Waddell & Reed Financial, Inc. Reports Fourth Quarter Results

Waddell & Reed Financial, Inc. Reports Fourth Quarter Results

OVERLAND PARK, Kan.--(BUSINESS WIRE)-- Waddell & Reed Financial, Inc. (NYS: WDR) today reported fourth quarter income from continuing operations of $52.4 million, or $0.61 per diluted share, compared to $52.1 million, or $0.61 per diluted share, during the third quarter of 2012 and $39.4 million, or $0.46 per diluted share, during the same period last year.

As previously disclosed, in October 2012, we entered into a definitive agreement to sell the Legend group of subsidiaries ("Legend"). As a result of this transaction, which was effective January 1, 2013, Legend's operations are classified as discontinued operations in all periods presented. Net income from Legend's discontinued operations added $0.01 per diluted share to both the current quarter as well as the fourth quarter of 2011. Unless stated otherwise, any reference to financial statement items in this release refers to results from continuing operations.

Operating income was $83.4 million during the quarter, an increase of 5% compared to the previous quarter and 34% compared to the same period last year. Our operating margin rose to a multi-year high of 27.5%, compared to 27.2% during the previous quarter and 22.8% during the same period last year.

At $96.4 billion, assets under management marked a new quarterly high, rising 2% during the quarter and 16% compared to December 31, 2011. Each of our distribution channels experienced small outflows during the quarter for a total of $165 million firm-wide, a rate of organic decay of less than 1%.

Business Discussion

Management commentary

"The uncertainty that overshadowed most of 2012 profoundly impacted investor sentiment as evidenced by the industry's actively managed equity outflows of approximately $150 billion," said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. "Despite this uncertainty, we stayed focused on executing our strategy, growing assets under management by 16% and generating $2.3 billion of net inflows. We remain committed to our principles of performance excellence and outstanding client service."

Advisors channel

Sales efforts of our financial advisors totaled $1.1 billion during the current quarter, an 18% improvement compared to the third quarter and a 24% improvement compared to the same period last year. Sales marked the second highest quarterly level in this channel's history, slightly below the high water mark set during the second quarter of 2008.

Flows were negative at $75 million during the quarter as investors apparently sought to realize capital gains in anticipation of higher tax rates in 2013. Still, our Advisors channel finished 2012 with inflows of $191 million for the year, comparing favorably to 2011's outflows of $156 million. Sales for the year were a record $4.1 billion.

Our advisors' productivity continued to rise, reaching an average of $44.3 thousand per advisor during the fourth quarter for an annual total of $168 thousand per advisor, an improvement of 8% compared to the year ended December 31, 2011. This productivity improvement is the combined result of our focus on more selective recruiting as well as our clients' increased use of fee-based advisory products. During 2012, approximately 37% of underwriting and distribution revenues generated by the Advisors channel came from asset-based fees on advisory products, compared to 29% during 2011.

Wholesale channel

Sales from our Wholesale channel were $3.5 billion during the quarter, a decline of 3% compared to the previous quarter and 7% compared to the fourth quarter of 2011. Net flows were negative at $77 million, only the second quarter of outflows in the channel's 10-year history. The current quarter's outflows may have been influenced by investors' desire to lock in capital gains before the highly anticipated increase in the capital gains tax rate.

The breadth of our sales remains good with 42% of sales in fixed income products - including 33% in our High Income product, and 58% in equities - including 33% in the Asset Strategy fund. Concentration of assets under management continues to diminish as seven funds are now in excess of $1 billion of assets under management. Asset Strategy, our largest fund, now accounts for 54% of total assets under management and 32% of 2012's sales compared to 59% of assets under management and 47% of sales during 2011.

Institutional channel

Sales of $562 million declined 22% compared to the previous quarter and rose 23% compared to the same period in 2011, reflecting the lumpy nature of institutional business. The current quarter had outflows of $13 million compared to inflows of $231 million and $3 million during the third quarter of 2012 and fourth quarter of 2011, respectively.

Core Equity, Large Cap Growth, and Asset Strategy remain major contributors to the channel's recent sales success. Redemption pressure on accounts we subadvise for one client in Europe persisted through the end of the year as European investors continued to underweight U.S. equities. Assets under management for these accounts aggregate to approximately 5% of total assets under management in our Institutional channel.

Management Fee Revenue Analysis

Both the sequential and year-over-year increase in quarterly revenues was due to higher levels of assets under management. The effective fee rate remains largely unchanged at 59.8 basis points during the current quarter, compared to 59.8 basis points during the third quarter and 60.1 basis points during the fourth quarter of 2011.

Underwriting and Distribution Revenue and Expense Analysis

Advisors channel

Higher asset allocation fees were responsible for approximately 40% of the increase in revenues compared to the third quarter, while higher sales commissions from front-load products, insurance, higher Rule 12b-1 fees and financial plans also saw meaningful sequential increases. Direct expenses as a percentage of revenues declined due to lower payouts on client assets now serviced by the home office and lower incentive payments on investment products. Indirect expenses saw a small increase, mostly due to true-ups to our sales convention costs.

Compared to the same period last year, revenues increased because of higher asset allocation fees. A small increase in Rule 12b-1 fees was offset by lower front-load commissions. Direct expenses rose with associated revenues. Indirect expenses remain unchanged.

Wholesale channel

Compared to the previous quarter, revenues rose with higher Rule 12b-1 fees. Direct expenses fell on a combination of lower wholesaler commissions and third party fees, and more than offset the increase to Rule 12b-1 fee payouts. Indirect expenses remain largely unchanged.

Compared to the fourth quarter of 2012, revenues rose with higher Rule 12b-1 fees. Direct expenses rose with higher Rule 12b-1 fees and higher third party costs. Indirect costs rose on higher IT costs.

Compensation and Related Expense Analysis

The sequential increase was largely due to higher payroll taxes on incentive bonus payments and the vesting of equity awards.

Compared to the fourth quarter of 2011, costs increased on a combination of higher base salary, payroll taxes, pension costs and group health care, and were partly offset by lower incentive compensation. Equity compensation also contributed to the increase due to the higher value of this year's grants.

General and Administrative Expense Analysis

The third quarter included a reduction in estimated legal costs, which were partially offset by higher consultant fees. These adjustments were responsible for the sequential increase in costs in the fourth quarter.

Compared with the same period last year, expenses fell due to a combination of lower legal and IT costs, which were partly offset by higher dealer services costs.

Balance Sheet Information

As of December 31, 2012, cash and cash equivalents and investment securities were $504 million, after payment of an $85 million special dividend in December. Long-term debt was $190 million and there was no short-term debt outstanding.

Stockholders' equity was $510 million and there were 85.7 million shares outstanding. During the quarter, we repurchased 378 thousand shares on the open market or privately, bringing our annual total to 1.5 million shares at an aggregate cost of $49 million. Separately, on December 31, we granted 467 thousand shares of restricted stock in accordance with our annual program.

Unaudited Consolidated Statement of Income 
(Amounts in thousands, except for per share data)2011  2012
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Operating Revenues:      
Investment management fees$131,644$138,985$133,495$126,476$134,900$134,213$138,364$141,754
Underwriting and distribution fees117,041121,101115,786115,556121,153123,687122,819128,806
Shareholder service fees  29,750   31,109   31,060   30,530  31,818   31,786   32,182   32,323 
Total operating revenues  278,435   291,195   280,341   272,562  287,871   289,686   293,365   302,883 
Operating Expenses:
Underwriting and distribution138,607142,910138,111140,590144,486148,067147,408150,020
Compensation and related costs39,54240,97136,10540,71444,15841,93142,34343,343
General and administrative16,08717,85420,97919,19017,76423,63415,77418,160
Subadvisory fees8,0808,3137,2916,2016,2715,2084,9214,609
Depreciation  3,483   3,725   3,866   3,690  3,359   3,329   3,188   3,335 
Total operating expenses  205,799   213,773   206,352   210,385  216,038   222,169   213,634   219,467 
Operating Income72,63677,42273,98962,17771,83367,51779,73183,416
Investment and other income/(loss)9482,459(4,178)2,8763,9491,3252,6321,911
Interest expense  (2,900)  (2,832)  (2,837)  (2,839) (2,826)  (2,825)  (2,826)  (2,834)
Income from continuing operations before taxes70,68477,04966,97462,21472,95666,01779,53782,493
Provision for taxes  26,314   27,954   27,603   22,843  26,119   24,792   27,421   30,143 
Income from continuing operations44,37049,09539,37139,37146,83741,22552,11652,350

Income/(loss) from discontinued operations, net of
income taxes

  1,263   875   463   651  550   493   (43,590)  971 
Net Income $45,633  $49,970  $39,834  $40,022 $47,387  $41,718  $8,526  $53,321 
Net Income per share from continuing operations0.520.570.460.460.550.480.610.61
Income/(loss) per share from discontinued operations  0.01   0.01   0.00   0.01  0.00   0.00   (0.51)  0.01 
Net income per share  0.53   0.58   0.46   0.47  0.55   0.48   0.10   0.62 
Weighted average shares outstanding - diluted  85,836   86,275   85,782   85,286  85,606   86,095   85,755   85,459 
Operating margin  26.1%  26.6%  26.4%  22.8%   25.0%  23.3%  27.2%  27.5%
Underwriting and Distribution                
(Amounts in thousands)20112012
Advisors Channel1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Indirect 22,791   23,724   24,761   26,138  26,367   26,755   25,727   26,349 
Total expenses$73,663  $76,146  $74,509  $77,454 $80,043