%

28

%

46

%

MorningStar

 

 

 

 

 

 

 

Funds with 4/5 stars

 

18

%

9

%

10

%

Assets with 4/5 stars

 

15

%

5

%

5

%

 

 

 

2015

 

2016

 

Broker-Dealer

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

AUA* (in billions)

 

$

53.7

 

$

53.6

 

$

49.4

 

$

51.0

 

$

49.9

 

$

50.5

 

$

52.1

 

 

 

AUA* fee based accounts (in billions)

 

$

18.0

 

$

18.3

 

$

17.0

 

$

17.6

 

$

17.4

 

$

17.8

 

$

18.5

 

 

 

# Advisors

 

1,745

 

1,780

 

1,795

 

1,819

 

1,803

 

1,799

 

1,796

 

 

 

Advisor productivity (in thousands)

 

$

65.9

 

$

67.9

 

$

66.3

 

$

64.9

 

$

61.3

 

$

63.1

 

$

59.0

 

 

 

U&D revenues (in thousands)

 

$

114,836

 

$

119,740

 

$

118,090

 

$

117,291

 

$

110,735

 

$

113,802

 

$

105,787

 

 

 

 

* AUA represent Assets Under Administration

 

6


 

Unaudited Balance Sheet Information

Schedule of Selected Items

 

(Amounts in millions)

 

Sept. 30, 2016

 

 

 

Cash & cash equivalents (unrestricted)

 

$

529.8

 

 

 

Investment securities

 

319.2

 

 

 

Total assets

 

1,398.6

 

 

 

Long-term debt

 

189.6

 

 

 

Total liabilities

 

542.8

 

 

 

Redeemable noncontrolling interests

 

10.4

 

 

 

Stockholders’ equity

 

845.4

 

 

 

 

 

 

 

 

 

Shares outstanding

 

82.8

 

million shares

 

 

 

 

Quarter ended

 

Year-to-Date

 

($ in thousands)

 

Sept. 30, 2016

 

Sept. 30, 2016

 

Shares repurchased

 

 

 

 

 

Number of shares

 

28,537

 

2,230,034

 

Total cost

 

$

522

 

$

47,984

 

 

 

 

 

 

 

Dividend paid

 

 

 

 

 

Rate per share

 

$

0.46

 

$

1.38

 

Total paid

 

$

38,120

 

$

114,736

 

 

 

 

 

 

 

Capital returned to stockholders

 

$

38,642

 

$

162,720

 

 

7


 

Unaudited Supplemental Information

 

In addition to reporting results in accordance with U.S. generally accepted accounting principles (“GAAP”), management believes adjusting results to exclude certain items provides investors with financial measures that better reflect the company’s core operating performance and allow for more appropriate comparisons to prior periods.  However, non-GAAP financial measures should not be considered a substitute for performance measures calculated in accordance with GAAP.

 

Adjusted Results

Reconciliation to GAAP

 

 

 

GAAP

 

 

 

Adjusted

 

GAAP

 

 

 

Adjusted

 

(Amounts in thousands, except for per share data)

 

3Q 16

 

Adj.

 

3Q 16

 

2Q 16

 

Adj.

 

2Q 16

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

138,745

 

—

 

$

138,745

 

$

140,880

 

—

 

$

140,880

 

Underwriting and distribution fees

 

135,778

 

—

 

135,778

 

146,312

 

—

 

146,312

 

Shareholder service fees

 

28,563

 

—

 

28,563

 

32,016

 

—

 

32,016

 

Total operating revenues

 

303,086

 

—

 

303,086

 

319,208

 

—

 

319,208

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

152,999

 

3,470

 

156,469

 

181,245

 

(14,285

)

166,960

 

Compensation and related costs

 

40,214

 

3,752

 

43,966

 

58,341

 

(9,818

)

48,523

 

General and administrative

 

23,280

 

(662

)

22,618

 

19,276

 

—

 

19,276

 

Subadvisory fees

 

2,566

 

—

 

2,566

 

2,325

 

—

 

2,325

 

Depreciation

 

4,541

 

—

 

4,541

 

4,260

 

—

 

4,260

 

Goodwill impairment

 

5,700

 

(5,700

)

—

 

—

 

—

 

—

 

Total operating expenses

 

229,300

 

860

 

230,160

 

265,447

 

(24,103

)

241,344

 

Operating Income

 

73,786

 

860

 

72,926

 

53,761

 

(24,103

)

77,864

 

Investment and other income/(loss)

 

7,878

 

—

 

7,878

 

687

 

—

 

687

 

Interest expense

 

(2,792

)

—

 

(2,792

)

(2,776

)

—

 

(2,776

)

Income before taxes

 

78,872

 

860

 

78,012

 

51,672

 

(24,103

)

75,775

 

Provision for taxes

 

24,067

 

(316

)

23,751

 

18,101

 

8,937

 

27,038

 

Net Income

 

$

54,805

 

544

 

$

54,261

 

$

33,571

 

(15,166

)

$

48,737

 

Noncontrolling interests

 

978

 

—

 

978

 

(124

)

—

 

(124

)

Net Income Attributable to Waddell & Reed Financial, Inc.

 

$

53,827

 

544

 

$

53,283

 

$

33,695

 

(15,166

)

$

48,861

 

Net income per share, basic and diluted:

 

0.65

 

0.01

 

0.64

 

0.41

 

(0.18

)

0.59

 

Weighted average shares outstanding - basic and diluted

 

82,834

 

82,834

 

82,834

 

82,947

 

82,947

 

82,947

 

 

Adjustments during the third quarter were:

 

·                  $8.5 million related to a curtailment gain ($4.7 million in U&D indirect and $3.8 million in compensation);

 

·                  $5.7 million charge related to the impairment of an intangible asset;

 

·                  $1.3 million charge related to the implementation of Project E to U&D indirect costs; and

 

·                  $0.7 million charge related to DOL preparation to G&A costs.

 

Adjustments during the second quarter were:

 

·                  $7.1 million for severance and related charges to U&D indirect costs (unaffiliated distribution $2.2 million; broker-dealer $4.9 million);

 

·                  $9.8 million for severance and related charges to compensation and related costs;

 

·                  $5.9 million related to the accelerated amortization of DAC to U&D direct costs (broker-dealer) due to a share class conversion; and

 

·                  $1.3 million related to costs associated with the implementation of technology to Project E to U&D indirect costs (broker-dealer).

 

8


 

Unaudited Consolidated Statement of Income

 

 

 

Nine Months Ended

 

(Amounts in thousands, except for per share data)

 

Sep-15

 

Sep-16

 

% Change

 

Operating Revenues:

 

 

 

 

 

 

 

Investment management fees

 

$

543,237

 

$

424,403

 

-21.9

%

Underwriting and distribution fees

 

503,616

 

428,748

 

-14.9

%

Shareholder service fees

 

108,704

 

92,959

 

-14.5

%

Total operating revenues

 

1,155,557

 

946,110

 

-18.1

%

Operating Expenses:

 

 

 

 

 

 

 

Underwriting and distribution

 

580,247

 

508,080

 

-12.4

%

Compensation and related costs

 

152,481

 

151,495

 

-0.6

%

General and administrative

 

79,033

 

61,708

 

-21.9

%

Subadvisory fees

 

7,086

 

6,984

 

-1.4

%

Depreciation

 

12,215

 

13,163

 

7.8

%

Goodwill impairment

 

—

 

5,700

 

 

 

Total operating expenses

 

831,062

 

747,130

 

-10.1

%

Operating Income

 

324,495

 

198,980

 

-38.7

%

Investment and other income

 

(12,891

)

(1,653

)

-87.2

%

Interest expense

 

(8,296

)

(8,336

)

0.5

%

Income before taxes

 

303,308

 

188,991

 

-37.7

%

Provision for taxes

 

120,692

 

63,146

 

-47.7

%

Net Income

 

$

182,616

 

$

125,845

 

-31.1

%

Noncontrolling interests

 

—

 

1,355

 

N/A

 

Net Income Attributable to Waddell & Reed Financial, Inc.

 

$

182,616

 

$

124,490

 

-31.8

%

Net income per share, basic and diluted

 

2.18

 

1.51

 

-30.9

%

Weighted average shares outstanding - basic and diluted

 

83,709

 

82,629

 

 

 

Operating margin

 

28.1

%

21.0

%

 

 

 

Net Distribution Cost Analysis

 

 

 

Nine Months Ended

 

(Amounts in thousands)

 

Sep-15

 

Sep-16

 

% Change

 

Retail Unaffiliated Distribution1

 

 

 

 

 

 

 

U&D Revenues

 

$

150,950

 

$

98,424

 

-34.8

%

U&D Expenses - Direct

 

(197,659

)

(128,787

)

-34.8

%

U&D Expenses - Indirect

 

(41,330

)

(38,931

)

-5.8

%

Net Distribution (Costs)

 

$

(88,039

)

$

(69,294

)

-21.3

%

 

 

 

 

 

 

 

 

Retail Broker-Dealer2

 

 

 

 

 

 

 

U&D Revenues

 

$

352,666

 

$

330,324

 

-6.3

%

U&D Expenses - Direct

 

(251,619

)

(240,293

)

-4.5

%

U&D Expenses - Indirect

 

(89,639

)

(100,069

)

11.6

%

Net Distribution Excess/(Costs)

 

$

11,408

 

$

(10,038

)

-188.0

%

 

1 Retail Unaffiliated Distribution was previously referred to as the “Wholesale channel”

 

2 Retail Broker-Dealer was previously referred to as the “Advisors channel”

 

9


 

Changes in Assets Under Management

(Amounts in millions)

 

 

 

Nine Months Ended

 

 

 

Sep-15

 

Sep-16

 

% Change

 

Retail Unaffiliated Distribution

 

 

 

 

 

 

 

Beginning assets

 

$

60,335

 

$

45,641

 

-24.4

%

Sales*

 

9,877

 

4,990

 

-49.5

%

Redemptions

 

(16,386

)

(18,047

)

10.1

%

Net Exchanges

 

633

 

446

 

N/M

 

Net flows

 

(5,876

)

(12,611

)

114.6

%

Market action

 

(5,139

)

260

 

-105.1

%

Ending assets

 

$

49,320

 

$

33,290

 

-32.5

%

 

 

 

 

 

 

 

 

Retail Broker-Dealer

 

 

 

 

 

 

 

Beginning assets

 

$

45,517

 

$

43,344

 

-4.8

%

Sales*

 

3,856

 

3,186

 

-17.4

%

Redemptions

 

(3,800

)

(4,068

)

7.1

%

Net Exchanges

 

(633

)

(529

)

N/M

 

Net flows

 

(577

)

(1,411

)

144.5

%

Market action

 

(2,725

)

1,237

 

-145.4

%

Ending assets

 

$

42,215

 

$

43,170

 

2.3

%

 

 

 

 

 

 

 

 

Institutional Channel

 

 

 

 

 

 

 

Beginning assets

 

$

17,798

 

$

15,414

 

-13.4

%

Sales*

 

1,968

 

823

 

-58.2

%

Redemptions

 

(4,280

)

(7,818

)

82.7

%

Net Exchanges

 

0

 

83

 

N/M

 

Net flows

 

(2,312

)

(6,912

)

199.0

%

Market action

 

(829

)

93

 

-111.2

%

Ending assets

 

$

14,657

 

$

8,595

 

-41.4

%

 

 

 

 

 

 

 

 

Consolidated Total

 

 

 

 

 

 

 

Beginning assets

 

$

123,650

 

$

104,399

 

-15.6

%

Sales*

 

15,701

 

8,999

 

-42.7

%

Redemptions

 

(24,466

)

(29,933

)

22.3

%

Net Exchanges

 

—

 

—

 

N/M

 

Net flows

 

(8,765

)

(20,934

)

138.8

%

Market action

 

(8,693

)

1,590

 

-118.3

%

Ending assets

 

$

106,192

 

$

85,055

 

-19.9

%

 

* Sales is primarily gross sales (net of sales commissions).  This amount also includes net reinvested dividends & capital gains and investment income.

 

10


 

Earnings Conference Call

 

Stockholders, members of the investment community and the general public are invited to listen to a live Web cast of our earnings release conference call today at 10:00 a.m. Eastern.  During this call, Philip J. Sanders, CEO and CIO, will review our quarterly results.  Live access to the teleconference will be available on the “Investor Relations” 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 seven days.

 

Web Site Resources

 

We invite you to visit the Investor Relations section of our Web site at www.waddell.com. Under the “Investor Info” tab you will find a link to presentations as well as to data tables which include supplemental information schedules.

 

Contacts

 

Investor Contact:

 

Nicole Russell, VP, Investor Relations, (913) 236-1880, [email protected]

 

Mutual Fund Investor Contact:

 

Call (888) WADDELL, or visit www.waddell.com or www.ivyfunds.com.

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 retail unaffiliated distribution channel (encompassing broker/dealer, retirement, and registered investment advisors), our retail broker-dealer channel (our network of financial advisors), 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 and internationally. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios, while Ivy Investment Management Company serves as investment advisor to Ivy Funds and investment advisor and global distributor to the Ivy Global Investors SICAV, an umbrella UCITS fund range domiciled in Luxembourg. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios, while Ivy Distributors, Inc. serves as principal underwriter and distributor to Ivy Funds.

 

11


 

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 us or on our behalf 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, 2015, which include, without limitation:

 

·                  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 adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;

·                  The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;

·                  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;

·                  The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;

·                  Our inability to reduce expenses rapidly enough to align with declines in our revenues, the level of our assets under management or our business environment.

·                  Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

·                  Our inability to attract and retain senior executive management and other key personnel to conduct our broker-dealer, fund management and investment advisory business;

·                  A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and

·                  Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.

 

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, 2015 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2016. All forward-looking statements speak only as of 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, except to the extent required by law.

 

12


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