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WDR > SEC Filings for WDR > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for WADDELL & REED FINANCIAL INC

Form 10-Q for WADDELL & REED FINANCIAL INC


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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 or on behalf of the Company 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, 2012, which include, without limitation:

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;

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 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;

Our inability to implement new information technology and systems, or inability to complete such implementation in a timely or cost effective manner;

Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

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; and

Our inability to hire and retain senior executive management and other key personnel.

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, 2012 and as updated in our


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quarterly reports on Form 10-Q for the year ending December 31, 2013. 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.

Overview

Founded in 1937, we are one of the oldest mutual fund complexes in the United States, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.

We derive our revenues from providing investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of commissions derived from sales of investment and insurance products, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, fees earned on fee-based asset allocation products, and related advisory services. The products sold have various commission structures and the revenues received from those sales vary based on the type and amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts. Our major expenses are underwriting and distribution-related commissions, employee compensation, amortization of deferred sales commissions, subadvisory fee expenses and information technology expense.

One of our distinctive qualities is that we are a significant distributor of investment products. Our retail products are distributed through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors and various retirement platforms, or through our Advisors channel sales force of independent financial advisors. We also market our investment advisory services to institutional investors, either directly or through consultants, in our Institutional channel.


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Company Highlights

In May, Ivy Funds successfully completed its initial public offering of the Ivy High Income Opportunities Fund, our first closed-end fund.

We internalized management of the Ivy Global Natural Resources Fund and Ivy VIP Global Natural Resources Fund effective July 2, 2013. These funds were previously subadvised by Mackenzie Financial Corporation.

In April, we launched the Ivy Global Real Estate Fund and Ivy Global Risk-Managed Real Estate Fund, both subadvised by LaSalle Investment Management Securities.

Income from continuing operations increased 26% compared to the second quarter of 2012, and our operating margin was 25.6%, an improvement from 23.3% for the same period a year ago.

Our assets under management increased 0.5% during the quarter, from $103.8 billion to $104.3 billion, driven by net inflows.

The Company renewed its credit facility by entering into a five year revolving credit facility (the "New Credit Facility") with various lenders, effective June 28, 2013, with favorable pricing compared to its expiring three year credit facility.

The Company sold its Legend group of subsidiaries ("Legend") effective January 1, 2013. The operational results of Legend have been reclassified as discontinued operations in the unaudited consolidated financial statements for the three and six months ended June 30, 2012. Unless stated otherwise, any reference to income statement items refers to results from continuing operations.

Our balance sheet remains solid, and we ended the quarter with cash and investments of $546.5 million.


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Assets Under Management

During the second quarter, assets under management increased to $104.3 billion compared to $103.8 billion on March 31, 2013 due to net inflows of $935 million, offset by market depreciation of $386 million.

Of the $1.1 billion net inflows in the Wholesale channel during the quarter, $303 million were a result of the launch of the Ivy High Income Opportunities closed-end mutual fund.

Change in Assets Under Management(1)



                                                   Second Quarter 2013
                                      Wholesale    Advisors   Institutional    Total
                                                      (in millions)

Beginning Assets                     $    53,254     37,915          12,626   103,795

Sales and Other Net Inflows(2)             5,030      1,404             379     6,813
Redemptions                               (3,983 )   (1,083 )          (811 )  (5,877 )
Net Exchanges                                 61        (62 )             -        (1 )
Net Flows                                  1,108        259            (432 )     935

Market Appreciation (Depreciation)          (502 )       (2 )           118      (386 )
Ending Assets                        $    53,860     38,172          12,312   104,344




                                               Second Quarter 2012
                                  Wholesale    Advisors   Institutional   Total
                                                  (in millions)

Beginning Assets                 $    46,738     35,073          11,981   93,792

Sales and Other Net Inflows(2)         4,113      1,193             625    5,931
Redemptions                           (3,535 )     (961 )        (1,058 ) (5,554 )
Net Exchanges                             48        (49 )             -       (1 )
Net Flows                                626        183            (433 )    376

Market Depreciation                   (2,985 )   (1,410 )          (654 ) (5,049 )
Ending Assets                    $    44,379     33,846          10,894   89,119


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Assets under management increased to $104.3 billion at June 30, 2013 compared to $96.4 billion on December 31, 2012 due to market appreciation of $4.9 billion and net inflows of $3.0 billion.

                                                Year to Date 2013
                                  Wholesale    Advisors   Institutional    Total
                                                  (in millions)

Beginning Assets                 $    48,930     35,660          11,775    96,365

Sales and Other Net Inflows(2)        10,072      2,707             809    13,588
Redemptions                           (7,140 )   (2,130 )        (1,280 ) (10,550 )
Net Exchanges                            127       (128 )             -        (1 )
Net Flows                              3,059        449            (471 )   3,037

Market Appreciation                    1,871      2,063           1,008     4,942
Ending Assets                    $    53,860     38,172          12,312   104,344




                                                Year to Date 2012
                                  Wholesale    Advisors   Institutional    Total
                                                  (in millions)

Beginning Assets                 $    40,954     31,709          10,494    83,157

Sales and Other Net Inflows(2)         8,633      2,290           1,307    12,230
Redemptions                           (6,981 )   (2,003 )        (1,565 ) (10,549 )
Net Exchanges                            (56 )       54               -        (2 )
Net Flows                              1,596        341            (258 )   1,679

Market Appreciation                    1,829      1,796             658     4,283
Ending Assets                    $    44,379     33,846          10,894    89,119



(1) Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

(2) Sales and Other Net Inflows is primarily gross sales (net of sales commission). This amount also includes net reinvested dividends and capital gains and investment income.

During the second quarter of 2013, we completed the initial public offering of our first closed-end mutual fund, the Ivy High Income Opportunities Fund. This fund, which trades under the symbol "IVH" on the New York Stock Exchange, raised $317.0 million in its common share offering, and an additional $14.0 million related to the exercise of the underwriters' option to purchase additional shares, which was completed during the third quarter. The fund has a leverage provision; as of June 30, 2013, the fund had utilized $60.0 million of the allowable leverage. The fund's investment objective is to seek to provide total return through a combination of a high level of current income and capital appreciation. The fund will seek to achieve its objective by investing primarily in high yield corporate bonds of varying maturities, secured loans and other corporate fixed income instruments.


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Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.

Average Assets Under Management



                              Second Quarter 2013
                Wholesale    Advisors   Institutional     Total
                                 (in millions)

Asset Class:
Equity         $    42,685     27,404          10,065   $  80,154
Fixed Income        11,236      9,700             644      21,580
Money Market           174      1,404               -       1,578
Total          $    54,095     38,508          10,709   $ 103,312




                              Second Quarter 2012
                Wholesale    Advisors   Institutional    Total
                                 (in millions)

Asset Class:
Equity         $    37,597     23,897          10,651   $ 72,145
Fixed Income         6,991      8,788             766     16,545
Money Market           185      1,308               -      1,493
Total          $    44,773     33,993          11,417   $ 90,183




                               Year to Date 2013
                Wholesale    Advisors   Institutional     Total
                                 (in millions)

Asset Class:
Equity         $    41,875     26,834          10,767   $  79,476
Fixed Income        10,859      9,648             720      21,227
Money Market           171      1,387               -       1,558
Total          $    52,905     37,869          11,487   $ 102,261




                               Year to Date 2012
                Wholesale    Advisors   Institutional    Total
                                 (in millions)

Asset Class:
Equity         $    38,249     24,091          10,525   $ 72,865
Fixed Income         6,380      8,599             776     15,755
Money Market           205      1,312               -      1,517
Total          $    44,834     34,002          11,301   $ 90,137


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Results of Operations - Three and Six Months Ended June 30, 2013 as Compared with Three and Six Months Ended June 30, 2012

Income from continuing operations

                                              Three months ended
                                                   June 30,
                                             2013            2012         Variance

Net income from continuing operations    $      51,957         41,225             26 %

Net income per share from continuing
operations, basic and diluted            $        0.61           0.48             27 %

Operating Margin                                  25.6 %         23.3 %           10 %




                                               Six months ended
                                                   June 30,
                                             2013            2012         Variance

Net income from continuing operations    $     105,820         88,062             20 %

Net income per share from continuing
operations, basic and diluted            $        1.23           1.03             19 %

Operating Margin                                  25.9 %         24.1 %            7 %

We reported net income from continuing operations of $52.0 million, or $0.61 per diluted share, for the second quarter of 2013 compared to $41.2 million, or $0.48 per diluted share, for the second quarter of 2012.

For the six months ended June 30, 2013, net income from continuing operations was $105.8 million or $1.23 per diluted share, compared to $88.1 million, or $1.03 per diluted share, for the six months ended June 30, 2012.

Related to the launch of the Ivy High Income Opportunities Fund in the second quarter, we incurred one-time pre-tax expenses of $8.6 million, recorded in underwriting and distribution and general and administrative expenses. These items will be discussed in the related sections that follow.

Total Revenues

Total revenues increased 15% to $331.7 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 due to an increase in both average assets under management and gross sales of 15%. For the six months ended June 30, 2013, total revenues increased $70.7 million, or 12% compared to the same period in the prior year due to an increase in average assets under management of 13%, and in increase in gross sales of 11%.


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                                           Three months ended
                                                June 30,
                                           2013             2012         Variance
                                         (in thousands, except percentage data)

Investment management fees           $        156,219       134,213              16 %
Underwriting and distribution fees            141,597       123,687              14 %
Shareholder service fees                       33,890        31,786               7 %
Total revenues                       $        331,706       289,686              15 %




                                           Six months ended
                                               June 30,
                                          2013            2012          Variance
                                         (in thousands, except percentage data)

Investment management fees           $      304,664        269,113               13 %
Underwriting and distribution fees          277,016        244,840               13 %
Shareholder service fees                     66,581         63,604                5 %
Total revenues                       $      648,261        577,557               12 %

Investment Management Fee Revenues

Investment management fee revenues are earned for providing investment advisory services to the Funds and to institutional and separate accounts. Investment management fee revenues increased $22.0 million, or 16%, from last year's second quarter. For the six month period ended June 30, 2013, investment management fee revenues increased $35.6 million, or 13%, compared to the same period in 2012.

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Wholesale, Advisors and Institutional channels, were $144.4 million for the quarter ended June 30, 2013. Revenues increased $20.8 million, or 17%, compared to the second quarter of 2012, while the related retail average assets increased 18% to $92.6 billion. Investment management fee revenues increased less than the related retail average assets due to a shift in assets to products with lower management fee rates. For the six months ended June 30, 2013, revenues from investment management services provided to our retail mutual funds were $281.3 million. Revenues increased $33.5 million, or 14%, compared to the first six months of 2012, while the related retail average assets increased 15% to $90.8 billion. Investment management fee revenues increased less than the related retail average assets due in part to a shift in assets toward products with lower than average management fee rates, as well as one less day in the first six months of 2013 compared to 2012.

Institutional account revenues were $11.8 million for the second quarter of 2013, representing an increase of $1.2 million, or 11%, from the second quarter of 2012, while average assets increased 12%. For the six month period ended June 30, 2013, institutional account revenues were $23.4 million, an increase of 10% compared to the same period in 2012, and average assets increased 11%. For both periods, account revenues increased less than the related average assets due to a decline in the average management fee rate.

Long-term redemption rates (which exclude money market fund redemptions) in the Wholesale channel were 29.4% in the second quarter of 2013 and 27.1% year-to-date, compared to 31.5% in the second quarter of 2012 and 31.1% for the first six months of 2012. In the Advisors channel, long-term redemption rates were 9.1% for the quarters ended June 30, 2013, and June 30, 2012. For the six months ended June 30, 2013, the Advisor channel's long-term redemption rate decreased to 9.3% compared to 9.6% for the same period in 2012. We expect the Advisors channel long-term redemption rate to remain lower than that of the industry average due to the personal and customized nature in which our financial advisors provide service to our clients. Long-term redemption rates for our Institutional channel were 25.5% and 37.3% for the second quarter of 2013 and 2012, respectively, and 20.6% for the six month period ended June 30, 2013 compared to 27.9% for the same period in 2012.


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Our overall redemption rate of 19.9% for the first six months of 2013 compares positively to the current year to date industry average of approximately 24%, based on data from the Investment Company Institute.

Underwriting and Distribution Fee Revenues and Expenses



The following tables summarize our underwriting and distribution fee revenues
and expenses segregated by distribution method within the respective Wholesale
or Advisors channel:



                                        Second Quarter 2013
                                  Wholesale    Advisors    Total
                                           (in thousands)

Revenue                           $   49,846     91,751    141,597
Expenses - Direct                    (64,694 )  (62,794 ) (127,488 )
Expenses - Indirect                  (11,229 )  (26,127 )  (37,356 )
Net Distribution (Costs)/Excess   $  (26,077 )    2,830    (23,247 )




                                 Second Quarter 2012
                           Wholesale    Advisors    Total
                                    (in thousands)

Revenue                    $   43,908     79,779    123,687
Expenses - Direct             (55,287 )  (55,813 ) (111,100 )
Expenses - Indirect           (10,212 )  (26,755 )  (36,967 )
Net Distribution (Costs)   $  (21,591 )   (2,789 )  (24,380 )




                                         Year to Date 2013
                                  Wholesale    Advisors    Total
                                           (in thousands)

Revenue                           $   98,021    178,995    277,016
Expenses - Direct                   (128,242 ) (122,451 ) (250,693 )
Expenses - Indirect                  (22,229 )  (53,493 )  (75,722 )
Net Distribution (Costs)/Excess   $  (52,450 )    3,051    (49,399 )




                                  Year to Date 2012
                           Wholesale    Advisors    Total
                                    (in thousands)

Revenue                    $   88,381    156,459    244,840
Expenses - Direct            (110,391 ) (109,489 ) (219,880 )
Expenses - Indirect           (19,551 )  (53,122 )  (72,673 )
Net Distribution (Costs)   $  (41,561 )   (6,152 )  (47,713 )

Underwriting and distribution revenues earned in the second quarter of 2013 increased $17.9 million, or 14%, compared with the second quarter of 2012 due to increased revenues in our Advisors channel of $12.0 million, and increased revenues in our Wholesale channel of $5.9 million. Revenues from fee-based asset allocation products increased $8.8 million compared to the prior year, as assets grew from $8.8 billion at June 30, 2012 to $11.8 billion at June 30, 2013. Rule 12b-1 asset-based service and distribution fee revenues increased $8.7 million, or 14%, primarily due to an increase in average mutual fund assets under


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management. Insurance premiums collected from our advisors increased revenues $0.7 million. Prior to the first quarter of 2013, these premiums were netted in operating expenses. Partially offsetting these increases, variable annuity revenues decreased $1.6 million.

For the six months ended June 30, 2013, underwriting and distribution revenues increased $32.2 million, or 13%, compared with the six months ended June 30, 2012. The increase was comprised of an increase in the Advisors channel of $22.5 million and a $9.7 million increase in Wholesale channel revenues period over period. Revenues from fee-based asset allocation products increased $17.5 million compared to the prior year. Rule 12b-1 asset-based service and distribution fee revenues increased $14.3 million, or 11%, due to an increase in average mutual fund assets under management. Insurance premiums collected from our advisors increased revenues $1.4 million. Prior to the first quarter of 2013, these premiums were netted in operating expenses. Partially offsetting these increases, variable annuity revenues decreased $3.2 million compared to the prior year.

Underwriting and distribution expenses increased by $16.8 million, or 11%, compared to the second quarter of 2012. The second quarter of 2013 included $1.8 million of underwriting and distribution expenses in the Wholesale channel associated with the launch of the Ivy High Income Opportunities closed-end fund. . . .

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