Waddell & Reed Financial, Inc. WDR today reported fourth quarter 2017 net income1 of $29.8 million, or $0.36 per diluted share, compared to net income of $53.6 million, or $0.64 per diluted share, during the prior quarter and net income of $29.0 million, or $0.35 per diluted share, during the fourth quarter of 2016.
Subsequent to the freeze of the pension plan in the third quarter of 2017, we elected in the fourth quarter to change to mark-to-market accounting for the pension plan. The impact from this change in accounting policy has been retrospectively applied to the financial results for all periods presented. These adjustments are non-cash and do not affect our pension liability. Supplemental schedules that include information regarding the prior quarter adjustments have been included with the Current Report on Form 8-K furnished to the SEC today and are also available on the Investor Relations section of our Web site at ir.waddell.com. The impact of the pension expense during the current quarter was $5.9 million ($4.5 million net of taxes) or $0.05 per share.
The enactment of the U.S. tax reform required us to revalue our net deferred tax asset, which resulted in a tax charge during the quarter of $5.4 million, or $0.07 per share.
Operating revenues of $294.5 million during the fourth quarter of 2017 increased 2% sequentially and 1% compared to the fourth quarter of 2016. The operating margin during the current quarter was 18.8% compared to 27.6% during the prior quarter and 16.4% during the same period last year. Pension expense caused most of the sequential variance in our operating margin.
As part of our initiative to improve corporate efficiency, we announced a plan last July that is expected to add between $30 and $40 million to pre-tax income by 2019. During 2017, we were able to reduce the run-rate for operating costs by approximately $20 million. In January 2018, we paid off $95 million of Series A senior notes at maturity, which will reduce annual interest costs by approximately $5 million. We have also fully implemented a laddered fixed income investment portfolio to optimize the return on our cash, which we estimate will add up to $5 million per year to investment income depending on the pace of share repurchases and on the cash needs of other corporate initiatives. Offsetting some of our progress to date is the reduction of management fees associated with the previously announced fund mergers. We estimate the impact of reduced management fee revenues to range between $10 and $11 million in 2018. We continue to work toward our cost savings goal and expect to reach our run-rate in 2019.
__________________________________________________
1 Net
income represents net income attributable to Waddell & Reed Financial,
Inc.
Business Discussion
Assets under management ended the year at $81.1 billion, unchanged compared to the prior quarter and to the prior year end. Sequentially, gross sales declined slightly. Net outflows were $2.7 billion during the quarter, compared to net outflows of $2.8 billion during the prior quarter and net outflows of $4.4 billion during the fourth quarter of 2016. Redemption pressure eased meaningfully over the last 12 months; however, gross sales volume remains subdued, improving only 1% annually compared to the year 2016. As a result of lower redemptions, net outflows improved to $11.4 billion during 2017 compared to net outflows of $25.3 billion during 2016.
"Over the past year, we have made solid headway in strengthening our investment management capabilities and increasing the competitiveness of our broker-dealer. Despite this progress, work remains to be done to continue to improve our investment performance across our product lineup, advance our broker-dealer initiatives and improve our sales execution in all of our distribution channels," said Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc. "Our team enters 2018 with a new level of energy and focus."
Financial Analysis
Under the new pension accounting method, actuarial gains and losses are recognized in the year incurred rather than amortizing them over future periods. The net impact of this change resulted in an increase to net income of $12.7 million, or $0.15 per share, during 2017.
"The reporting method change for our pension plan will eliminate the timing impact of past actuarial gains and losses from current operating results," said Brent K. Bloss, Waddell & Reed's Senior Vice President and Chief Financial Officer. "We are currently implementing a de-risking strategy for the plan's assets following the freeze of the plan, which should result in less volatility when comparing actual results of the plan assets to actuarial assumptions in the future. Our pension plan remains well funded and this change will have no effect on our employee benefits under the plan."
Management Fee Revenue Analysis
Revenues increased 2% sequentially due to an increase in average assets under management and a small increase in the effective fee rate. Compared to the same period last year, revenues rose 3% as an increase in the effective fee rate more than offset a small decline in average assets under management.
During the current quarter, the effective management fee rate was 66.5 basis points, compared to 66.1 basis points during the third quarter of 2017 and 64.4 basis points during the fourth quarter of 2016. Average assets under management were $81.3 billion during the current quarter, compared to $80.5 billion and $82.0 billion during the third quarter of 2017 and the fourth quarter of 2016, respectively.
Underwriting and Distribution Analysis
Underwriting and Distribution Revenues
Revenues increased 3% sequentially. The increase in revenues was mainly due to higher advisory fees in our broker-dealer, and to a lesser degree, higher sales commissions. Revenues declined slightly compared to the same quarter in 2016, as the increase in advisory fees in our broker-dealer were offset by lower asset-based Rule 12b-1 service and distribution fees in our retail unaffiliated channel.
Underwriting and Distribution Costs
Direct costs increased 1% sequentially due to higher advisory fees in our broker-dealer. Indirect costs increased 21%. Most of the variance is due to a $9.4 million increase in pension expense. The third quarter included a benefit from the valuation associated with the pension plan's freeze in September, while the current quarter included costs associated with the plan's re-measurement.
Compared to the same quarter in 2016, direct costs declined 4% due primarily to the realignment of field management compensation from U&D direct to U&D indirect in our broker-dealer. Indirect costs declined 6% due to a combination of lower wholesaler compensation and IT support. The increase in compensation associated with the field realignment in our broker-dealer was more than offset by lower sales and support costs for this channel.
Compensation and Related Expense Analysis
Costs increased 78% sequentially. Most of the variance is due to a $21.3 million increase in pension expenses. The third quarter included a benefit from the valuation associated with the pension plan's freeze in September, while the current quarter included costs associated with the plan's re-measurement. Higher incentive compensation, benefits and share-based compensation contributed approximately $2 million in aggregate to the sequential increase in costs. Compared to the same quarter in 2016, costs rose 5% due to higher share-based compensation.
General and Administrative Expense Analysis
Costs decreased 14% sequentially due to a combination of lower legal and consulting costs and reduced usage of temporary office staff. Compared to the same period in 2016, costs increased 7%. The year over year increase in cost was due to higher IT costs and additional use of temporary staff.
Income Tax Expense Analysis
The effective tax rate for the quarter was elevated due to a revaluation of our net deferred tax asset and other tax adjustments resulting from the enactment of U.S. tax reform of $5.4 million, or $0.07 per share, as well as a tax shortfall on restricted stock vesting in the quarter of $1.8 million, or $0.02 per share.
We estimate a tax run rate for 2018 to be in the range of 23% to 25%, though the actual effective tax rate may differ due to nonrecurring or discrete items and issuance of additional guidance on, or changes to our analysis of, recent tax reform legislation.
Investment Management Performance
Starting in June 2017, we began using I shares in our rankings. This change was made to use a consistent share class that aligns with the industry's sales and asset concentrations. Performance in prior periods utilized each funds' older share class, which was generally the A shares.
| Fund Rankings | 1 Year | 3 Years | 5 Years | ||||||||
| Lipper | |||||||||||
| Funds ranked in top half | 32 | % | 38 | % | 46 | % | |||||
| Assets ranked in top half | 36 | % | 41 | % | 50 | % | |||||
| MorningStar | |||||||||||
| Funds ranked in top half | 35 | % | 28 | % | 45 | % | |||||
| Assets ranked in top half | 42 | % | 29 | % | 49 | % | |||||
| MorningStar Ratings | Overall | 3 Years | 5 Years | ||||||||
| Funds with 4/5 stars | 28 | % | 11 | % | 28 | % | |||||
| Assets with 4/5 stars | 38 | % | 11 | % | 38 | % | |||||
| Asset Manager | |||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||
| Mar. 31, | Jun. 30, | Sep. 30, | Dec. 31 | Mar. 31, | Jun. 30, | Sep. 30, | Dec. 31 | ||||||||||||||||||||||||||||||||||||
| 2016 | 2017 | ||||||||||||||||||||||||||||||||||||||||||
| Retail Unaffiliated Distribution | |||||||||||||||||||||||||||||||||||||||||||
| Beginning assets | $ | 45,641 | $ | 38,623 | $ | 35,197 | $ | 33,290 | $ | 30,295 | $ | 30,182 | $ | 30,307 | $ | 31,062 | |||||||||||||||||||||||||||
| Sales 1 | 2,144 | 1,526 | 1,320 | 1,373 | 1,799 | 2,080 | 1,790 | 1,577 | |||||||||||||||||||||||||||||||||||
| Redemptions | (7,680 | ) | (5,543 | ) | (4,824 | ) | (4,390 | ) | (3,707 | ) | (2,886 | ) | (2,486 | ) | (2,912 | ) | |||||||||||||||||||||||||||
| Net exchanges | 158 | 127 | 161 | 11 | 236 | 235 | 213 | 316 | |||||||||||||||||||||||||||||||||||
| Net Flows | (5,378 | ) | (3,890 | ) | (3,343 | ) | (3,006 | ) | (1,672 | ) | (571 | ) | (483 | ) | (1,019 | ) | |||||||||||||||||||||||||||
| Market action | (1,640 | ) | 464 | 1,436 | 11 | 1,559 | 696 | 1,238 | 1,090 | ||||||||||||||||||||||||||||||||||
| Ending assets | $ | 38,623 | $ | 35,197 | $ | 33,290 | $ | 30,295 | $ | 30,182 | $ | 30,307 | $ | 31,062 | $ | 31,133 | |||||||||||||||||||||||||||
|
Organic growth |
(47.1 | ) | % | (40.3 | ) | % | (38.0 | ) | % | (36.1 | ) | % | (22.1 | ) | % | (7.6 | ) | % | (6.4 | ) | % | (13.1 | ) | % | |||||||||||||||||||
|
Redemption rate |
77.7 | % | 61.3 | % | 56.2 | % | 56.7 | % | 50.5 | % | 39.2 | % | 33.0 | % | 37.9 | % | |||||||||||||||||||||||||||
| Retail Broker-Dealer | |||||||||||||||||||||||||||||||||||||||||||
| Beginning assets | $ | 43,344 | $ | 42,142 | $ | 42,261 | $ | 43,170 | $ | 42,322 | $ | 43,110 | $ | 43,084 | $ | 43,472 | |||||||||||||||||||||||||||
| Sales 1 | 1,068 | 1,094 | 1,024 | 1,101 | 978 | 1,142 | 1,024 | 1,077 | |||||||||||||||||||||||||||||||||||
| Redemptions | (1,197 | ) | (1,329 | ) | (1,542 | ) | (1,669 | ) | (1,871 | ) | (1,812 | ) | (2,049 | ) | (2,026 | ) | |||||||||||||||||||||||||||
| Net exchanges | (172 | ) | (163 | ) | (194 | ) | (182 | ) | (236 | ) | (241 | ) | (213 | ) | (316 | ) | |||||||||||||||||||||||||||
| Net Flows | (301 | ) | (398 | ) | (712 | ) | (750 | ) | (1,129 | ) | (911 | ) | (1,238 | ) | (1,265 | ) | |||||||||||||||||||||||||||
| Market action | (901 | ) | 517 | 1,621 | (98 | ) | 1,917 | 885 | 1,626 | 1,453 | |||||||||||||||||||||||||||||||||
| Ending assets | $ | 42,142 | $ | 42,261 | $ | 43,170 | $ | 42,322 | $ | 43,110 | $ | 43,084 | $ | 43,472 | $ | 43,660 | |||||||||||||||||||||||||||
|
Organic growth |
(2.8 | ) | % | (3.8 | ) | % | (6.7 | ) | % | (6.9 | ) | % | (10.7 | ) | % | (8.5 | ) | % | (11.5 | ) | % | (11.6 | ) | % | |||||||||||||||||||
|
Redemption rate |
9.3 | % | 10.5 | % | 12.1 | % | 12.5 | % | 15.1 | % | 14.7 | % | 16.4 | % | 16.1 | % | |||||||||||||||||||||||||||
| Institutional | |||||||||||||||||||||||||||||||||||||||||||
| Beginning assets | $ | 15,414 | $ | 14,426 | $ | 8,993 | $ | 8,595 | $ | 7,904 | $ | 7,792 | $ | 7,036 | $ | 6,365 | |||||||||||||||||||||||||||
| Sales 1 | 453 | 190 | 180 | 242 | 142 | 78 | 68 | 66 | |||||||||||||||||||||||||||||||||||
| Redemptions | (1,068 | ) | (5,699 | ) | (1,051 | ) | (1,042 | ) | (727 | ) | (1,057 | ) | (1,139 | ) | (521 | ) | |||||||||||||||||||||||||||
| Net exchanges | 14 | 36 | 33 | 171 | - | 6 | - | - | |||||||||||||||||||||||||||||||||||
| Net Flows | (601 | ) | (5,473 | ) | (838 | ) | (629 | ) | (585 | ) | (973 | ) | (1,071 | ) | (455 | ) | |||||||||||||||||||||||||||
| Market action | (387 | ) | 40 | 440 | (62 | ) | 473 | 217 | 400 | 379 | |||||||||||||||||||||||||||||||||
| Ending assets | $ | 14,426 | $ | 8,993 | $ | 8,595 | $ | 7,904 | $ | 7,792 | $ | 7,036 | $ | 6,365 | $ | 6,289 | |||||||||||||||||||||||||||
|
Organic growth |
(15.6 | ) | % | (151.8 | ) | % | (37.3 | ) | % | (29.3 | ) | % | (29.6 | ) | % | (49.9 | ) | % | (60.9 | ) | % | (28.6 | ) | % | |||||||||||||||||||
|
Redemption rate |
29.9 | % | 198.9 | % | 46.4 | % | 51.3 | % | 37.2 | % | 58.7 | % | 67.3 | % | 32.2 | % | |||||||||||||||||||||||||||
| Consolidated Total | |||||||||||||||||||||||||||||||||||||||||||
| Beginning assets | $ | 104,399 | $ | 95,191 | $ | 86,451 | $ | 85,055 | $ | 80,521 | $ | 81,084 | $ | 80,427 | $ | 80,899 | |||||||||||||||||||||||||||
| Sales 1 | 3,665 | 2,810 | 2,524 | 2,716 | 2,919 | 3,300 | 2,882 | 2,720 | |||||||||||||||||||||||||||||||||||
| Redemptions | (9,945 | ) | (12,571 | ) | (7,417 | ) | (7,101 | ) | (6,305 | ) | (5,755 | ) | (5,674 | ) | (5,459 | ) | |||||||||||||||||||||||||||
| Net exchanges | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Flows | (6,280 | ) | (9,761 | ) | (4,893 | ) | (4,385 | ) | (3,386 | ) | (2,455 | ) | (2,792 | ) | (2,739 | ) | |||||||||||||||||||||||||||
| Market action | (2,928 | ) | 1,021 | 3,497 | (149 | ) | 3,949 | 1,798 | 3,264 | 2,922 | |||||||||||||||||||||||||||||||||
| Ending assets | $ | 95,191 | $ | 86,451 | $ | 85,055 | $ | 80,521 | $ | 81,084 | $ | 80,427 | $ | 80,899 | $ | 81,082 | |||||||||||||||||||||||||||
|
Organic growth |
(24.1 | ) | % | (41.0 | ) | % | (22.6 | ) | % | (20.6 | ) | % | (16.8 | ) | % | (12.1 | ) | % | (13.9 | ) | % | (13.5 | ) | % | |||||||||||||||||||
|
Redemption rate |
41.3 | % | 55.6 | % | 33.3 | % | 33.3 | % | 30.5 | % | 27.9 | % | 27.1 | % | 25.7 | % | |||||||||||||||||||||||||||
| 1 | Sales is primarily gross sales (net of sales commissions). This amount also includes net reinvested dividends & capital gains and investment income. | ||||||||||||||||||||||||||||||||||||||||||
| Mar. 31, | Jun. 30, | Sept. 30, | Dec. 31 | Mar. 31, | Jun. 30, | Sept. 30, | Dec. 31 | ||||||||||||||||||||||||||||||||||||
| Broker-Dealer | 2016 | 2017 | |||||||||||||||||||||||||||||||||||||||||
|
AUA ($ in billions) |
$ | 49.9 | $ | 50.5 | $ | 52.1 | $ | 51.7 | $ | 53.6 | $ | 54.1 | $ | 55.5 | $ | 56.7 | |||||||||||||||||||||||||||
| AUA fee based accounts ($ in billions) | $ | 17.4 | $ | 17.8 | $ | 18.5 | $ | 18.4 | $ | 19.1 | $ | 19.5 | $ | 20.7 | $ | 21.6 | |||||||||||||||||||||||||||
| Advisor headcount | 1,803 | 1,799 | 1,796 | 1,780 | 1,662 | 1,581 | 1,481 | 1,367 | |||||||||||||||||||||||||||||||||||
| Advisor productivity ($ in thousands) | $ | 61.3 | $ | 63.1 | $ | 59.0 | $ | 59.4 | $ | 60.7 | $ | 65.0 | $ | 69.0 | $ | 76.9 | |||||||||||||||||||||||||||
| Advisor associates | 233 | 238 | 237 | 221 | 252 | 254 | 262 | 265 | |||||||||||||||||||||||||||||||||||
| U&D revenues ($ in thousands) | $ | 110,735 | $ | 113,802 | $ | 105,787 | $ | 105,931 | $ | 103,942 | $ | 105,252 | $ | 106,000 | $ | 109,512 | |||||||||||||||||||||||||||
| Unaudited Consolidated Statement of Income | |||||||||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Dec. 31, | Sep. 30, | Dec. 31, | Sequential Qtr. | Year-over-Year Qtr. | |||||||||||||||||||||||||||||||
| 2017 | 2017 | 2016 | Change | % | Change | % | |||||||||||||||||||||||||||||
| Operating Revenues: | |||||||||||||||||||||||||||||||||||
| Investment management fees | $ | 136,387 | $ | 134,149 | $ | 132,709 | $ | 2,238 | 1.7 | % | $ | 3,678 | 2.8 | % | |||||||||||||||||||||
| Underwriting and distribution fees | 132,200 | 128,892 | 132,922 | 3,308 | 2.6 | % | (722 | ) | (0.5 | ) | % | ||||||||||||||||||||||||
| Shareholder service fees | 25,889 | 26,406 | 27,282 | (517 | ) | (2.0 | ) | % | (1,393 | ) | (5.1 | ) | % | ||||||||||||||||||||||
| Total operating revenues | 294,476 | 289,447 | 292,913 | 5,029 | 1.7 | % | 1,563 | 0.5 | % | ||||||||||||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||||||||||||||
| Underwriting and distribution | 151,038 | 141,830 | 158,390 | 9,208 | 6.5 | % | (7,352 | ) | (4.6 | ) | % | ||||||||||||||||||||||||
| Compensation and related costs | 55,281 | 31,076 | 52,450 | 24,205 | 77.9 | % | 2,831 | 5.4 | % | ||||||||||||||||||||||||||
| General and administrative | 23,811 | 27,832 | 22,288 | (4,021 | ) | (14.4 | ) | % | 1,523 | 6.8 | % | ||||||||||||||||||||||||
| Subadvisory fees | 3,717 | 3,566 | 2,588 | 151 | 4.2 | % | 1,129 | 43.6 | % | ||||||||||||||||||||||||||
| Depreciation | 5,357 | 5,230 | 5,196 | 127 | 2.4 | % | 161 | 3.1 | % | ||||||||||||||||||||||||||
| Intangible impairment | - | - | 4,049 | - | (4,049 | ) | N/M | ||||||||||||||||||||||||||||
| Total operating expenses | 239,204 | 209,534 | 244,961 | 29,670 | 14.2 | % | (5,757 | ) | (2.4 | ) | % | ||||||||||||||||||||||||
| Operating Income | 55,272 | 79,913 | 47,952 | (24,641 | ) | (30.8 | ) | % | 7,320 | 15.3 | % | ||||||||||||||||||||||||
| Investment and other income/(loss) | 4,303 | 7,236 | 890 | (2,933 | ) | (40.5 | ) | % | 3,413 | 383.5 | % | ||||||||||||||||||||||||
| Interest expense | (2,909 | ) | (2,796 | ) | (2,786 | ) | (113 | ) | (4.0 | ) | % | (123 | ) | (4.4 | ) | % | |||||||||||||||||||
| Income before taxes | 56,666 | 84,353 | 46,056 | (27,687 | ) | (32.8 | ) | % | 10,610 | 23.0 | % | ||||||||||||||||||||||||
| Provision for taxes | 26,380 | 29,499 | 16,958 | (3,119 | ) | (10.6 | ) | % | 9,422 | 55.6 | % | ||||||||||||||||||||||||
| Net Income | 30,286 | 54,854 | 29,098 | (24,568 | ) | (44.8 | ) | % | 1,188 | 4.1 | % | ||||||||||||||||||||||||
| Noncontrolling interests | 521 | 1,272 | 59 | (751 | ) | (59.0 | ) | % | 462 | 783.1 | % | ||||||||||||||||||||||||
| Net Income Attributable to Waddell & Reed Financial, Inc. | $ | 29,765 | $ | 53,582 | $ | 29,039 | ($23,817 | ) | (44.4 | ) | % | $ | 726 | 2.5 | % | ||||||||||||||||||||
| Net income per share, basic and diluted: | 0.36 | 0.64 | 0.35 | ||||||||||||||||||||||||||||||||
| Weighted average shares outstanding - basic and diluted | 83,137 | 83,476 | 82,783 | ||||||||||||||||||||||||||||||||
| Operating margin | 18.8 | % | 27.6 | % | 16.4 | % | |||||||||||||||||||||||||||||
| Net Distribution Cost Analysis | |||||||||||||||||||||||||||||||||||
| ($ in thousands) | Three Months Ended | ||||||||||||||||||||||||||||||||||
| Dec. 31, | Sep. 30, | Dec. 31, | Sequential Qtr. | Year-over-Year Qtr. | |||||||||||||||||||||||||||||||
| 2017 | 2017 | 2016 | Change | % | Change | % | |||||||||||||||||||||||||||||
| Retail Unaffiliated Distribution | |||||||||||||||||||||||||||||||||||
| U&D Revenues | $ | 22,688 | $ | 22,892 | $ | 26,991 | (204 | ) | (0.9 | ) | % | (4,303 | ) | (15.9 | ) | % | |||||||||||||||||||
| U&D Expenses - Direct | (31,392 | ) | (31,779 | ) | (35,854 | ) | (387 | ) | (1.2 | ) | % | (4,462 | ) | (12.4 | ) | % | |||||||||||||||||||
| U&D Expenses - Indirect | (9,919 | ) | (8,581 | ) | (13,412 | ) | 1,338 | 15.6 | % | (3,493 | ) | (26.0 | ) | % | |||||||||||||||||||||
| Net Distribution Costs | ($18,623 | ) | ($17,468 | ) | ($22,275 | ) | (1,155 | ) | (6.6 | ) | % | 3,652 | 16.4 | % | |||||||||||||||||||||
| Retail Broker-Dealer | |||||||||||||||||||||||||||||||||||
| U&D Revenues | $ | 109,512 | $ | 106,000 | $ | 105,931 | 3,512 | 3.3 | % | 3,581 | 3.4 | % | |||||||||||||||||||||||
| U&D Expenses - Direct | (72,675 | ) | (71,119 | ) | (72,380 | ) | 1,556 | 2.2 | % | 295 | 0.4 | % | |||||||||||||||||||||||
| U&D Expenses - Indirect | (37,052 | ) | (30,351 | ) | (36,744 | ) | 6,701 | 22.1 | % | 308 | 0.8 | % | |||||||||||||||||||||||
| Net Distribution Costs | ($215 | ) | $ | 4,530 | ($3,193 | ) | (4,745 | ) | N/M | 2,978 | N/M | ||||||||||||||||||||||||
| Unaudited Consolidated Statement of Income | ||||||||||||||||||||
| ($ in thousands, except per share data) | ||||||||||||||||||||
| Twelve Months Ended | ||||||||||||||||||||
| Dec. 31, | Dec. 31, | |||||||||||||||||||
| 2017 | 2016 | Change | % | |||||||||||||||||
| Operating Revenues: | ||||||||||||||||||||
| Investment management fees | $ | 531,850 | $ | 557,112 | ($25,262 | ) | (4.5 | ) | % | |||||||||||
| Underwriting and distribution fees | 518,699 | 561,670 | (42,971 | ) | (7.7 | ) | % | |||||||||||||
| Shareholder service fees | 106,595 | 120,241 | (13,646 | ) | (11.3 | ) | % | |||||||||||||
| Total operating revenues | 1,157,144 | 1,239,023 | (81,879 | ) | (6.6 | ) | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Underwriting and distribution | 593,424 | 664,648 | (71,224 | ) | (10.7 | ) | % | |||||||||||||
| Compensation and related costs | 181,376 | 200,822 | (19,446 | ) | (9.7 | ) | % | |||||||||||||
| General and administrative | 105,520 | 83,996 | 21,524 | 25.6 | % | |||||||||||||||
| Subadvisory fees | 13,174 | 9,572 | 3,602 | 37.6 | % | |||||||||||||||
| Depreciation | 20,983 | 18,359 | 2,624 | 14.3 | % | |||||||||||||||
| Intangible impairment | 1,500 | 9,749 | (8,249 | ) | (84.6 | ) | % | |||||||||||||
| Total operating expenses | 915,977 | 987,146 | (71,169 | ) | (7.2 | ) | % | |||||||||||||
| Operating Income | 241,167 | 251,877 | (10,710 | ) | (4.3 | ) | % | |||||||||||||
| Investment and other income/(loss) | 15,689 | (763 | ) | 16,452 | N/M | |||||||||||||||
| Interest expense | (11,279 | ) | (11,122 | ) | (157 | ) | 1.4 | % | ||||||||||||
| Income before taxes | 245,577 | 239,992 | 5,585 | 2.3 | % | |||||||||||||||
| Provision for taxes | 101,368 | 81,884 | 19,484 | 23.8 | % | |||||||||||||||
| Net Income | 144,209 | 158,108 | (13,899 | ) | (8.8 | ) | % | |||||||||||||
| Noncontrolling interests | 2,930 | 1,414 | 1,516 | 107.2 | % | |||||||||||||||
| Net Income Attributable to Waddell & Reed Financial, Inc. | $ | 141,279 | $ | 156,694 | ($15,415 | ) | (9.8 | ) | % | |||||||||||
| Net income per share, basic and diluted: | 1.69 | 1.90 | ||||||||||||||||||
| Weighted average shares outstanding - basic and diluted | 83,573 | 82,668 | ||||||||||||||||||
| Operating margin | 20.8 | % | 20.3 | % | ||||||||||||||||
| Net Distribution Cost Analysis | ||||||||||||||||||||
| ($ in thousands) | Twelve Months Ended | |||||||||||||||||||
| Dec. 31, | Dec. 31, | |||||||||||||||||||
| 2017 | 2016 | Change | % | |||||||||||||||||
| Retail Unaffiliated Distribution | ||||||||||||||||||||
| U&D Revenues | $ | 93,994 | $ | 125,415 | (31,421 | ) | (25.1 | ) | % | |||||||||||
| U&D Expenses - Direct | (130,077 | ) | (164,641 | ) | (34,564 | ) | (21.0 | ) | % | |||||||||||
| U&D Expenses - Indirect | (38,178 | ) | (52,210 | ) | (14,032 | ) | (26.9 | ) | % | |||||||||||
| Net Distribution Costs | ($74,261 | ) | ($91,436 | ) | 17,175 | 18.8 | % | |||||||||||||
| Retail Broker-Dealer | ||||||||||||||||||||
| U&D Revenues | $ | 424,706 | $ | 436,255 | (11,549 | ) | (2.6 | ) | % | |||||||||||
| U&D Expenses - Direct | (286,306 | ) | (312,673 | ) | (26,367 | ) | (8.4 | ) | % | |||||||||||
| U&D Expenses - Indirect | (138,863 | ) | (135,124 | ) | 3,739 | 2.8 | % | |||||||||||||
| Net Distribution Costs | ($463 | ) | ($11,542 | ) | 11,079 | 96.0 | % | |||||||||||||
| Unaudited Condensed Balance Sheet | |||||||
| ($ in thousands) | Dec. 31, | Dec. 31, | |||||
| 2017 | 2016 | ||||||
| Assets | |||||||
| Cash & cash equivalents (unrestricted) | $207,829 | $555,102 | |||||
| Investment securities | 700,492 | 328,750 | |||||
| Other assets | 221,407 | 271,402 | |||||
| Property and equipment, net | 87,667 | 102,449 | |||||
| Goodwill and intangible assets | 147,069 | 148,569 | |||||
| Total assets | $1,364,464 | $1,406,272 | |||||
| Liabilities, redeemable noncontrolling interests and equity | |||||||
| Short-term notes payable | $94,996 | - | |||||
| Long-term debt | 94,783 | 189,605 | |||||
| Other liabilities | 287,292 | 362,012 | |||||
| Redeemable noncontrolling interests | 14,509 | 10,653 | |||||
| Total equity | 872,884 | 844,002 | |||||
| Liabilities, redeemable noncontrolling interests and equity | $1,364,464 | $1,406,272 | |||||
|
Shares outstanding (in millions) |
82.7 | 83.1 | |||||
| Unaudited Condensed Cash Flow | |||||||||||||||||||||||||||
| ($ in thousands) | Three Months Ended | Twelve Months Ended | |||||||||||||||||||||||||
| Dec. 31, | Sep. 30, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||
| Cash provided by (used in): | 2017 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||
| Operating activities | $ | 70,519 | $ | 20,682 | $ | 57,588 | $ | 53,939 | $ | 123,647 | |||||||||||||||||
| Investing activities | (13,415 | ) | (181,312 | ) |
6,590 |
(212,395 | ) |
75,871 |
|||||||||||||||||||
| Financing activities | (75,197 | ) | (41,387 | ) |
(38,860 |
) | (188,817 | ) |
(202,911 |
) | |||||||||||||||||
| Net change during period | ($18,093 | ) | ($202,017 | ) | $ | 25,318 | ($347,273 | ) | ($3,393 | ) | |||||||||||||||||
| Three Months Ended | Twelve Months Ended | ||||||||||||||||||||||||||
| Dec. 31, | Sep. 30, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||
| ($ in thousands) | 2017 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||
| Shares repurchased | |||||||||||||||||||||||||||
| Number of shares | 937,927 | 190,056 | 90,692 | 1,842,337 | 2,320,726 | ||||||||||||||||||||||
| Total cost | $ | 20,133 | $ | 3,622 | $ | 1,769 | $ | 35,768 | $ | 49,753 | |||||||||||||||||
| Dividend paid | |||||||||||||||||||||||||||
| Rate per share | $ | 0.46 | $ | 0.46 | $ | 0.46 | $ | 1.84 | $ | 1.84 | |||||||||||||||||
| Total paid | $ | 38,351 | $ | 38,455 | $ | 38,094 | $ | 154,042 | $ | 152,830 | |||||||||||||||||
| Capital returned to stockholders | $ | 58,484 | $ | 42,077 | $ | 39,863 | $ | 189,810 | $ | 202,583 | |||||||||||||||||
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 ir.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 ir.waddell.com. Under the "Investor Information" tab you will find a link to presentations as well as to data tables, which include supplemental information schedules.
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 (through 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 adviser to the Waddell & Reed Advisors Group of Mutual Funds, while Ivy Investment Management Company serves as investment adviser to Ivy Funds, Ivy NextShares, Ivy Variable Insurance Portfolios and InvestEd Portfolios, and investment adviser and global distributor to the Ivy Global Investors SICAV, an umbrella UCITS fund domiciled in Luxembourg. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds and InvestEd Portfolios, while Ivy Distributors, Inc. serves as principal underwriter and distributor to Ivy Funds and Ivy Variable Insurance Portfolios.
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, stock repurchases 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, 2016, 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;
- Changes in our business model, operations and procedures, including our methods of distributing our proprietary products, as a result of the Department of Labor's new fiduciary rule;
- 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;
- 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, 2016 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2017. 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.
View source version on businesswire.com: http://www.businesswire.com/news/home/20180130005379/en/
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