Form 8-K WADDELL & REED FINANCIAL For: Oct 27

 

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 27, 2015

 

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

 

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 27, 2015, Waddell & Reed Financial, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the fiscal quarter ended September 30, 2015.  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 27, 2015

 

 

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 27, 2015	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 27, 2015

 

4

Exhibit 99.1

 

 

News Release

 

Waddell & Reed Financial, Inc. Reports Third Quarter Results

 

Overland Park, KS, Oct. 27, 2015 — Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter 2015 net income of $48.1 million, or $0.58 per diluted share, compared to net income of $67.4 million, or $0.80 per diluted share, during the previous quarter and net income of $74.6 million, or $0.89 per diluted share, during the third quarter of 2014.

 

The current quarter’s net income included unrealized losses on seed investments totaling $15.3 million ($0.18 per diluted share).  The third quarter of 2014 included a non-cash impairment charge of $7.9 million ($5.0 million net of taxes, or $0.06 per diluted share) related to a subadvisory agreement.

 

Operating income of $109.0 million declined 2% sequentially and 13% compared to the third quarter of 2014.  Sequentially, operating revenues fell by 5% while expenses fell by 6%, leading to a slight improvement in the operating margin to 29.0% in the current quarter compared to 28.2% in the second quarter.  Compared to the same period last year, operating revenues declined by 8% and expenses declined 6%.

 

The current quarter’s effective tax rate was 46.2%, compared to 37.7% during the previous quarter and 38.4% during the same period last year.  This quarter’s increase in the effective tax rate was mainly driven by unrealized investment losses in our seed investment portfolios for which no tax benefits were recognized.

 

Assets under management ended the quarter at $106 billion, down 12% from June 30, 2015.  Market depreciation was responsible for more than 70% of the sequential decline in assets under management.  Sales of $4.5 billion during the current quarter declined 23% sequentially.  While sales decelerated across each distribution channel, the decline was most notable in our Institutional channel due to a strong second quarter, which included the funding of two new accounts.  Net outflows of $4.2 billion during the current quarter were due principally to net outflows of $2.6 billion from our Asset Strategy funds and redemptions totaling $1.0 billion from an institutional account that moved from active core to a smart beta strategy.

 

“The underperformance of a few key strategies negatively impacted sales and obscured the underlying opportunities building across a broader number of funds.  Volatility in the financial markets, the economic slowdown in China and uncertainty around the Federal Reserve’s rate decision has created considerable anxiety for investors,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc.  “Our focus is on improving performance while protecting our clients’ assets through this period of extraordinary volatility.  We remain committed both to careful cost control and the pursuit of key strategic initiatives, and will work hard to balance both.”

 

1

 

Management Fee Revenue Analysis

 

Management fees declined 6% sequentially due to lower average assets under management; however, this was modestly offset from one additional day in the current quarter.  Compared to the same period last year, management fees declined 11% compared to a 14% decline in average assets under management.  Management fees as a percentage declined less than average assets due to a mix-shift in the asset base that led to an improvement of 1.5 basis points in the effective fee rate.

 

The effective fee rate for the current quarter was 60.5 basis points compared to 60.4 basis points and 59.0 basis points during the second quarter of 2015 and third quarter of 2014, respectively.

 

Underwriting and Distribution Analysis

 

Underwriting and Distribution Revenues

 

Revenues declined 4% sequentially due principally to a decline in asset-based Rule 12b-1 fees in our Wholesale channel.  Our Advisors channel also contributed to the decrease in revenues through lower asset-based advisory fees, front-load commissions and Rule 12b-1 fees.

 

Compared to the same quarter in 2014, revenues declined 5% due to lower Rule 12b-1 fees in our Wholesale channel and were partly offset by higher asset-based advisory fees and front-load variable annuity sales commissions in our Advisors channel.

 

Underwriting and Distribution Costs

 

Costs declined 3% sequentially.  Direct costs in both retail distribution channels declined along with revenues.  Indirect costs in the Wholesale channel declined due to lower compensation and advertising expenses, while lower sales meeting costs were the primary driver in our Advisors channel.

 

Compared to the same period last year, costs declined 4%.  Wholesale channel direct costs declined due to lower Rule 12b-1 fees and lower commission costs, while Advisor channel direct costs increased slightly more as a percentage of revenues.  Indirect costs were largely unchanged.

 

Compensation and Related Expense Analysis

 

Costs declined 13% sequentially due principally to lower incentive compensation costs and, to a lesser degree, lower equity compensation costs and payroll taxes.  Compared to the third quarter of 2014, costs declined 5% due to lower incentive and equity compensation costs, which were partially offset by an increase in base compensation and pension costs.

 

General and Administrative Expense Analysis

 

Costs declined 9% sequentially due primarily to lower IT costs.  Compared to the third quarter of 2014, costs were largely unchanged as higher IT costs were offset by lower account servicing costs to third party dealers stemming from lower asset levels and lower temporary office services costs.

 

2

 

Unaudited Consolidated Statement of Income

(Amounts in thousands, except for per share data)

 

		2014												2015
		1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.			1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.
Operating Revenues:
Investment management fees		$	188,037		$	193,624		$	197,783		$	188,658		$	182,105		$	185,914		$	175,218
Underwriting and distribution fees		165,267			169,001			173,047			171,363			166,978			171,508			165,130
Shareholder service fees		37,112			38,009			38,728			37,130			36,375			36,568			35,761
Total operating revenues		390,416			400,634			409,558			397,151			385,458			393,990			376,109
Operating Expenses:
Underwriting and distribution		194,951			195,608			197,246			195,522			195,420			195,762			189,065
Compensation and related costs		50,009			48,589			48,375			47,437			53,495			52,829			46,157
General and administrative		23,756			27,183			24,924			28,774			25,678			27,897			25,458
Subadvisory fees		1,877			2,069			2,203			2,287			2,387			2,394			2,305
Depreciation		3,249			3,541			3,786			4,058			4,034			4,064			4,117
Intangible asset impairment		—			—			7,900			—			—			—			—
Total operating expenses		273,842			276,990			284,434			278,078			281,014			282,946			267,102
Operating Income		116,574			123,644			125,124			119,073			104,444			111,044			109,007
Investment and other income/(loss)		3,900			6,100			(1,205		)	7,995			3,972			9			(16,872		)
Interest expense		(2,755		)	(2,755		)	(2,769		)	(2,763		)	(2,766		)	(2,765		)	(2,765		)
Income before taxes		117,719			126,989			121,150			124,305			105,650			108,288			89,370
Provision for taxes		42,855			44,001			46,564			43,412			38,537			40,843			41,312
Net Income		$	74,864		$	82,988		$	74,586		$	80,893		$	67,113		$	67,445		$	48,058
Net income per share, basic and diluted:		0.88			0.98			0.89			0.97			0.80			0.80			0.58
Weighted average shares outstanding - basic and diluted		85,019			85,073			84,242			83,623			83,581			84,079			83,469
Operating margin		29.9		%	30.9		%	30.6		%	30.0		%	27.1		%	28.2		%	29.0		%

 

Net Distribution Cost Analysis

(Amounts in thousands)

 

		1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.			1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.
Wholesale Channel
U&D Revenues		$	59,564		$	60,237		$	59,807		$	55,331		$	52,142		$	51,768		$	47,040
U&D Expenses - Direct		(79,700		)	(76,834		)	(75,775		)	(70,150		)	(68,595		)	(66,947		)	(62,117		)
U&D Expenses - Indirect		(11,535		)	(12,791		)	(13,317		)	(14,032		)	(14,029		)	(13,972		)	(13,329		)
Net Distribution (Costs)		$	(31,671	)	$	(29,388	)	$	(29,285	)	$	(28,851	)	$	(30,482	)	$	(29,151	)	$	(28,406	)
Advisors Channel
U&D Revenues		$	105,703		$	108,764		$	113,240		$	116,032		$	114,836		$	119,740		$	118,090
U&D Expenses - Direct		(74,697		)	(76,867		)	(79,700		)	(82,231		)	(82,022		)	(85,177		)	(84,420		)
U&D Expenses - Indirect		(29,019		)	(29,116		)	(28,454		)	(29,109		)	(30,774		)	(29,666		)	(29,199		)
Net Distribution Excess		$	1,987		$	2,781		$	5,086		$	4,692		$	2,040		$	4,897		$	4,471

 

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Changes in Assets Under Management

(Amounts in millions)

 

		2014												2015
		1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.			1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.
Wholesale Channel
Beginning assets		$	67,055		$	70,467		$	71,671		$	66,375		$	60,335		$	59,412		$	57,545
Sales*		7,017			4,864			4,269			2,383			3,870			3,239			2,768
Redemptions		(3,562		)	(4,363		)	(7,008		)	(8,592		)	(6,259		)	(4,558		)	(5,569		)
Net Exchanges		112			(397		)	112			74			224			144			265
Net flows		3,567			104			(2,627		)	(6,135		)	(2,165		)	(1,175		)	(2,536		)
Market action		(155		)	1,100			(2,669		)	95			1,242			(692		)	(5,689		)
Ending assets		$	70,467		$	71,671		$	66,375		$	60,335		$	59,412		$	57,545		$	49,320
Advisors Channel
Beginning assets		$	43,667		$	44,224		$	45,797		$	44,908		$	45,517		$	46,385		$	45,947
Sales*		1,435			1,457			1,322			1,332			1,270			1,347			1,238
Redemptions		(1,106		)	(1,098		)	(1,146		)	(1,224		)	(1,279		)	(1,279		)	(1,242		)
Net Exchanges		(112		)	(88		)	(112		)	(74		)	(224		)	(144		)	(265		)
Net flows		217			271			64			34			(233		)	(76		)	(269		)
Market action		340			1,302			(953		)	575			1,101			(362		)	(3,463		)
Ending assets		$	44,224		$	45,797		$	44,908		$	45,517		$	46,385		$	45,947		$	42,215
Institutional Channel
Beginning assets		$	15,821		$	16,692		$	18,165		$	17,603		$	17,798		$	17,097		$	17,214
Sales*		1,554			1,193			328			317			300			1,203			465
Redemptions		(679		)	(851		)	(727		)	(663		)	(1,460		)	(1,003		)	(1,817		)
Net Exchanges		—			485			—			—			—			—			—
Net flows		875			827			(399		)	(346		)	(1,160		)	200			(1,352		)
Market action		(4		)	646			(163		)	541			459			(83		)	(1,205		)
Ending assets		$	16,692		$	18,165		$	17,603		$	17,798		$	17,097		$	17,214		$	14,657
Consolidated Total
Beginning assets		$	126,543		$	131,383		$	135,633		$	128,886		$	123,650		$	122,894		$	120,706
Sales*		10,006			7,514			5,919			4,032			5,440			5,789			4,471
Redemptions		(5,347		)	(6,312		)	(8,881		)	(10,479		)	(8,998		)	(6,840		)	(8,628		)
Net Exchanges		—			—			—			—			—			—			—
Net flows		4,659			1,202			(2,962		)	(6,447		)	(3,558		)	(1,051		)	(4,157		)
Market action		181			3,048			(3,785		)	1,211			2,802			(1,137		)	(10,357		)
Ending assets		$	131,383		$	135,633		$	128,886		$	123,650		$	122,894		$	120,706		$	106,192

 

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

 

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Supplemental Information

 

		2014								2015
		1st Qtr.		2nd Qtr.		3rd Qtr.		4th Qtr.		1st Qtr.		2nd Qtr.		3rd Qtr.		4th Qtr.
Channel highlights
Number of Wholesalers		60		60		59		59		61		62		61
Number of Advisors		1,737		1,740		1,759		1,766		1,745		1,780		1,795
Advisors’ Productivity *		60.9		62.4		64.6		65.7		65.9		67.9		66.3
Redemption rates - long term assets
Wholesale		21.1	%	25.1	%	40.3	%	53.8	%	42.9	%	31.0	%	41.2	%
Advisors		8.2	%	7.9	%	8.2	%	8.9	%	9.0	%	9.0	%	8.9	%
Institutional		17.0	%	19.9	%	16.1	%	14.7	%	33.7	%	23.2	%	45.4	%
Total		16.2	%	18.7	%	26.1	%	32.4	%	29.0	%	21.7	%	29.3	%
Operating highlights
Organic growth/(decay) annualized		14.7	%	3.7	%	-8.7	%	-20.0	%	-11.5	%	-3.4	%	-13.8	%
Total assets under management (in millions)		131,383		135,633		128,886		123,650		122,894		120,706		106,192
Diversification (Company Total)
As % of Sales
Asset Strategy		33.4	%	26.3	%	24.9	%	4.2	%	17.1	%	12.5	%	12.5	%
Fixed Income		23.3	%	25.4	%	28.8	%	28.1	%	23.8	%	16.8	%	18.9	%
Other		43.3	%	48.3	%	46.3	%	67.7	%	59.1	%	70.7	%	68.6	%
As % of Assets Under Management
Asset Strategy		33.9	%	32.9	%	32.0	%	28.8	%	27.0	%	25.7	%	23.7	%
Fixed Income		18.6	%	18.7	%	18.2	%	17.8	%	17.7	%	17.5	%	18.7	%
Other		47.5	%	48.4	%	49.8	%	53.4	%	55.3	%	56.8	%	57.6	%
Operating margin		29.9	%	30.9	%	30.6	%	30.0	%	27.1	%	28.2	%	29.0	%

 

		1 Year		3 Years		5 Years
Lipper Fund Rankings
Funds ranked in top quartile		21	%	36	%	22	%
Funds ranked in top half		48	%	64	%	52	%
Assets ranked in top quartile		10	%	51	%	34	%
Assets ranked in top half		27	%	74	%	74	%

 

* Advisors’ productivity is calculated by dividing U&D revenues for the Advisors channel by the average number of advisors during the period.

 

5

 

Unaudited Balance Sheet Information

Schedule of Selected Items

 

(Amounts in millions)		Sept. 30, 2015
Cash & cash equivalents (unrestricted)		$	612.7
Investment securities		219.4
Total assets		1,442.8
Long-term debt		190.0
Total liabilities		605.9
Stockholders’ equity		836.9
Shares outstanding		83.1			million shares

 

		Quarter ended			Year-to-Date
($ in thousands)		Sept. 30, 2015			Sept. 30, 2015
Shares repurchased
Number of shares		812,764			1,435,355
Total cost		$	33,274		$	63,277
Dividend paid
Rate per share		$	0.43		$	1.29
Total paid		$	36,030		$	108,249
Capital returned to stockholders		$	69,304		$	171,526

 

6

 

Unaudited Consolidated Statement of Income

(Amounts in thousands, except for per share data)

 

		Nine Months Ended
		Sep-14			Sep-15			% Change
Operating Revenues:
Investment management fees		$	579,444		$	543,237		-6.2	%
Underwriting and distribution fees		507,315			503,616			-0.7	%
Shareholder service fees		113,849			108,704			-4.5	%
Total operating revenues		1,200,608			1,155,557			-3.8	%
Operating Expenses:
Underwriting and distribution		587,805			580,247			-1.3	%
Compensation and related costs		146,973			152,481			3.7	%
General and administrative		75,863			79,033			4.2	%
Subadvisory fees		6,149			7,086			15.2	%
Depreciation		10,576			12,215			15.5	%
Intangible asset impairment		7,900			—			N/A
Total operating expenses		835,266			831,062			-0.5	%
Operating Income		365,342			324,495			-11.2	%
Investment and other income		8,795			(12,891		)	-246.6	%
Interest expense		(8,279		)	(8,296		)	0.2	%
Income before taxes		365,858			303,308			-17.1	%
Provision for taxes		133,420			120,692			-9.5	%
Net Income		$	232,438		$	182,616		-21.4	%
Net income per share, basic and diluted		2.74			2.18			-20.4	%
Weighted average shares outstanding - basic and diluted		84,775			83,709
Operating margin		30.4		%	28.1		%

 

Net Distribution Cost Analysis

(Amounts in thousands)

 

		Nine Months Ended
		Sep-14			Sep-15			% Change
Wholesale Channel
U&D Revenues		$	179,608		$	150,950		-16.0	%
U&D Expenses - Direct		(232,309		)	(197,659		)	-14.9	%
U&D Expenses - Indirect		(37,643		)	(41,330		)	9.8	%
Net Distribution (Costs)		$	(90,344	)	$	(88,039	)	-2.6	%
Advisors Channel
U&D Revenues		$	327,707		$	352,666		7.6	%
U&D Expenses - Direct		(231,264		)	(251,619		)	8.8	%
U&D Expenses - Indirect		(86,589		)	(89,639		)	3.5	%
Net Distribution Excess		$	9,854		$	11,408		15.8	%

 

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