Waddell & Reed Financial, Inc. Reports Second Quarter Results

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Waddell & Reed Financial, Inc. Reports Second Quarter Results

OVERLAND PARK, Kan.--(BUSINESS WIRE)-- Waddell & Reed Financial, Inc. (NYS: WDR) today reported second quarter net income of $52.0 million, or $0.61 per diluted share, compared to net income of $53.9 million, or $0.63 per diluted share during the previous quarter, and net income from continuing operations of $41.2 million, or $0.48 per diluted share during the second quarter of 2012.

The current quarter included a charge of $8.6 million ($5.4 million net of taxes), or $0.06 per diluted share, for costs incurred during the launch of the Ivy High Income Opportunities Fund (NYS: IVH) , our first closed-end fund. Excluding these costs, second quarter adjusted net income would have been $57.3 million, or $0.67 per diluted share. The use of non-GAAP adjusted figures is presented for the purpose of providing comparative results to other periods. The table on page 2 provides a breakdown of expenses associated with the launch of the Ivy High Income Opportunities Fund and a reconciliation to GAAP.


Operating revenues were $332 million, an improvement of 5% compared to the previous quarter and 15% compared to the same period last year. The operating margin was 25.6%; however, excluding the above referenced costs associated with the launch of our closed-end fund, the operating margin was 28.2%, a multi-year high.

On July 2, we internalized the management of the Global Natural Resources funds after the portfolio manager's retirement from Mackenzie Financial Corporation, the subadvisor. By managing the Global Natural Resources funds in-house, the company will realize a decline in future subadvisory costs.

Assets under management were $104 billion at quarter-end, a sequential increase of 1% and a year-over-year increase of 17%. Net inflows were $935 million, compared to $2.1 billion during the previous quarter and $376 million during the second quarter of 2012.

   

Reconciliation to GAAP

Summary Income Statement

 
As reportedIVHAdjusted
(Amounts in thousands, except for per share data)(GAAP)Expenses(Non-GAAP)
Total Operating Revenues$331,706$-$331,706
 
Operating Expenses:
U&D Direct127,488(1,288)126,200
U&D Indirect  37,356   (536)  36,820 
Underwriting and distribution (total)164,844(1,824)163,020
General and administrative26,938(6,728)20,210
All other operating expenses  54,889   -   54,889 
Total Operating Expenses  246,671   (8,552)  238,119 
Operating Income85,0358,55293,587
Non-operating expenses  (1,856)  -   (1,856)
Income before provision for income taxes83,1798,55291,731
Provision for income taxes  31,222   3,177   34,399 
Net Income $51,957  $5,375  $57,332 
Net income per share  0.61   0.06   0.67 
Weighted average shares outstanding - diluted  85,869   85,869   85,869 
Operating margin  25.6%  N/A   28.2%
 

Business Discussion

Management commentary

"We continue to make progress toward our objective of improving the operating margin," said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. "We have been able to improve margins through careful expense management, consistent organic growth, and the benefit of positive market action on our business model."

Channelized discussion

Our Wholesale channel ended the quarter with $53.9 billion in assets under management, up $0.6 billion, or 1% sequentially. Sales momentum continued with $5.0 billion of new sales during the quarter, a multi-year quarterly high. Net inflows of $1.1 billion remain solid, although somewhat lower than the previous quarter. Investors' concern over the Federal Reserve tapering its Quantitative Easing program and rising interest rates impacted demand for financial assets in June, and led to an increase in redemptions and slowing gross sales.

Our Advisors channel ended the quarter with $38.2 billion in assets under management, up $0.3 billion, or 1% sequentially. Sales of $1.4 billion mark a new record high for this channel, rising 8% compared to the earlier high set during the previous quarter. Net inflows of $259 million remain robust, underscoring the stability of our Advisors' model and sustainability of the asset base.

Finally, our Institutional channel ended the quarter with $12.3 billion in assets under management, down $0.3 billion, or 2% sequentially. Sales of $379 million during the quarter were somewhat lower than expected; reflecting the long closing cycle of the business. Net outflows were $432 million.

Management Fee Revenue Analysis

The sequential increase in revenues is due primarily to higher levels of average assets under management and benefited from one additional day during the current period. Compared to the same period last year, revenues rose on higher levels of average assets under management.

Net Distribution Cost Analysis

Wholesale channel

Compared to the previous quarter, higher asset levels led to an increase in both revenues and direct costs. Higher wholesaler commissions also added to direct costs during the quarter. Indirect costs were largely unchanged as higher marketing costs associated with the launch of our closed-end fund were offset by lower computer software costs and lower payroll taxes.

Compared to the second quarter of 2012, higher asset levels led to an increase in both revenues and direct costs. Higher wholesaler commissions due to increased sales volume also contributed to the increase in direct costs. Indirect costs rose due to higher marketing costs associated with the launch of our closed-end fund.

Advisors channel

Sequentially, revenues rose as higher levels of assets under management led to increased asset-based Rule 12b-1 fees and advisory fees. Higher sales commissions also contributed to the increase in revenues. The effective commission payout rate remained unchanged, resulting in direct expenses rising in line with revenues. Indirect costs declined due to favorable adjustments to pension and group health plan costs, lower payroll taxes and lower field office expenses.

Compared to the same period last year, higher levels of assets under management and an increase in sales commissions drove the increase in revenues and direct expenses. Indirect costs were lower due to field office cost management.

Compensation and Related Expense Analysis

The sequential decline is due to lower incentive compensation costs, favorable adjustments to pension and group health plan costs, and lower payroll taxes. These were largely offset by an increase in equity compensation costs. Compared to the same period last year, costs increased on a combination of higher base salaries, incentive compensation and equity compensation.

General and Administrative Expense Analysis

The sequential increase is largely due to $6.7 million in costs associated with the launch of our closed-end fund during the quarter. The previous quarter included a reduction in estimated legal costs, while the current quarter saw an increase in national advertising costs.

Compared to the same period last year, the above referenced increase in costs was somewhat offset by a $5.0 million charge to write off software and capitalized development costs during the second quarter of 2012.

Investment and Other Income Analysis

Sequentially, gains in both our available-for-sale and trading portfolios were higher in the previous period. Compared to the same quarter last year, investment and other income remained largely unchanged.

Balance Sheet Information

As of June 30, 2013, cash and cash equivalents and investment securities were $547 million. Long-term debt was $190 million and there was no short-term debt outstanding.

Stockholders' equity was $563 million and there were 85.8 million shares outstanding. During the quarter, we repurchased 789 thousand shares on the open market or privately, bringing our annual total to 871 thousand shares at an aggregate cost, including commissions, of $37 million.

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Unaudited Consolidated Statement of Income               
(Amounts in thousands, except for per share data)20122013
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Operating Revenues:
Investment management fees$134,900$134,213$138,364$141,754$148,445$156,219
Underwriting and distribution fees121,153123,687122,819128,806135,419141,597
Shareholder service fees  31,818   31,786   32,182   32,323  32,691   33,890     
Total operating revenues  287,871   289,686   293,365   302,883  316,555   331,706     
Operating Expenses:
Underwriting and distribution144,486148,067147,408150,020161,571164,844
Compensation and related costs44,15841,93142,34343,34348,15547,376
General and administrative17,76423,63415,77418,16016,20826,938
Subadvisory fees6,2715,2084,9214,6094,4844,291
Depreciation  3,359   3,329   3,188   3,335  3,227   3,222     
Total operating expenses  216,038   222,169   213,634   219,467  233,645   246,671     
Operating Income71,83367,51779,73183,41682,91085,035
Investment and other income3,9491,3252,6321,9114,3771,002
Interest expense  (2,826)  (2,825)  (2,826)  (2,834) (2,854)  (2,858)    
Income from continuing operations before taxes72,95666,01779,53782,49384,43383,179
Provision for taxes  26,119   24,792   27,421   30,143  30,570   31,222     
Income from continuing operations46,83741,22552,11652,35053,86351,957
Income/(loss) from discontinued operations, net of income taxes  550   493   (43,590)  971  0   0     
Net Income $47,387  $41,718  $8,526  $53,321 $53,863  $51,957     
Net Income per share from continuing operations0.550.480.610.610.630.61
Income/(loss) per share from discontinued operations  0.00   0.00   (0.51)  0.01  0.00   0.00     
Net income per share  0.55   0.48   0.10   0.62  0.63   0.61     
Weighted average shares outstanding - diluted  85,606   86,095   85,755   85,459  85,593   85,869     
Operating margin  25.0%  23.3%  27.2%  27.5% 26.2%  25.6%    
 
 
Net Distribution Cost Analysis
(Amounts in thousands)