Exhibit 99.1
Waddell & Reed Financial, Inc. Reports Third Quarter Results
Overland Park, KS, October 24, 2006 — Waddell & Reed Financial, Inc. (NYSE: WDR) reported third quarter net income of $24.6 million, or $0.30 per diluted share, compared to net income of $24.5 million, or $0.30 per diluted share in last year’s third quarter and a net loss of $33.0 million, or $0.40 per diluted share, in the second quarter of 2006.
Last year’s third quarter included a tax benefit of $1.8 million, or $0.02 per diluted share, related to a change in determination of the deductibility of certain legal matters expensed in the second quarter of 2005. This year’s second quarter included after-tax charges totaling $59.4 million, or $0.72 per diluted share, related to a regulatory settlement and an impairment charge to goodwill. Excluding these non-recurring items, net income was $22.7 million, or $0.28 per diluted share, in the third quarter of 2005 and $26.4 million, or $0.32 per diluted share, in the second quarter of 2006.
Except where specifically noted, comparisons to previous periods in the text of this release are made excluding these adjustments and charges. We believe adjusting results for the above-referenced non-recurring items provides stockholders with a more comparable basis for evaluating our operating results and financial performance to other periods. A schedule reconciling adjusted results to GAAP is provided on the bottom of our Schedule of Selected Operating Data on page 4 and an “Adjusted Results” schedule is provided on page 5.
As previously disclosed in this quarter, the arbitration panel adjudicating the remaining matter between the Company and Torchmark Corporation ruled against the Company and awarded Torchmark $7.4 million. This award was paid in the current quarter and a reserve previously established for this matter largely covered this expense. Additionally, on September 25, 2006, the remainder of the Williams excessive fee litigation was dismissed. General and Administrative expenses rose sequentially by $5.6 million, in large part due to legal and related expenses associated with the resolution of legal matters and prior regulatory settlements.
Business Discussion
Advisors channel
We are encouraged by the sales trends in our Advisors channel. Sales remain at levels considerably higher than those we had experienced during the past several years, reflecting our sustained efforts to reinvigorate this channel.
Gross sales declined by 10% compared to those of the second quarter, but improved by 21% compared to last year’s third quarter. As a result of lower sequential sales volume, net sales were slightly negative with outflows of $47 million during the quarter compared to inflows of $37 million in the second quarter
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and outflows of $117 million in last year’s comparable period. Weaker sales on a sequential quarter basis resulted in a 13% decline in advisor productivity, but a 19% improvement compared to the third quarter of 2005.
Wholesale channel
Our Wholesale channel continues to produce strong gross sales and solid net flows, reflecting our ongoing efforts to grow this channel and broaden our distribution. Looking ahead, our focus remains on broadening the span of products generating meaningful sales. Net sales for the quarter were $575 million compared to $670 million in the second quarter of 2006 and $290 million in the third quarter of 2005.
We experienced a positive mix-shift in sales volume of Waddell & Reed-managed funds compared to subadvised funds. Specifically, Waddell & Reed-managed funds accounted for 62% of gross sales in the current quarter compared to 46% in the second quarter of 2006 and 35% in last year’s third quarter. This mix-shift has a positive impact on our operating margins as management fees earned on Waddell & Reed-managed funds are not subject to subadvisory expenses.
Institutional
Flows from our recent subadvisory relationship with Pictet & Cie are positive. In addition to the initial mandate received in June 2006, we collected an additional $94 million in new sales during the quarter.
Outflows at ACF have slowed, with net redemptions declining to $72 million during the quarter from $187 million in the second quarter. ACF’s assets under management were $654 million on September 30, 2006.
Overall, our Institutional business had net outflows of $59 million during the quarter compared to $147 million in the second quarter of 2006 and $617 million in last year’s comparable period.
Management commentary
“Our diverse yet complementary distribution models continue to show solid progress,” said Hank Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. “Sales slowed somewhat over the summer months, but the underlying progress we made is still clear. Flows in our Advisors channel were significantly better than those experienced in the past five years, the product mix-shift in our Wholesale channel continues to favor Waddell & Reed-managed products which should ultimately support margin expansion and finally, our newly formed relationship with Pictet & Cie is showing early promise.
“On the legal front,” continued Herrmann, “the dismissal of the Williams case has allowed us to put all outstanding material legal issues firmly behind us. We can now fully concentrate on delivering long-term value to our clients and to our stockholders unhindered by non-operational distractions.”
Operating Revenues Analysis
On a sequential quarter basis, the decline in operating revenues is due almost entirely to lower underwriting and distribution revenues. Underwriting and distribution revenues were lower due to the decline in front-load sales.
Compared to last year’s third quarter, the increase in operating revenues is due in part to higher management fee revenues, higher underwriting and distribution fees and to a lesser extent, higher
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shareholder service fee revenues. Management fee revenues rose in close correlation to average assets under management. Underwriting and distribution fees rose on a combination of higher asset-based Rule 12b-1 service and distribution fee revenues, higher front-load sales volume in our Advisors channel, and higher sales volume by Legend advisors. Finally, shareholder service fees, a per-account fee, rose due to a greater number of shareholder accounts.
Beginning October 1, 2006, as part of our settlement with the New York Attorney General, we reduced management fee rates of certain mutual funds which will reduce management fee revenues by $5 million per year.
Operating Expense Analysis
On a sequential quarter basis, the increase in operating expenses is due to higher general and administrative costs. These costs were largely offset by lower underwriting and distribution costs and lower compensation and related costs. The increase in general and administrative costs is due to legal costs associated with resolving the remainder of our previously disclosed outstanding legal and regulatory matters and higher technology costs and fund expenses. Underwriting and distribution costs declined in part due to lower front-load sales volume and lower indirect expenses in our Advisors channel, including lower payroll taxes and pension, advertising and promotion, travel and technology costs. Partially offsetting these cost savings were higher service and distribution costs. Compensation and related costs decreased due to refinement of estimates used in the calculation of equity compensation related to changes in circumstances.
Compared to last year’s third quarter, costs increased on a combination of higher underwriting and distribution costs and, to a lesser extent, to higher general and administrative costs and higher subadvisory costs. Underwriting and distribution costs increased primarily due to higher front-load sales volume as well as higher service and distribution costs in both retail distribution channels. Indirect costs in our Advisors channel increased slightly as higher payroll taxes and pension costs were largely offset by lower sale program costs in our Advisors channel. The increase in general and administrative costs is due to factors discussed above. Finally, as was the case on a linked-quarter basis, subavisory expenses rose due to higher asset levels in our subadvised funds.
Balance Sheet Information
Cash and cash equivalents and investment securities were $204 million (including $34 million held for the exclusive benefit of customers in compliance with federal securities industry regulations). We have no short-term outstanding borrowings against our money market loan program or our $200 million credit facility.
Stockholders’ equity was $222 million and there were 84.1 million shares outstanding. During the quarter, we repurchased 933,229 shares of common stock at an aggregate cost, including commissions, of $22.5 million.
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WADDELL & REED FINANCIAL, INC.
Unaudited Schedule of Selected Operating Data
(Amounts in thousands, except for per share data)
| | Three Months Ended | | | | | | Three Months
Ended | | | | | |
| | September 30, | | Change | | June 30, | | Change | |
| | 2006 | | 2005 | | $ | | % | | 2006 | | $ | | % | |
Operating Revenues: | | | | | | | | | | | | | | | |
Investment management fees | | $ | 77,955 | | $ | 68,857 | | 9,098 | | 13.2 | | $ | 78,190 | | (235 | ) | -0.3 | |
Underwriting & distribution fees | | 77,908 | | 68,069 | | 9,839 | | 14.5 | | 80,494 | | (2,586 | ) | -3.2 | |
Shareholder service fees | | 22,719 | | 20,587 | | 2,132 | | 10.4 | | 22,627 | | 92 | | 0.4 | |
Total operating revenues | | 178,582 | | 157,513 | | 21,069 | | 13.4 | | 181,311 | | (2,729 | ) | -1.5 | |
| | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | |
Underwriting and distribution | | 87,927 | | 75,957 | | 11,970 | | 15.8 | | 91,545 | | (3,618 | ) | -4.0 | |
Compensation and related costs (1) | | 25,767 | | 25,692 | | 75 | | 0.3 | | 27,076 | | (1,309 | ) | -4.8 | |
General and administrative | | 15,539 | | 10,106 | | 5,433 | | 53.8 | | 64,982 | | (49,443 | ) | -76.1 | |
Subadvisory | | 7,960 | | 4,953 | | 3,007 | | 60.7 | | 7,599 | | 361 | | 4.8 | |
Depreciation | | 2,970 | | 2,651 | | 319 | | 12.0 | | 2,956 | | 14 | | 0.5 | |
Goodwill impairment | | 0 | | 0 | | 0.0 | | 0.0 | | 20,000 | | (20,000 | ) | nm | |
Total operating expense | | 140,163 | | 119,359 | | 20,804 | | 17.4 | | 214,158 | | (73,995 | ) | -34.6 | |
| | | | | | | | | | | | | | | |
Operating Income (loss) | | 38,419 | | 38,154 | | 265 | | 0.7 | | (32,847 | ) | 71,266 | | 217.0 | |
| | | | | | | | | | | | | | | |
Investment & other income | | 2,960 | | 1,449 | | 1,511 | | 104.3 | | 2,144 | | 816 | | 38.1 | |
Interest expense | | (3,048 | ) | (3,659 | ) | 611 | | -16.7 | | (2,984 | ) | (64 | ) | 2.1 | |
| | | | | | | | | | | | | | | |
Income (loss) before taxes | | 38,331 | | 35,944 | | 2,387 | | 6.6 | | (33,687 | ) | 72,018 | | 213.8 | |
Provision for taxes | | 13,740 | | 11,412 | | 2,328 | | 20.4 | | (665 | ) | 14,405 | | 2166.2 | |
| | | | | | | | | | | | | | | |
Net Income (loss) | | 24,591 | | 24,532 | | 59 | | 0.2 | | (33,022 | ) | 57,613 | | 174.5 | |
| | | | | | | | | | | | | | | |
Net income (loss) per share - basic | | 0.30 | | 0.30 | | 0.00 | | 0.0 | | (0.40 | ) | n/m | | n/m | |
Net income (loss) per share - diluted | | 0.30 | | 0.30 | | 0.00 | | 0.0 | | n/a | | n/m | | n/m | |
| | | | | | | | | | | | | | | |
Adjusted net income (2) | | 24,591 | | 22,717 | | 1,874 | | 8.2 | | 26,369 | | (1,778 | ) | -6.7 | |
Adjusted net income per share - diluted(2) | | 0.30 | | 0.28 | | 0.02 | | 7.1 | | 0.32 | | (0.02 | ) | -6.3 | |
| | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | | 81,595 | | 80,914 | | | | | | 81,570 | | | | | |
Weighted average shares outstanding -
diluted (3) | | 83,171 | | 81,891 | | | | | | 81,570 | | | | | |
| | | | | | | | | | | | | | | |
Operating margin | | 21.5 | % | 24.2 | % | | | | | -18.1 | % | | | | |
Adjusted operating margin(2) | | 21.5 | % | 24.2 | % | | | | | 23.2 | % | | | | |
Waddell & Reed Advisors U&D margin (4) | | -5.2 | % | -6.2 | % | | | | | -7.9 | % | | | | |
| | | | | | | | | | | | | | | | | | |
(1) Includes equity compensation of $4,890 and $5,845 million, respectively
(2) Reconciliation to GAAP provided below
(3) Due to net loss for the 3 months ended 6/30/06 there is no share dilution
(4) Excludes our wholesale underwriting and distribution activities
Net income (loss), as reported | | | | $ | 24,532 | | | | | | $ | (33,022 | ) | | | | |
Adjustments (net of taxes) | | | | | | | | | | | | | | | |
Tax benefit related to legal matters | | | | (1,815 | ) | | | | | — | | | | | |
Regulatory settlement | | | | — | | | | | | 39,391 | | | | | |
Impairment charge | | | | — | | | | | | 20,000 | | | | | |
Adjusted net income | | | | $ | 22,717 | | | | | | $ | 26,369 | | | | | |
| | | | | | | | | | | | | | | |
Net income (loss) per diluted share, as reported | | | | $ | 0.30 | | | | | | $ | (0.40 | ) | | | | |
Adjustments | | | | | | | | | | | | | | | |
Tax benefit related to legal matters | | | | (0.02 | ) | | | | | — | | | | | |
Regulatory settlement | | | | — | | | | | | 0.48 | | | | | |
Impairment charge | | | | — | | | | | | 0.24 | | | | | |
Adjusted net income | | | | $ | 0.28 | | | | | | $ | 0.32 | | | | | |
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WADDELL & REED FINANCIAL, INC.
Changes in Assets Under Management
For the quarter ended
(Amounts in millions)
| | Advisors | | Wholesale | | Institutional | | Total | |
September 30, 2006 | | | | | | | | | |
Beginning Assets | | $ | 28,361 | | $ | 8,952 | | $ | 7,688 | | $ | 45,001 | |
| | | | | | | | | |
Sales | | 759 | | 1,088 | | 345 | | 2,192 | |
Redemptions | | (806 | ) | (513 | ) | (404 | ) | (1,723 | ) |
Net Sales | | (47 | ) | 575 | | (59 | ) | 469 | |
| | | | | | | | | |
Net Exchanges and Adjustments | | (38 | ) | 37 | | 0 | | (1 | ) |
Reinvested Dividends and Capital Gains | | 64 | | 10 | | 28 | | 102 | |
Net Flows | | (21 | ) | 622 | | (31 | ) | 570 | |
| | | | | | | | | |
Market Appreciation/(Depreciation) | | 212 | | (91 | ) | (79 | ) | 42 | |
Ending Assets | | $ | 28,552 | | $ | 9,483 | | $ | 7,578 | | $ | 45,613 | |
| | | | | | | | | |
September 30, 2005 | | | | | | | | | |
Beginning Assets | | $ | 25,392 | | $ | 5,367 | | $ | 8,315 | | $ | 39,074 | |
| | | | | | | | | |
Sales | | 628 | | 564 | | 127 | | 1,319 | |
Redemptions | | (745 | ) | (274 | ) | (744 | ) | (1,763 | ) |
Net Sales | | (117 | ) | 290 | | (617 | ) | (444 | ) |
| | | | | | | | | |
Net Exchanges and Adjustments | | (26 | ) | 23 | | 0 | | (3 | ) |
Reinvested Dividends and Capital Gains | | 36 | | 4 | | 27 | | 67 | |
Net Flows | | (107 | ) | 317 | | (590 | ) | (380 | ) |
| | | | | | | | | |
Market Appreciation | | 1,294 | | 454 | | 279 | | 2,027 | |
Ending Assets | | $ | 26,579 | | $ | 6,138 | | $ | 8,004 | | $ | 40,721 | |
| | | | | | | | | |
June 30, 2006 | | | | | | | | | |
Beginning Assets | | $ | 28,630 | | $ | 8,227 | | $ | 7,995 | | $ | 44,852 | |
| | | | | | | | | |
Sales | | 847 | | 1,175 | | 222 | | 2,244 | |
Redemptions | | (810 | ) | (505 | ) | (369 | ) | (1,684 | ) |
Net Sales | | 37 | | 670 | | (147 | ) | 560 | |
| | | | | | | | | |
Net Exchanges and Adjustments | | (40 | ) | 38 | | 0 | | (2 | ) |
Reinvested Dividends and Capital Gains | | 112 | | 25 | | 30 | | 167 | |
Net Flows | | 109 | | 733 | | (117 | ) | 725 | |
| | | | | | | | | |
Market Depreciation | | (378 | ) | (8 | ) | (190 | ) | (576 | ) |
Ending Assets | | $ | 28,361 | | $ | 8,952 | | $ | 7,688 | | $ | 45,001 | |
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WADDELL & REED FINANCIAL, INC.
Supplemental Information
Other Items
| | 3Q 06 | | 3Q 05 | | % change | | 2Q 06 | | % change | |
Redemption rates - long-term assets | | | | | | | | | | | |
Advisors | | 9.0 | % | 9.2 | % | | | 8.9 | % | | |
| | | | | | | | | | | |
Wholesale | | 21.5 | % | 18.3 | % | | | 23.1 | % | | |
| | | | | | | | | | | |
Institutional | | 21.4 | % | 35.8 | % | | | 19.1 | % | | |
| | | | | | | | | | | |
Total | | 13.7 | % | 16.0 | % | | | 13.4 | % | | |
| | | | | | | | | | | |
Sales per advisor (000s) (1) | | | | | | | | | | | |
Total | | 233 | | 195 | | 19.5 | % | 269 | | -13.4 | % |
| | | | | | | | | | | |
2+ Years | | 327 | | 278 | | 17.6 | % | 396 | | -17.4 | % |
| | | | | | | | | | | |
0 to 2 Years | | 72 | | 63 | | 14.3 | % | 83 | | -13.3 | % |
| | | | | | | | | | | |
Gross production per advisor (000s) (2) | | 16.9 | | 13.3 | | 27.1 | % | 15.9 | | 6.3 | % |
| | | | | | | | | | | |
Number of advisors (3) | | 2,276 | | 2,443 | | -6.8 | % | 2,273 | | 0.1 | % |
| | | | | | | | | | | |
Number of shareholder accounts (000s) | | 2,833 | | 2,579 | | 9.8 | % | 2,833 | | 0.0 | % |
| | | | | | | | | | | |
Number of shareholders | | 653,810 | | 639,675 | | 2.2 | % | 651,542 | | 0.3 | % |
(1) Average commissionable sales per Waddell & Reed Advisor
(2) Average gross commission generated per Waddell & Reed Advisor
(3) Excludes Legend retirement advisors
Lipper Ranking
Percentage of funds | | 1 Year | | 3 Years | | 5 Years | |
Equity Funds | | | | | | | |
Top Quartile | | 45 | % | 47 | % | 39 | % |
Top Half | | 53 | % | 67 | % | 78 | % |
All Funds | | | | | | | |
Top Quartile | | 38 | % | 38 | % | 31 | % |
Top Half | | 52 | % | 59 | % | 69 | % |
MorningStar Ranking
Percentage of funds with 4 or 5 stars | | Overall | | 3 Years | | 5 Years | |
Equity Funds | | 25 | % | 25 | % | 30 | % |
All Funds | | 20 | % | 18 | % | 24 | % |
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Earnings Conference Call
Stockholders, members of the investment community and the general public are invited to listen to a live webcast of our earnings release conference call today, October 24, 2006 at 10:00 a.m. Eastern. During this call, Henry J. Herrmann, CEO, will review our third quarter results. Live access to the teleconference will be available on the “Corporate” section of our website at www.waddell.com. A webcast replay will be made available shortly after the call through October 31st.
Website Resources
We invite you to visit the “Corporate” section of our website at www.waddell.com under the caption “Data Tables” to review supplemental information schedules.
Contacts
Investor Contact:
Nicole McIntosh, Director of Investor Relations, (913) 236-1880, nmcintosh@waddell.com
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 Waddell & Reed Advisors channel (our network of financial advisors), our Wholesale channel (encompassing broker/dealer, retirement, registered investment advisors as well as the activities of our Legend subsidiary), and our Institutional distribution effort (including defined benefit plans, pension plans and endowments, as well as the activities of ACF 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. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, W&R Target Funds, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Investment Management Company serves as investment advisor to Ivy Funds, Inc. and the Ivy Funds portfolios. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, W&R Target Funds, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Funds Distributor, Inc. serves as principal underwriter and distributor to Ivy Funds, Inc. and the Ivy Funds portfolios.
Forward-Looking Statements
The statements in this press release relating to matters that are not historical facts are forward-looking statements based on management’s belief and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. Such differences could be caused by a number of factors including, but not limited to, a risk that the expected benefits from the expansion of our distribution channels may not be as beneficial as anticipated, unexpected and adverse results of litigation or regulation, governmental investigation, settlements of such investigations and regulatory investigations of the Company, acts of terrorism and/or war, less favorable economic and market conditions including our cost to finance the Company, the risk that the intended results of our changes to long-term incentive compensation may not meet our expectations, and other risks as set out in the reports we have filed with the SEC. Should one or more of these risks materialize or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We assume no duty to publicly update or revise such statements, whether as a result of new information, future events or otherwise.
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