Exhibit 99.1
News Release
Waddell & Reed Financial, Inc. Reports Third Quarter Results
Overland Park, KS, Oct. 25, 2016 — Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter 2016 net income1 of $53.8 million, or $0.65 per diluted share, compared to net income of $33.7 million, or $0.41 per diluted share, during the prior quarter and net income of $48.1 million, or $0.58 per diluted share, during the third quarter of 2015. Operating income was $73.8 million during the current quarter and the operating margin was 24.3%, compared to $53.8 million and 16.8%, respectively, during the prior quarter and $109.0 million and 29.0%, respectively, during the same quarter in 2015.
The third quarter of 2016 included a curtailment gain of $8.5 million associated with an amendment to our post-retirement medical benefit plan that discontinues coverage for individuals who retire after December 31, 2016, a charge of $5.7 million for the impairment of an intangible asset related to a sub-advisory relationship, implementation costs of $1.3 million related to Project E and costs of $0.7 million related to the Department of Labor’s fiduciary rule. The second quarter of 2016 included charges related to severance, the accelerated amortization of deferred acquisition costs (“DAC”) and the implementation of Project E. A schedule of how each of these items impacted our financial statements can be found in the financial tables at the end of this release.
Business Discussion
Assets under management were $85 billion at September 30, 2016, declining less than 2% from the prior quarter. Outflows of $4.9 billion were partially offset by market appreciation of $3.5 billion. Despite improvement in investment performance year-to-date, sales volume remains weak.
The impact of our cost reduction initiative is becoming more visible. The current quarter included the full benefit of our recent workforce reductions, and we continue to carefully manage costs. Additionally, the amendment of our post-retirement medical benefit plan is expected to lower future medical claims costs.
“Our industry is undergoing a period of transformational change and we understand that in order to remain competitive our business needs to evolve,” said Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc. “While we have made progress in addressing the areas of our business that require attention, we realize a lot of work still remains to be done.”
Management Fee Revenue Analysis
Management fees declined 2% sequentially, while average assets under management declined 4%. Fees declined at a lesser rate than average assets under management due to an increase in the effective fee rate, which resulted from the combination of lower institutional assets and a mix-shift within the retail asset
1 Net income represents net income attributable to Waddell & Reed Financial, Inc.
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base. Compared to the same quarter last year, management fees declined 21% due to a 24% decline in average assets under management, which was partly offset by a mix-shift within the asset base that increased the average fee rate.
Average assets under management were $87 billion during the current quarter, compared to $91 billion during the prior quarter and $115 billion during the third quarter of 2015. The effective fee rate for the current quarter was 63.6 basis points compared to 62.4 basis points and 60.5 basis points during the second quarter of 2016 and third quarter of 2015, respectively.
Underwriting and Distribution Analysis
Underwriting and Distribution Revenues
Revenues declined 7% sequentially due in large part to a share class conversion in our retail broker-dealer channel. Revenues also declined due to lower asset-based Rule 12b-1 service and distribution fees in our retail unaffiliated channel resulting from the decline in asset levels. Compared to the same period last year, revenues declined 18% due to lower asset-based Rule 12b-1 fees in our retail unaffiliated channel as well as the impact of a share class conversion in our retail broker-dealer channel.
Underwriting and Distribution Costs
Direct costs declined 14% compared to the second quarter of 2016. Several items contributed to the decrease, including a charge recorded in the prior quarter for the accelerated amortization of DAC, a share-class conversion affecting our retail broker-dealer in July that reduced asset-based Rule 12b-1 service and distribution fee payouts to financial advisors, and lower Rule 12b-1 service and distribution fee payments in our retail unaffiliated channel. Indirect costs declined 19% due to charges for severance recorded during the prior period, a gain due to the amendment to our post-retirement medical plan during the current quarter, and to a lesser degree, lower compensation, incentive award and marketing costs during the current quarter.
Compared to the third quarter of 2015, costs declined 19%. Direct costs declined due to lower asset levels, which resulted in lower asset-based Rule 12b-1 service and distribution fees and to a lesser degree, lower sales commissions and lower wholesaler commissions. Indirect costs in our retail broker-dealer declined primarily as a result of the gain due to the amendment to our post-retirement medical plan, which was partly offset by higher costs associated with the implementation of Project E.
Compensation and Related Expense Analysis
Costs declined 31% sequentially, with the majority of the change due to a severance charge recorded in the previous quarter and a gain due to the amendment of our post-retirement medical benefit plan during the current quarter. The remainder of the decrease was due to lower salaries and benefits due to workforce reductions. Compared to the same period in 2015, the 13% decline is due to a combination of the gain resulting from the amendment of our post-retirement medical plan and lower headcount.
General and Administrative Expense Analysis
Costs rose 21% compared to the prior quarter due in part to the planned transition to contractor labor in our IT department and higher costs related to our preparation for the implementation of the Department of Labor’s new fiduciary rule. Compared to the same quarter in 2015, costs declined 9% due to lower dealer service costs, and to a lesser degree, a decline in advertising costs.
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Investment and Other Income
Compared to the second quarter of 2016, investment and other income rose due to a combination of realized gains across our trading portfolios, available for sale securities and our sponsored funds. Last year’s third quarter included sizable losses on investments compared to gains in the current year from the sale of available for sale securities and net mark-to-market gains from our investments in sponsored funds.
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Unaudited Consolidated Statement of Income
(Amounts in thousands, except for per share data)
| | 2015 | | 2016 | |
| | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | |
Operating Revenues: | | | | | | | | | | | | | | | | | |
Investment management fees | | $ | 182,105 | | $ | 185,914 | | $ | 175,218 | | $ | 166,325 | | $ | 144,778 | | $ | 140,880 | | $ | 138,745 | | | |
Underwriting and distribution fees | | 166,978 | | 171,508 | | 165,130 | | 160,382 | | 146,658 | | 146,312 | | 135,778 | | | |
Shareholder service fees | | 36,375 | | 36,568 | | 35,761 | | 34,367 | | 32,380 | | 32,016 | | 28,563 | | | |
Total operating revenues | | 385,458 | | 393,990 | | 376,109 | | 361,074 | | 323,816 | | 319,208 | | 303,086 | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | |
Underwriting and distribution | | 195,420 | | 195,762 | | 189,065 | | 189,534 | | 173,836 | | 181,245 | | 152,999 | | | |
Compensation and related costs | | 53,495 | | 52,829 | | 46,157 | | 48,271 | | 52,940 | | 58,341 | | 40,214 | | | |
General and administrative | | 25,678 | | 27,897 | | 25,458 | | 26,033 | | 19,152 | | 19,276 | | 23,280 | | | |
Subadvisory fees | | 2,387 | | 2,394 | | 2,305 | | 2,048 | | 2,093 | | 2,325 | | 2,566 | | | |
Depreciation | | 4,034 | | 4,064 | | 4,117 | | 3,831 | | 4,362 | | 4,260 | | 4,541 | | | |
Goodwill impairment | | — | | — | | — | | — | | — | | — | | 5,700 | | | |
Total operating expenses | | 281,014 | | 282,946 | | 267,102 | | 269,717 | | 252,383 | | 265,447 | | 229,300 | | | |
Operating Income | | 104,444 | | 111,044 | | 109,007 | | 91,357 | | 71,433 | | 53,761 | | 73,786 | | | |
Investment and other income/(loss) | | 3,972 | | 9 | | (16,872 | ) | 7,647 | | (10,218 | ) | 687 | | 7,878 | | | |
Interest expense | | (2,766 | ) | (2,765 | ) | (2,765 | ) | (2,772 | ) | (2,768 | ) | (2,776 | ) | (2,792 | ) | | |
Income before taxes | | 105,650 | | 108,288 | | 89,370 | | 96,232 | | 58,447 | | 51,672 | | 78,872 | | | |
Provision for taxes | | 38,537 | | 40,843 | | 41,312 | | 33,312 | | 20,978 | | 18,101 | | 24,067 | | | |
Net Income | | $ | 67,113 | | $ | 67,445 | | $ | 48,058 | | $ | 62,920 | | $ | 37,469 | | $ | 33,571 | | $ | 54,805 | | | |
Noncontrolling interests | | — | | — | | — | | — | | 501 | | (124 | ) | 978 | | | |
Net Income Attributable to Waddell & Reed Financial, Inc. | | $ | 67,113 | | $ | 67,445 | | $ | 48,058 | | $ | 62,920 | | $ | 36,968 | | $ | 33,695 | | $ | 53,827 | | | |
Net income per share, basic and diluted: | | 0.80 | | 0.80 | | 0.58 | | 0.76 | | 0.45 | | 0.41 | | 0.65 | | | |
Weighted average shares outstanding - basic and diluted | | 83,581 | | 84,079 | | 83,469 | | 82,873 | | 82,104 | | 82,947 | | 82,834 | | | |
Operating margin | | 27.1 | % | 28.2 | % | 29.0 | % | 25.3 | % | 22.1 | % | 16.8 | % | 24.3 | % | | |
Net Distribution Cost Analysis
(Amounts in thousands)
| | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | |
Retail Unaffiliated Distribution1 | | | | | | | | | | | | | | | | | |
U&D Revenues | | $ | 52,142 | | $ | 51,768 | | $ | 47,040 | | $ | 43,091 | | $ | 35,923 | | $ | 32,510 | | $ | 29,991 | | | |
U&D Expenses - Direct | | (68,595 | ) | (66,947 | ) | (62,117 | ) | (57,119 | ) | (46,846 | ) | (42,452 | ) | (39,489 | ) | | |
U&D Expenses - Indirect | | (14,029 | ) | (13,972 | ) | (13,329 | ) | (14,614 | ) | (13,349 | ) | (14,939 | ) | (10,643 | ) | | |
Net Distribution (Costs) | | $ | (30,482 | ) | $ | (29,151 | ) | $ | (28,406 | ) | $ | (28,642 | ) | $ | (24,272 | ) | $ | (24,881 | ) | $ | (20,141 | ) | | |
| | | | | | | | | | | | | | | | | |
Retail Broker-Dealer2 | | | | | | | | | | | | | | | | | |
U&D Revenues | | $ | 114,836 | | $ | 119,740 | | $ | 118,090 | | $ | 117,291 | | $ | 110,735 | | $ | 113,802 | | $ | 105,787 | | | |
U&D Expenses - Direct | | (82,022 | ) | (85,177 | ) | (84,420 | ) | (83,413 | ) | (80,277 | ) | (87,740 | ) | (72,276 | ) | | |
U&D Expenses - Indirect | | (30,774 | ) | (29,666 | ) | (29,199 | ) | (34,388 | ) | (33,364 | ) | (36,114 | ) | (30,591 | ) | | |
Net Distribution Excess/(Costs) | | $ | 2,040 | | $ | 4,897 | | $ | 4,471 | | $ | (510 | ) | $ | (2,906 | ) | $ | (10,052 | ) | $ | 2,920 | | | |
1 Retail Unaffiliated Distribution was previously referred to as the “Wholesale channel”
2 Retail Broker-Dealer was previously referred to as the “Advisors channel”
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Changes in Assets Under Management
(Amounts in millions)
| | 2015 | | 2016 | |
| | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | |
Retail Unaffiliated Distribution | | | | | | | | | | | | | | | | | |
Beginning assets | | $ | 60,335 | | $ | 59,412 | | $ | 57,545 | | $ | 49,320 | | $ | 45,641 | | $ | 38,623 | | $ | 35,197 | | | |
Sales* | | 3,870 | | 3,239 | | 2,768 | | 2,341 | | 2,144 | | 1,526 | | 1,320 | | | |
Redemptions | | (6,259 | ) | (4,558 | ) | (5,569 | ) | (7,300 | ) | (7,680 | ) | (5,543 | ) | (4,824 | ) | | |
Net Exchanges | | 224 | | 144 | | 265 | | 176 | | 158 | | 127 | | 161 | | | |
Net flows | | (2,165 | ) | (1,175 | ) | (2,536 | ) | (4,783 | ) | (5,378 | ) | (3,890 | ) | (3,343 | ) | | |
Market action | | 1,242 | | (692 | ) | (5,689 | ) | 1,104 | | (1,640 | ) | 464 | | 1,436 | | | |
Ending assets | | $ | 59,412 | | $ | 57,545 | | $ | 49,320 | | $ | 45,641 | | $ | 38,623 | | $ | 35,197 | | $ | 33,290 | | | |
| | | | | | | | | | | | | | | | | |
Retail Broker-Dealer | | | | | | | | | | | | | | | | | |
Beginning assets | | $ | 45,517 | | $ | 46,385 | | $ | 45,947 | | $ | 42,215 | | $ | 43,344 | | $ | 42,142 | | $ | 42,261 | | | |
Sales* | | 1,270 | | 1,347 | | 1,238 | | 1,218 | | 1,068 | | 1,094 | | 1,024 | | | |
Redemptions | | (1,279 | ) | (1,279 | ) | (1,242 | ) | (1,245 | ) | (1,197 | ) | (1,329 | ) | (1,542 | ) | | |
Net Exchanges | | (224 | ) | (144 | ) | (265 | ) | (176 | ) | (172 | ) | (163 | ) | (194 | ) | | |
Net flows | | (233 | ) | (76 | ) | (269 | ) | (203 | ) | (301 | ) | (398 | ) | (712 | ) | | |
Market action | | 1,101 | | (362 | ) | (3,463 | ) | 1,332 | | (901 | ) | 517 | | 1,621 | | | |
Ending assets | | $ | 46,385 | | $ | 45,947 | | $ | 42,215 | | $ | 43,344 | | $ | 42,142 | | $ | 42,261 | | $ | 43,170 | | | |
| | | | | | | | | | | | | | | | | |
Institutional | | | | | | | | | | | | | | | | | |
Beginning assets | | $ | 17,798 | | $ | 17,097 | | $ | 17,214 | | $ | 14,657 | | $ | 15,414 | | $ | 14,426 | | $ | 8,993 | | | |
Sales* | | 300 | | 1,203 | | 465 | | 773 | | 453 | | 190 | | 180 | | | |
Redemptions | | (1,460 | ) | (1,003 | ) | (1,817 | ) | (799 | ) | (1,068 | ) | (5,699 | ) | (1,051 | ) | | |
Net Exchanges | | — | | — | | — | | — | | 14 | | 36 | | 33 | | | |
Net flows | | (1,160 | ) | 200 | | (1,352 | ) | (26 | ) | (601 | ) | (5,473 | ) | (838 | ) | | |
Market action | | 459 | | (83 | ) | (1,205 | ) | 783 | | (387 | ) | 40 | | 440 | | | |
Ending assets | | $ | 17,097 | | $ | 17,214 | | $ | 14,657 | | $ | 15,414 | | $ | 14,426 | | $ | 8,993 | | $ | 8,595 | | | |
| | | | | | | | | | | | | | | | | |
Consolidated Total | | | | | | | | | | | | | | | | | |
Beginning assets | | $ | 123,650 | | $ | 122,894 | | $ | 120,706 | | $ | 106,192 | | $ | 104,399 | | $ | 95,191 | | $ | 86,451 | | | |
Sales* | | 5,440 | | 5,789 | | 4,471 | | 4,332 | | 3,665 | | 2,810 | | 2,524 | | | |
Redemptions | | (8,998 | ) | (6,840 | ) | (8,628 | ) | (9,344 | ) | (9,945 | ) | (12,571 | ) | (7,417 | ) | | |
Net Exchanges | | — | | — | | — | | — | | — | | — | | — | | | |
Net flows | | (3,558 | ) | (1,051 | ) | (4,157 | ) | (5,012 | ) | (6,280 | ) | (9,761 | ) | (4,893 | ) | | |
Market action | | 2,802 | | (1,137 | ) | (10,357 | ) | 3,219 | | (2,928 | ) | 1,021 | | 3,497 | | | |
Ending assets | | $ | 122,894 | | $ | 120,706 | | $ | 106,192 | | $ | 104,399 | | $ | 95,191 | | $ | 86,451 | | $ | 85,055 | | | |
* 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
Asset Manager | | 2015 | | 2016 | |
(S in millions) | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | |
Retail Unaffiliated Distribution | | | | | | | | | | | | | | | | | |
AUM | | $ | 59,412 | | $ | 57,545 | | $ | 49,320 | | $ | 45,641 | | $ | 38,623 | | $ | 35,197 | | $ | 33,290 | | | |
Net flows | | $ | (2,165 | ) | $ | (1,175 | ) | $ | (2,536 | ) | $ | (4,783 | ) | $ | (5,378 | ) | $ | (3,890 | ) | $ | (3,343 | ) | | |
Organic growth | | -14.4 | % | -7.9 | % | -17.6 | % | -38.8 | % | -47.1 | % | -40.3 | % | -38.0 | % | | |
Redemption Rate | | 42.9 | % | 31.0 | % | 41.2 | % | 59.3 | % | 77.7 | % | 61.3 | % | 56.2 | % | | |
Retail Broker-Dealer | | | | | | | | | | | | | | | | | |
AUM | | $ | 46,385 | | $ | 45,947 | | $ | 42,215 | | $ | 43,344 | | $ | 42,142 | | $ | 42,261 | | $ | 43,170 | | | |
Net flows | | $ | (233 | ) | $ | (76 | ) | $ | (269 | ) | $ | (203 | ) | $ | (301 | ) | $ | (398 | ) | $ | (712 | ) | | |
Organic growth | | -2.0 | % | -0.7 | % | -2.3 | % | -1.9 | % | -2.8 | % | -3.8 | % | -6.7 | % | | |
Redemption Rate | | 9.0 | % | 9.0 | % | 8.9 | % | 9.3 | % | 9.3 | % | 10.5 | % | 12.1 | % | | |
Institutional | | | | | | | | | | | | | | | | | |
AUM | | $ | 17,097 | | $ | 17,214 | | $ | 14,657 | | $ | 15,414 | | $ | 14,426 | | $ | 8,993 | | $ | 8,595 | | | |
Net flows | | $ | (1,160 | ) | $ | 200 | | $ | (1,352 | ) | $ | (26 | ) | $ | (601 | ) | $ | (5,473 | ) | $ | (838 | ) | | |
Organic growth | | -26.1 | % | 4.7 | % | -31.4 | % | -0.7 | % | -15.6 | % | -151.8 | % | -37.3 | % | | |
Redemption Rate | | 33.7 | % | 23.2 | % | 45.4 | % | 20.5 | % | 29.9 | % | 198.9 | % | 46.4 | % | | |
| | 1 Year | | 3 Years | | 5 Years | |
Fund Rankings | | | | | | | |
Lipper | | | | | | | |
Funds ranked in top half | | 36 | % | 38 | % | 42 | % |
Assets ranked in top half | | 28 | % | 28 | % | 46 | % |
MorningStar | | | | | | | |
Funds with 4/5 stars | | 18 | % | 9 | % | 10 | % |
Assets with 4/5 stars | | 15 | % | 5 | % | 5 | % |
| | 2015 | | 2016 | |
Broker-Dealer | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | | 1st Qtr. | | 2nd Qtr. | | 3rd Qtr. | | 4th Qtr. | |
AUA* (in billions) | | $ | 53.7 | | $ | 53.6 | | $ | 49.4 | | $ | 51.0 | | $ | 49.9 | | $ | 50.5 | | $ | 52.1 | | | |
AUA* fee based accounts (in billions) | | $ | 18.0 | | $ | 18.3 | | $ | 17.0 | | $ | 17.6 | | $ | 17.4 | | $ | 17.8 | | $ | 18.5 | | | |
# Advisors | | 1,745 | | 1,780 | | 1,795 | | 1,819 | | 1,803 | | 1,799 | | 1,796 | | | |
Advisor productivity (in thousands) | | $ | 65.9 | | $ | 67.9 | | $ | 66.3 | | $ | 64.9 | | $ | 61.3 | | $ | 63.1 | | $ | 59.0 | | | |
U&D revenues (in thousands) | | $ | 114,836 | | $ | 119,740 | | $ | 118,090 | | $ | 117,291 | | $ | 110,735 | | $ | 113,802 | | $ | 105,787 | | | |
* AUA represent Assets Under Administration
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Unaudited Balance Sheet Information
Schedule of Selected Items
(Amounts in millions) | | Sept. 30, 2016 | | | |
Cash & cash equivalents (unrestricted) | | $ | 529.8 | | | |
Investment securities | | 319.2 | | | |
Total assets | | 1,398.6 | | | |
Long-term debt | | 189.6 | | | |
Total liabilities | | 542.8 | | | |
Redeemable noncontrolling interests | | 10.4 | | | |
Stockholders’ equity | | 845.4 | | | |
| | | | | |
Shares outstanding | | 82.8 | | million shares | |
| | | | | | |
| | Quarter ended | | Year-to-Date | |
($ in thousands) | | Sept. 30, 2016 | | Sept. 30, 2016 | |
Shares repurchased | | | | | |
Number of shares | | 28,537 | | 2,230,034 | |
Total cost | | $ | 522 | | $ | 47,984 | |
| | | | | |
Dividend paid | | | | | |
Rate per share | | $ | 0.46 | | $ | 1.38 | |
Total paid | | $ | 38,120 | | $ | 114,736 | |
| | | | | |
Capital returned to stockholders | | $ | 38,642 | | $ | 162,720 | |
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Unaudited Supplemental Information
In addition to reporting results in accordance with U.S. generally accepted accounting principles (“GAAP”), management believes adjusting results to exclude certain items provides investors with financial measures that better reflect the company’s core operating performance and allow for more appropriate comparisons to prior periods. However, non-GAAP financial measures should not be considered a substitute for performance measures calculated in accordance with GAAP.
Adjusted Results
Reconciliation to GAAP
| | GAAP | | | | Adjusted | | GAAP | | | | Adjusted | |
(Amounts in thousands, except for per share data) | | 3Q 16 | | Adj. | | 3Q 16 | | 2Q 16 | | Adj. | | 2Q 16 | |
Operating Revenues: | | | | | | | | | | | | | |
Investment management fees | | $ | 138,745 | | — | | $ | 138,745 | | $ | 140,880 | | — | | $ | 140,880 | |
Underwriting and distribution fees | | 135,778 | | — | | 135,778 | | 146,312 | | — | | 146,312 | |
Shareholder service fees | | 28,563 | | — | | 28,563 | | 32,016 | | — | | 32,016 | |
Total operating revenues | | 303,086 | | — | | 303,086 | | 319,208 | | — | | 319,208 | |
Operating Expenses: | | | | | | | | | | | | | |
Underwriting and distribution | | 152,999 | | 3,470 | | 156,469 | | 181,245 | | (14,285 | ) | 166,960 | |
Compensation and related costs | | 40,214 | | 3,752 | | 43,966 | | 58,341 | | (9,818 | ) | 48,523 | |
General and administrative | | 23,280 | | (662 | ) | 22,618 | | 19,276 | | — | | 19,276 | |
Subadvisory fees | | 2,566 | | — | | 2,566 | | 2,325 | | — | | 2,325 | |
Depreciation | | 4,541 | | — | | 4,541 | | 4,260 | | — | | 4,260 | |
Goodwill impairment | | 5,700 | | (5,700 | ) | — | | — | | — | | — | |
Total operating expenses | | 229,300 | | 860 | | 230,160 | | 265,447 | | (24,103 | ) | 241,344 | |
Operating Income | | 73,786 | | 860 | | 72,926 | | 53,761 | | (24,103 | ) | 77,864 | |
Investment and other income/(loss) | | 7,878 | | — | | 7,878 | | 687 | | — | | 687 | |
Interest expense | | (2,792 | ) | — | | (2,792 | ) | (2,776 | ) | — | | (2,776 | ) |
Income before taxes | | 78,872 | | 860 | | 78,012 | | 51,672 | | (24,103 | ) | 75,775 | |
Provision for taxes | | 24,067 | | (316 | ) | 23,751 | | 18,101 | | 8,937 | | 27,038 | |
Net Income | | $ | 54,805 | | 544 | | $ | 54,261 | | $ | 33,571 | | (15,166 | ) | $ | 48,737 | |
Noncontrolling interests | | 978 | | — | | 978 | | (124 | ) | — | | (124 | ) |
Net Income Attributable to Waddell & Reed Financial, Inc. | | $ | 53,827 | | 544 | | $ | 53,283 | | $ | 33,695 | | (15,166 | ) | $ | 48,861 | |
Net income per share, basic and diluted: | | 0.65 | | 0.01 | | 0.64 | | 0.41 | | (0.18 | ) | 0.59 | |
Weighted average shares outstanding - basic and diluted | | 82,834 | | 82,834 | | 82,834 | | 82,947 | | 82,947 | | 82,947 | |
Adjustments during the third quarter were:
· $8.5 million related to a curtailment gain ($4.7 million in U&D indirect and $3.8 million in compensation);
· $5.7 million charge related to the impairment of an intangible asset;
· $1.3 million charge related to the implementation of Project E to U&D indirect costs; and
· $0.7 million charge related to DOL preparation to G&A costs.
Adjustments during the second quarter were:
· $7.1 million for severance and related charges to U&D indirect costs (unaffiliated distribution $2.2 million; broker-dealer $4.9 million);
· $9.8 million for severance and related charges to compensation and related costs;
· $5.9 million related to the accelerated amortization of DAC to U&D direct costs (broker-dealer) due to a share class conversion; and
· $1.3 million related to costs associated with the implementation of technology to Project E to U&D indirect costs (broker-dealer).
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Unaudited Consolidated Statement of Income
| | Nine Months Ended | |
(Amounts in thousands, except for per share data) | | Sep-15 | | Sep-16 | | % Change | |
Operating Revenues: | | | | | | | |
Investment management fees | | $ | 543,237 | | $ | 424,403 | | -21.9 | % |
Underwriting and distribution fees | | 503,616 | | 428,748 | | -14.9 | % |
Shareholder service fees | | 108,704 | | 92,959 | | -14.5 | % |
Total operating revenues | | 1,155,557 | | 946,110 | | -18.1 | % |
Operating Expenses: | | | | | | | |
Underwriting and distribution | | 580,247 | | 508,080 | | -12.4 | % |
Compensation and related costs | | 152,481 | | 151,495 | | -0.6 | % |
General and administrative | | 79,033 | | 61,708 | | -21.9 | % |
Subadvisory fees | | 7,086 | | 6,984 | | -1.4 | % |
Depreciation | | 12,215 | | 13,163 | | 7.8 | % |
Goodwill impairment | | — | | 5,700 | | | |
Total operating expenses | | 831,062 | | 747,130 | | -10.1 | % |
Operating Income | | 324,495 | | 198,980 | | -38.7 | % |
Investment and other income | | (12,891 | ) | (1,653 | ) | -87.2 | % |
Interest expense | | (8,296 | ) | (8,336 | ) | 0.5 | % |
Income before taxes | | 303,308 | | 188,991 | | -37.7 | % |
Provision for taxes | | 120,692 | | 63,146 | | -47.7 | % |
Net Income | | $ | 182,616 | | $ | 125,845 | | -31.1 | % |
Noncontrolling interests | | — | | 1,355 | | N/A | |
Net Income Attributable to Waddell & Reed Financial, Inc. | | $ | 182,616 | | $ | 124,490 | | -31.8 | % |
Net income per share, basic and diluted | | 2.18 | | 1.51 | | -30.9 | % |
Weighted average shares outstanding - basic and diluted | | 83,709 | | 82,629 | | | |
Operating margin | | 28.1 | % | 21.0 | % | | |
Net Distribution Cost Analysis
| | Nine Months Ended | |
(Amounts in thousands) | | Sep-15 | | Sep-16 | | % Change | |
Retail Unaffiliated Distribution1 | | | | | | | |
U&D Revenues | | $ | 150,950 | | $ | 98,424 | | -34.8 | % |
U&D Expenses - Direct | | (197,659 | ) | (128,787 | ) | -34.8 | % |
U&D Expenses - Indirect | | (41,330 | ) | (38,931 | ) | -5.8 | % |
Net Distribution (Costs) | | $ | (88,039 | ) | $ | (69,294 | ) | -21.3 | % |
| | | | | | | |
Retail Broker-Dealer2 | | | | | | | |
U&D Revenues | | $ | 352,666 | | $ | 330,324 | | -6.3 | % |
U&D Expenses - Direct | | (251,619 | ) | (240,293 | ) | -4.5 | % |
U&D Expenses - Indirect | | (89,639 | ) | (100,069 | ) | 11.6 | % |
Net Distribution Excess/(Costs) | | $ | 11,408 | | $ | (10,038 | ) | -188.0 | % |
1 Retail Unaffiliated Distribution was previously referred to as the “Wholesale channel”
2 Retail Broker-Dealer was previously referred to as the “Advisors channel”
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Changes in Assets Under Management
(Amounts in millions)
| | Nine Months Ended | |
| | Sep-15 | | Sep-16 | | % Change | |
Retail Unaffiliated Distribution | | | | | | | |
Beginning assets | | $ | 60,335 | | $ | 45,641 | | -24.4 | % |
Sales* | | 9,877 | | 4,990 | | -49.5 | % |
Redemptions | | (16,386 | ) | (18,047 | ) | 10.1 | % |
Net Exchanges | | 633 | | 446 | | N/M | |
Net flows | | (5,876 | ) | (12,611 | ) | 114.6 | % |
Market action | | (5,139 | ) | 260 | | -105.1 | % |
Ending assets | | $ | 49,320 | | $ | 33,290 | | -32.5 | % |
| | | | | | | |
Retail Broker-Dealer | | | | | | | |
Beginning assets | | $ | 45,517 | | $ | 43,344 | | -4.8 | % |
Sales* | | 3,856 | | 3,186 | | -17.4 | % |
Redemptions | | (3,800 | ) | (4,068 | ) | 7.1 | % |
Net Exchanges | | (633 | ) | (529 | ) | N/M | |
Net flows | | (577 | ) | (1,411 | ) | 144.5 | % |
Market action | | (2,725 | ) | 1,237 | | -145.4 | % |
Ending assets | | $ | 42,215 | | $ | 43,170 | | 2.3 | % |
| | | | | | | |
Institutional Channel | | | | | | | |
Beginning assets | | $ | 17,798 | | $ | 15,414 | | -13.4 | % |
Sales* | | 1,968 | | 823 | | -58.2 | % |
Redemptions | | (4,280 | ) | (7,818 | ) | 82.7 | % |
Net Exchanges | | 0 | | 83 | | N/M | |
Net flows | | (2,312 | ) | (6,912 | ) | 199.0 | % |
Market action | | (829 | ) | 93 | | -111.2 | % |
Ending assets | | $ | 14,657 | | $ | 8,595 | | -41.4 | % |
| | | | | | | |
Consolidated Total | | | | | | | |
Beginning assets | | $ | 123,650 | | $ | 104,399 | | -15.6 | % |
Sales* | | 15,701 | | 8,999 | | -42.7 | % |
Redemptions | | (24,466 | ) | (29,933 | ) | 22.3 | % |
Net Exchanges | | — | | — | | N/M | |
Net flows | | (8,765 | ) | (20,934 | ) | 138.8 | % |
Market action | | (8,693 | ) | 1,590 | | -118.3 | % |
Ending assets | | $ | 106,192 | | $ | 85,055 | | -19.9 | % |
* 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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Earnings Conference Call
Stockholders, members of the investment community and the general public are invited to listen to a live Web cast of our earnings release conference call today at 10:00 a.m. Eastern. During this call, Philip J. Sanders, CEO and CIO, will review our quarterly results. Live access to the teleconference will be available on the “Investor Relations” section of our Web site at www.waddell.com. A Web cast replay will be made available shortly after the conclusion of the call and accessible for seven days.
Web Site Resources
We invite you to visit the Investor Relations section of our Web site at www.waddell.com. Under the “Investor Info” tab you will find a link to presentations as well as to data tables which include supplemental information schedules.
Contacts
Investor Contact:
Nicole Russell, VP, Investor Relations, (913) 236-1880, nrussell@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 retail unaffiliated distribution channel (encompassing broker/dealer, retirement, and registered investment advisors), our retail broker-dealer channel (our network of financial advisors), and our Institutional channel (including defined benefit plans, pension plans and endowments, 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 and internationally. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios, while Ivy Investment Management Company serves as investment advisor to Ivy Funds and investment advisor and global distributor to the Ivy Global Investors SICAV, an umbrella UCITS fund range domiciled in Luxembourg. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios, while Ivy Distributors, Inc. serves as principal underwriter and distributor to Ivy Funds.
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Forward-Looking Statements
This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015, which include, without limitation:
· The loss of existing distribution channels or inability to access new distribution channels;
· A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;
· The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;
· The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;
· A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;
· The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
· Our inability to reduce expenses rapidly enough to align with declines in our revenues, the level of our assets under management or our business environment.
· Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;
· Our inability to attract and retain senior executive management and other key personnel to conduct our broker-dealer, fund management and investment advisory business;
· A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and
· Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.
The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission, including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2015 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2016. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
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