Waddell & Reed Financial, Inc. Reports Second Quarter Results
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 $376 million during the second quarter of 2012.
Reconciliation to GAAP
Summary Income Statement
|(Amounts in thousands, except for per share data)||(GAAP)||Expenses||(Non-GAAP)|
|Total Operating Revenues||$||331,706||$||-||$||331,706|
|Underwriting and distribution (total)||164,844||(1,824||)||163,020|
|General and administrative||26,938||(6,728||)||20,210|
|All other operating expenses||54,889||-||54,889|
|Total Operating Expenses||246,671||(8,552||)||238,119|
|Income before provision for income taxes||83,179||8,552||91,731|
|Provision for income taxes||31,222||3,177||34,399|
|Net income per share||0.61||0.06||0.67|
|Weighted average shares outstanding - diluted||85,869||85,869||85,869|
"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."
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
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.
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 $37 million.
|Unaudited Consolidated Statement of Income|
|(Amounts in thousands, except for per share data)||2012||2013|
|1st Qtr.||2nd Qtr.||3rd Qtr.||4th Qtr.||1st Qtr.||2nd Qtr.||3rd Qtr.||4th Qtr.|
|Investment management fees||$||134,900||$||134,213||$||138,364||$||141,754||$||148,445||$||156,219|
|Underwriting and distribution fees||121,153||123,687||122,819||128,806||135,419||141,597|
|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|
|Underwriting and distribution||144,486||148,067||147,408||150,020||161,571||164,844|
|Compensation and related costs||44,158||41,931||42,343||43,343||48,155||47,376|
|General and administrative||17,764||23,634||15,774||18,160||16,208||26,938|
|Total operating expenses||216,038||222,169||213,634||219,467||233,645||246,671|
|Investment and other income||3,949||1,325||2,632||1,911||4,377||1,002|
|Income from continuing operations before taxes||72,956||66,017||79,537||82,493||84,433||83,179|
|Provision for taxes||26,119||24,792||27,421||30,143||30,570||31,222|
|Income from continuing operations||46,837||41,225||52,116||52,350||53,863||51,957|
|Income/(loss) from discontinued operations, net of income taxes||550||493||(43,590||)||971||0||0|
|Net Income per share from continuing operations||0.55||0.48||0.61||0.61||0.63||0.61|
|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|
|Net Distribution Cost Analysis|
|(Amounts in thousands)|