Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WDR > SEC Filings for WDR > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for WADDELL & REED FINANCIAL INC

Form 10-Q for WADDELL & REED FINANCIAL INC


1-Aug-2014

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, 2013, 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;

Our inability to provide sufficient capital to support new investment products;

The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;

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 attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment management advisory business.

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, 2013 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2014. All forward-looking statements


Table of Contents

speak only as 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 services, 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 Rule 12b-1 asset-based service and distribution fees, fees earned on fee-based asset allocation products and related advisory services, distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. 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 commissions, employee compensation, field support, dealer services expense and information technology expense.

One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. 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, and through our Advisors channel sales force of independent financial advisors. Through the Institutional channel, we serve as sub-advisor for domestic and foreign distributors of investment products and manage investments for pension funds, Taft-Hartley plans and endowments.


Table of Contents

Second Quarter Highlights

In April, we launched the Ivy Emerging Markets Local Currency Debt Fund, subadvised by Pictet Asset Management. The fund provides investors the opportunity to capture fixed income opportunities from a select group of emerging market economies.

In May, we signed a fund adoption transaction agreement with Emerging Managers Group ("EMG") through which Ivy Investment Management Company will take over responsibility as investment adviser and Ivy Funds Distributor, Inc. as distributor of the Selector Management Fund SICAV (collectively, Ivy Investment Management Company and Ivy Funds Distributor, Inc. are referred to as "Ivy"). This agreement, which received regulatory approval in July and is expected to close during the third quarter, will allow Ivy to serve the non-resident customer market through national broker-dealer firms in the United States and establish a greater international distribution of Ivy's investment management capabilities.

Operating revenues of $400.6 million increased $68.9 million, or 21%, compared to the second quarter of 2013.

Operating income of $123.6 million increased $38.6 million, or 45%, compared to the second quarter of 2013, and net income of $83.0 million increased $25.7 million, or 45%, over this same period, when excluding costs from the launch of the Ivy High Income Opportunities closed-end fund in 2013.

Our operating margin was 30.9%, an improvement from 25.6% for the same period a year ago.

Our assets under management increased 30% from $104.3 billion at June 30, 2013 to $135.6 billion at June 30, 2014.

Company-wide sales exceeded $100.0 million for eleven investment strategies, including two investment strategies for which sales exceeded $500.0 million and two investment strategies for which sales exceeded $1.0 billion.

Sales increased 10% to $7.5 billion for the second quarter of 2014 compared to the same period in 2013.

Our balance sheet remains solid, and we ended the quarter with cash and investments of $725.0 million.


Table of Contents

Assets Under Management

Assets under management increased to $135.6 billion compared to $104.3 billion on June 30, 2013.

Change in Assets Under Management(1)



                                                   Second Quarter 2014
                                      Wholesale    Advisors   Institutional    Total
                                                      (in millions)
Beginning Assets                     $    70,467     44,224          16,692   131,383

Sales(2)                                   4,864      1,457           1,193     7,514
Redemptions                               (4,363 )   (1,098 )          (851 )  (6,312 )
Net Exchanges                               (397 )      (88 )           485         -
Net Flows                                    104        271             827     1,202

Market Appreciation                        1,100      1,302             646     3,048
Ending Assets                        $    71,671     45,797          18,165   135,633

                                                   Second Quarter 2013
                                      Wholesale    Advisors   Institutional    Total
                                                      (in millions)
Beginning Assets                     $    53,254     37,915          12,626   103,795

Sales(2)                                   5,030      1,403             379     6,812
Redemptions                               (3,983 )   (1,083 )          (811 )  (5,877 )
Net Exchanges                                 61        (61 )             -         -
Net Flows                                  1,108        259            (432 )     935

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


Table of Contents

Assets under management increased to $135.6 billion at June 30, 2014 compared to $126.5 billion on December 31, 2013 due to inflows of $5.9 billion and market appreciation of $3.2 billion.

                                     Year to Date 2014
                       Wholesale    Advisors   Institutional    Total
                                       (in millions)
Beginning Assets      $    67,055     43,667          15,821   126,543

Sales(2)                   11,881      2,892           2,747    17,520
Redemptions                (7,925 )   (2,204 )        (1,530 ) (11,659 )
Net Exchanges                (285 )     (200 )           485         -
Net Flows                   3,671        488           1,702     5,861

Market Appreciation           945      1,642             642     3,229
Ending Assets         $    71,671     45,797          18,165   135,633




                                     Year to Date 2013
                       Wholesale    Advisors   Institutional    Total
                                       (in millions)
Beginning Assets      $    48,930     35,660          11,775    96,365

Sales(2)                   10,072      2,706             809    13,587
Redemptions                (7,140 )   (2,130 )        (1,280 ) (10,550 )
Net Exchanges                 127       (127 )             -         -
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



(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) Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and investment income.


Table of Contents

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 2014
                Wholesale    Advisors   Institutional     Total
                                 (in millions)

Asset Class:
Equity         $    55,679     32,547          16,410   $ 104,636
Fixed Income        14,254      9,903             785      24,942
Money Market           167      2,066               -       2,233
Total          $    70,100     44,516          17,195   $ 131,811




                              Second Quarter 2013
                Wholesale    Advisors   Institutional     Total
                                 (in millions)

Asset Class:
Equity         $    42,685     27,404          12,003   $  82,092
Fixed Income        11,236      9,700             735      21,671
Money Market           174      1,404               -       1,578
Total          $    54,095     38,508          12,738   $ 105,341




                               Year to Date 2014
                Wholesale    Advisors   Institutional     Total
                                 (in millions)

Asset Class:
Equity         $    55,367     32,498          15,975   $ 103,840
Fixed Income        13,820      9,761             710      24,291
Money Market           176      1,996               -       2,172
Total          $    69,363     44,255          16,685   $ 130,303




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

Asset Class:
Equity         $    41,875     26,834          11,741   $  80,450
Fixed Income        10,859      9,648             766      21,273
Money Market           171      1,387               -       1,558
Total          $    52,905     37,869          12,507   $ 103,281


Table of Contents

Results of Operations - Three and Six Months Ended June 30, 2014 as Compared with Three and Six Months Ended June 30, 2013

Net Income



                                         Three months ended
                                              June 30,
                                           2014         2013    Variance

Net Income                              $    82,988    51,957         60 %

Earnings per share, basic and diluted   $      0.98      0.61         61 %

Operating Margin                               30.9 %    25.6 %       21 %




                                         Six months ended
                                             June 30,
                                          2014       2013     Variance

Net Income                              $ 157,852   105,820         49 %

Earnings per share, basic and diluted   $    1.86      1.23         51 %

Operating Margin                             30.4 %    25.9 %       17 %

Total Revenues

Total revenues increased 21% to $400.6 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 due to an increase in average assets under management of 25% and an increase in sales of 10%. For the six months ended June 30, 2014, total revenues increased $142.8 million, or 22% compared to the same period in the prior year due to an increase in average assets under management of 26%, and an increase in sales of 29%.

                                           Three months ended
                                                June 30,
                                           2014             2013         Variance
                                         (in thousands, except percentage data)

Investment management fees           $        193,624       156,219              24 %
Underwriting and distribution fees            169,001       141,597              19 %
Shareholder service fees                       38,009        33,890              12 %
Total revenues                       $        400,634       331,706              21 %


Table of Contents

                                           Six months ended
                                               June 30,
                                          2014            2013          Variance
                                         (in thousands, except percentage data)

Investment management fees           $      381,661        304,664               25 %
Underwriting and distribution fees          334,268        277,016               21 %
Shareholder service fees                     75,121         66,581               13 %
Total revenues                       $      791,050        648,261               22 %

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 $37.4 million, or 24%, from last year's second quarter. For the six month period ended June 30, 2014, investment management fee revenues increased $77.0 million, or 25%, compared to the same period in 2013.

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Wholesale and Advisors channels, were $179.0 million for the quarter ended June 30, 2014. Revenues increased $34.6 million, or 24%, compared to the second quarter of 2013, while the related retail average assets increased 24% to $114.6 billion. Management fee waivers of $2.8 and $2.4 million were recorded as an offset to investment management fees for the periods ending June 30, 2014 and June 30, 2013, respectively. Of the total management fee waivers recorded, $2.1 million was related to money market accounts for the second quarter of 2014 and $1.5 million was related to money market accounts for the second quarter of 2013. For the six months ended June 30, 2014, revenues from investment management services provided to our retail mutual funds were $353.0 million. Revenues increased $71.8 million, or 26%, compared to the first six months of 2013, while the related retail average assets increased 25% to $113.6 billion. Management fee waivers of $5.6 and $4.6 million were recorded as an offset to investment management fees for the six months ending June 30, 2014 and June 30, 2013, respectively. Of the total management fee waivers recorded, $4.0 million was related to money market accounts for the first six months of 2014 and $2.9 million was related to money market accounts for the first six months of 2013.

Institutional account revenues were $14.6 million for the second quarter of 2014, representing an increase of $2.8 million, or 24%, from the second quarter of 2013, while average assets increased 35%. For the six month period ended June 30, 2014, institutional account revenues were $28.7 million, an increase of 22% compared to the same period in 2013, and average assets increased 33%. For both periods, account revenues increased less than the related average assets due to a decline in the average management fee rate. The decline in the average management fee rate was driven by a mix-shift of assets into investment styles and account types with lower management fee rates.

Long-term redemption rates (which exclude money market fund redemptions) in the Wholesale channel were 25.1% in the second quarter of 2014 and 23.1% year-to-date, compared to 29.4% in the second quarter of 2013 and 27.1% for the first six months of 2013. In the Advisors channel, long-term redemption rates were 7.9% for the quarter ended June 30, 2014 compared to 9.1% in the second quarter of 2013. For the six months ended June 30, 2014, the Advisor channel's long-term redemption rate decreased to 8.1% compared to 9.3% for the same period in 2013. 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 by focusing on meeting their long-term financial objectives. Long-term redemption rates for our Institutional channel were 19.9% and 25.5% for the second quarter of 2014 and 2013, respectively, and 18.5% for the six month period ended June 30, 2014 compared to 20.6% for the same period in 2013.

Our overall redemption rate of 17.5% for the first six months of 2014 compares positively to the current year to date industry average of approximately 23%, based on data from the Investment Company Institute.


Table of Contents

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 2014
                                  Wholesale    Advisors    Total
                                           (in thousands)

Revenue                           $   60,237    108,764    169,001
Expenses - Direct                    (76,834 )  (76,867 ) (153,701 )
Expenses - Indirect                  (12,791 )  (29,116 )  (41,907 )
Net Distribution (Costs)/Excess   $  (29,388 )    2,781    (26,607 )




                                        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 )




                                         Year to Date 2014
                                  Wholesale    Advisors    Total
                                           (in thousands)

Revenue                           $  119,801    214,467    334,268
Expenses - Direct                   (156,534 ) (151,564 ) (308,098 )
Expenses - Indirect                  (24,326 )  (58,135 )  (82,461 )
Net Distribution (Costs)/Excess   $  (61,059 )    4,768    (56,291 )




                                         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 )


Table of Contents

The following tables summarize the significant components of underwriting and distribution fee revenues segregated by distribution channel:

                                                      Second Quarter 2014
                                            Wholesale       Advisors         Total
                                                        (in thousands)

Underwriting and distribution fee
revenues
Rule 12b-1 service and distribution
fees                                      $      57,712         30,200         87,912
Fee-based asset allocation product
revenues                                              -         49,348         49,348
Sales commissions on front-end load
mutual fund and variable annuity sales            1,638         17,134         18,772
Sales commissions on other products                   -          6,443          6,443
Other revenues                                      887          5,639          6,526
Total                                     $      60,237        108,764        169,001




                                                      Second Quarter 2013
                                            Wholesale       Advisors         Total
                                                        (in thousands)

Underwriting and distribution fee
revenues
Rule 12b-1 service and distribution
fees                                      $      47,654         25,986         73,640
Fee-based asset allocation product
revenues                                              -         37,042         37,042
Sales commissions on front-end load
mutual fund and variable annuity sales            1,282         18,287         19,569
Sales commissions on other products                   -          5,150          5,150
Other revenues                                      910          5,286          6,196
Total                                     $      49,846         91,751        141,597




                                                       Year to Date 2014
                                            Wholesale       Advisors         Total
                                                        (in thousands)

Underwriting and distribution fee
revenues
Rule 12b-1 service and distribution
fees                                      $     114,504         59,131        173,635
Fee-based asset allocation product
revenues                                              -         96,695         96,695
Sales commissions on front-end load
mutual fund and variable annuity sales            3,670         34,266         37,936
Sales commissions on other products                   -         12,804         12,804
. . .
  Add WDR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WDR - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.