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Section 1: 8-K (8-K)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): January 31, 2017

 

 

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

001-13913

 

51-0261715

(State or Other
Jurisdiction of
Incorporation)

 

(Commission
File Number)

 

(IRS Employer
Identification No.)

 

6300 Lamar Avenue

Overland Park, Kansas 66202

(Address of Principal Executive Offices) (Zip Code)

 

(913) 236-2000

(Registrant’s Telephone Number, including Area Code)

 

(Registrant’s Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

ITEM 2.02           RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

 

On January 31, 2017, Waddell & Reed Financial, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the fiscal quarter ended December 31, 2016.  A copy of the Company’s press release is furnished as Exhibit 99.1 and incorporated herein by reference.

 

ITEM 9.01           FINANCIAL STATEMENTS AND EXHIBITS.

 

(d)                                 Exhibits.

 

99.1                        Press Release dated January 31, 2017 announcing the Company’s financial results for the fiscal quarter ended December 31, 2016.

 

2



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

WADDELL & REED FINANCIAL, INC.

 

 

 

Date: January 31, 2017

By:

/s/ Brent K. Bloss

 

 

Brent K. Bloss

 

 

Senior Vice President, Chief Financial Officer
and Treasurer

 

3



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press Release dated January 31, 2017 announcing the Company’s financial results for the fiscal quarter ended December 31, 2016.

 

4


(Back To Top)

Section 2: EX-99.1 (EX-99.1)

Exhibit 99.1

GRAPHIC

 

News Release

 

Waddell & Reed Financial, Inc. Reports Fourth Quarter Results

 

Overland Park, KS, Jan. 31, 2017 – Waddell & Reed Financial, Inc. (NYSE: WDR) today reported fourth quarter 2016 net income1 of $22.4 million, or $0.27 per diluted share, compared to net income of $53.8 million, or $0.65 per diluted share, during the prior quarter and net income of $62.9 million, or $0.76 per diluted share, during the fourth quarter of 2015.  Net income for the year ended December 31, 2016 was $146.9 million, or $1.78 per diluted share, compared to net income of $245.5 million, or $2.94 per diluted share, for the year ended December 31, 2015.

 

Fourth quarter 2016 net income, adjusted for certain charges, was $40.0 million, or $0.48 per diluted share, compared to net income, adjusted for certain charges, of $53.3 million, or $0.64 per diluted share, during the third quarter of 2016.  For the year ended December 31, 2016, net income, adjusted for certain charges, was $177.1 million, or $2.14 per diluted share.  A detailed schedule reconciling non-GAAP financial measures to GAAP net income and earnings per diluted share is provided in the “Adjusted Results” tables at the end of this release.

 

Business Discussion

Flow pressure lessened during the quarter with net outflows of $4.4 billion comparing favorably to both the prior quarter and to the fourth quarter of 2015.  Sales rose every month during the quarter, improving 8% compared to the third quarter.  However, sales for the year remain at a multi-year low and, while we have made progress, there remains a need for continued improvement.  Assets under management ended the year at $81 billion, declining 5% during the quarter and 23% compared to December 31, 2015.

 

We successfully implemented a cost reduction program in 2016, which led to a 9% year-over-year reduction in operating costs.  Several charges were incurred during the year, which added $48 million to 2016 operating costs, making our anticipated run-rate for 2017 even more favorable.  These costs included severance charges, a pension settlement charge, and the impairment of intangible assets, and were partly offset by a curtailment gain on our post-retirement medical benefit plan.  We also incurred costs for the implementation of Project E and costs for the implementation of the Department of Labor’s fiduciary standard rule, which will continue into 2017 but then subside.

 

“Our entire organization is committed to strengthening our competitive position during this period of unprecedented change in our industry,” said Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc.  “We are focused on all aspects of our business, including organizational structure, operational efficiencies, product offerings, and fee levels.”

 


1  Net income represents net income attributable to Waddell & Reed Financial, Inc.

 

1



 

Management Fee Revenue Analysis

Management fees declined 4% sequentially, while average assets under management declined 6%.  Fees declined at a lesser rate than average assets under management due to an increase in the effective fee rate, which was a result of a mix-shift within the asset base.  Compared to the same quarter last year, management fees declined 20%, while average assets under management declined 25%.  The loss of $7.5 billion in institutional assets, which had a low fee rate, as well as a mix-shift in the retail asset base led revenues to decline at a lesser rate than average assets under management.

 

Average assets under management were $82 billion during the current quarter, compared to $87 billion during the prior quarter and $109 billion during the same period in 2015.   The effective fee rate for the current quarter was 64.4 basis points compared to 63.6 basis points and 60.6 basis points during the third quarter of 2016 and fourth quarter of 2015, respectively.

 

Underwriting and Distribution Analysis

 

Underwriting and Distribution Revenues

 

Revenues declined 2% sequentially due to lower asset-based Rule 12b-1 service and distribution fees in our retail unaffiliated channel resulting from a decline in asset levels.  Compared to the same period last year, revenues declined 17% due to lower asset-based Rule 12b-1 fees in our retail unaffiliated channel, as well as the impact of the third quarter’s share conversion of load-waived Class A shares, previously offered in our advisory products, to Class I shares, which do not charge  Rule 12b-1 fees.

 

Underwriting and Distribution Costs

 

Costs rose 7% compared to the third quarter.  Direct costs declined 3% in correlation with the decrease in revenues, while indirect costs rose 33%.  Several items contributed to the increase in indirect costs, including the pension settlement charge, the curtailment gain due to an amendment to our post-retirement medical benefit plan during the prior quarter and, to a lesser degree, severance costs associated with the realignment of our retail unaffiliated and institutional distribution channels.

 

Compared to the fourth quarter of 2015, costs declined 14%.  Direct costs declined 23% 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 increased 12% due to the pension settlement charge and, to a lesser degree, costs associated with the implementation of Project E.  Excluding these charges, indirect costs were flat.

 

Compensation and Related Expense Analysis

Costs increased 45% sequentially due to a pension settlement charge in the current quarter and the curtailment gain related to an amendment of our post-retirement medical benefit plan during the prior quarter.  Compared to the fourth quarter of 2015, costs increased 21% due to the pension settlement charge.  Excluding these charges, costs declined modestly due to workforce reductions and lower incentive compensation.

 

General and Administrative Expense Analysis

Costs declined 4% compared to the prior quarter due to continued cost control across the organization.  Compared to the same quarter last year, costs declined 14%.  Lower dealer service costs and a reduction in advertising more than offset an increase in legal and consulting costs primarily attributable to the implementation of the new DOL fiduciary rule.

 

2



 

Changes in Assets Under Management

($ in millions)

 

 

 

Three Months Ended

 

Year Ended

 

 

 

Mar 31,

 

Jun 30,

 

Sept 30,

 

Dec 31,

 

Mar 31,

 

Jun 30,

 

Sept 30,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

 

 

2015

 

2016

 

2015

 

2016

 

Retail Unaffiliated
Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

60,335

 

$

59,412

 

$

57,545

 

$

49,320

 

$

45,641

 

$

38,623

 

$

35,197

 

$

33,290

 

$

60,335

 

$

45,641

 

Sales*

 

3,870

 

3,239

 

2,768

 

2,341

 

2,144

 

1,526

 

1,320

 

1,373

 

12,218

 

6,363

 

Redemptions

 

(6,259

)

(4,558

)

(5,569

)

(7,300

)

(7,680

)

(5,543

)

(4,824

)

(4,390

)

(23,686

)

(22,437

)

Net Exchanges

 

224

 

144

 

265

 

176

 

158

 

127

 

161

 

11

 

809

 

457

 

Net flows

 

(2,165

)

(1,175

)

(2,536

)

(4,783

)

(5,378

)

(3,890

)

(3,343

)

(3,006

)

(10,659

)

(15,617

)

Market action

 

1,242

 

(692

)

(5,689

)

1,104

 

(1,640

)

464

 

1,436

 

11

 

(4,035

)

271

 

Ending assets

 

$

59,412

 

$

57,545

 

$

49,320

 

$

45,641

 

$

38,623

 

$

35,197

 

$

33,290

 

$

30,295

 

$

45,641

 

$

30,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Broker-Dealer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

45,517

 

$

46,385

 

$

45,947

 

$

42,215

 

$

43,344

 

$

42,142

 

$

42,261

 

$

43,170

 

$

45,517

 

$

43,344

 

Sales*

 

1,270

 

1,347

 

1,238

 

1,218

 

1,068

 

1,094

 

1,024

 

1,101

 

5,073

 

4,287

 

Redemptions

 

(1,279

)

(1,279

)

(1,242

)

(1,245

)

(1,197

)

(1,329

)

(1,542

)

(1,669

)

(5,045

)

(5,737

)

Net Exchanges

 

(224

)

(144

)

(265

)

(176

)

(172

)

(163

)

(194

)

(182

)

(809

)

(711

)

Net flows

 

(233

)

(76

)

(269

)

(203

)

(301

)

(398

)

(712

)

(750

)

(781

)

(2,161

)

Market action

 

1,101

 

(362

)

(3,463

)

1,332

 

(901

)

517

 

1,621

 

(98

)

(1,392

)

1,139

 

Ending assets

 

$

46,385

 

$

45,947

 

$

42,215

 

$

43,344

 

$

42,142

 

$

42,261

 

$

43,170

 

$

42,322

 

$

43,344

 

$

42,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

17,798

 

$

17,097

 

$

17,214

 

$

14,657

 

$

15,414

 

$

14,426

 

$

8,993

 

$

8,595

 

$

17,798

 

$

15,414

 

Sales*

 

300

 

1,203

 

465

 

773

 

453

 

190

 

180

 

242

 

2,741

 

1,065

 

Redemptions

 

(1,460

)

(1,003

)

(1,817

)

(799

)

(1,068

)

(5,699

)

(1,051

)

(1,042

)

(5,079

)

(8,860

)

Net Exchanges

 

 

 

 

 

14

 

36

 

33

 

171

 

 

254

 

Net flows

 

(1,160

)

200

 

(1,352

)

(26

)

(601

)

(5,473

)

(838

)

(629

)

(2,338

)

(7,541

)

Market action

 

459

 

(83

)

(1,205

)

783

 

(387

)

40

 

440

 

(62

)

(46

)

31

 

Ending assets

 

$

17,097

 

$

17,214

 

$

14,657

 

$

15,414

 

$

14,426

 

$

8,993

 

$

8,595

 

$

7,904

 

$

15,414

 

$

7,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning assets

 

$

123,650

 

$

122,894

 

$

120,706

 

$

106,192

 

$

104,399

 

$

95,191

 

$

86,451

 

$

85,055

 

$

123,650

 

$

104,399

 

Sales*

 

5,440

 

5,789

 

4,471

 

4,332

 

3,665

 

2,810

 

2,524

 

2,716

 

20,032

 

11,715

 

Redemptions

 

(8,998

)

(6,840

)

(8,628

)

(9,344

)

(9,945

)

(12,571

)

(7,417

)

(7,101

)

(33,810

)

(37,034

)

Net Exchanges

 

 

 

 

 

 

 

 

 

 

 

Net flows

 

(3,558

)

(1,051

)

(4,157

)

(5,012

)

(6,280

)

(9,761

)

(4,893

)

(4,385

)

(13,778

)

(25,319

)

Market action

 

2,802

 

(1,137

)

(10,357

)

3,219

 

(2,928

)

1,021

 

3,497

 

(149

)

(5,473

)

1,441

 

Ending assets

 

$

122,894

 

$

120,706

 

$

106,192

 

$

104,399

 

$

95,191

 

$

86,451

 

$

85,055

 

$

80,521

 

$

104,399

 

$

80,521

 

 


* Sales is primarily gross sales (net of sales commissions).  This amount also includes

net reinvested dividends & capital gains and investment income.

 

3



 

Supplemental Information

 

 

 

Three Months Ended

 

Asset Manager

 

Mar 31,

 

Jun 30,

 

Sept 30,

 

Dec 31,

 

Mar 31,

 

Jun 30,

 

Sept 30,

 

Dec 31,

 

($ in millions)

 

2015

 

2016

 

Retail Unaffiliated Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

$

59,412

 

$

57,545

 

$

49,320

 

$

45,641

 

$

38,623

 

$

35,197

 

$

33,290

 

$

30,295

 

Net flows

 

$

(2,165

)

$

(1,175

)

$

(2,536

)

$

(4,783

)

$

(5,378

)

$

(3,890

)

$

(3,343

)

$

(3,006

)

Organic growth

 

-14.4

%

-7.9

%

-17.6

%

-38.8

%

-47.1

%

-40.3

%

-38.0

%

-36.1

%

Redemption Rate

 

42.9

%

31.0

%

41.2

%

59.3

%

77.7

%

61.3

%

56.2

%

56.7

%

Retail Broker-Dealer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

$

46,385

 

$

45,947

 

$

42,215

 

$

43,344

 

$

42,142

 

$

42,261

 

$

43,170

 

$

42,322

 

Net flows

 

$

(233

)

$

(76

)

$

(269

)

$

(203

)

$

(301

)

$

(398

)

$

(712

)

$

(750

)

Organic growth

 

-2.0

%

-0.7

%

-2.3

%

-1.9

%

-2.8

%

-3.8

%

-6.7

%

-6.9

%

Redemption Rate

 

9.0

%

9.0

%

8.9

%

9.3

%

9.3

%

10.5

%

12.1

%

12.5

%

Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

$

17,097

 

$

17,214

 

$

14,657

 

$

15,414

 

$

14,426

 

$

8,993

 

$

8,595

 

$

7,904

 

Net flows

 

$

(1,160

)

$

200

 

$

(1,352

)

$

(26

)

$

(601

)

$

(5,473

)

$

(838

)

$

(629

)

Organic growth

 

-26.1

%

4.7

%

-31.4

%

-0.7

%

-15.6

%

-151.8

%

-37.3

%

-29.3

%

Redemption Rate

 

33.7

%

23.2

%

45.4

%

20.5

%

29.9

%

198.9

%

46.4

%

51.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fund Rankings

 

1 Year

 

3 Years

 

5 Years

 

 

 

 

 

 

 

 

 

 

 

Lipper

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds ranked in top half

 

43

%

35

%

33

%

 

 

 

 

 

 

 

 

 

 

Assets ranked in top half

 

33

%

28

%

42

%

 

 

 

 

 

 

 

 

 

 

MorningStar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds with 4/5 stars

 

29

%

17

%

19

%

 

 

 

 

 

 

 

 

 

 

Assets with 4/5 stars

 

31

%

13

%

24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Broker-Dealer

 

Mar 31,

 

Jun 30,

 

Sept 30,

 

Dec 31,

 

Mar 31,

 

Jun 30,

 

Sept 30,

 

Dec 31,

 

 

 

2015

 

2016

 

AUA* (in billions)

 

$

53.7

 

$

53.6

 

$

49.4

 

$

51.0

 

$

49.9

 

$

50.5

 

$

52.1

 

$

51.7

 

AUA* fee based accounts (in billions)

 

$

18.0

 

$

18.3

 

$

17.0

 

$

17.6

 

$

17.4

 

$

17.8

 

$

18.5

 

$

18.4

 

# Advisors

 

1,745

 

1,780

 

1,795

 

1,819

 

1,803

 

1,799

 

1,796

 

1,780

 

Advisor productivity (in thousands)

 

$

65.9

 

$

67.9

 

$

66.3

 

$

64.9

 

$

61.3

 

$

63.1

 

$

59.0

 

$

59.4

 

U&D revenues (in thousands)

 

$

114,836

 

$

119,740

 

$

118,090

 

$

117,291

 

$

110,735

 

$

113,802

 

$

105,787

 

$

105,931

 

 


* AUA represent Assets Under Administration

 

4



 

Unaudited Consolidated Statement of Income

($ in thousands, except per share data)

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

Dec. 31,

 

Sept. 30,

 

Dec. 31,

 

Sequential Qtr.

 

Year-over-Year Qtr.

 

 

 

2016

 

2016

 

2015

 

Change

 

%

 

Change

 

%

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

132,709

 

$

138,745

 

$

166,325

 

$

(6,036

)

-4.4

%

$

(33,616

)

-20.2

%

Underwriting and distribution fees

 

132,922

 

135,778

 

160,382

 

(2,856

)

-2.1

%

(27,460

)

-17.1

%

Shareholder service fees

 

27,282

 

28,563

 

34,367

 

(1,281

)

-4.5

%

(7,085

)

-20.6

%

Total operating revenues

 

292,913

 

303,086

 

361,074

 

(10,173

)

-3.4

%

(68,161

)

-18.9

%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

163,025

 

152,999

 

189,534

 

10,026

 

6.6

%

(26,509

)

-14.0

%

Compensation and related costs

 

58,354

 

40,214

 

48,271

 

18,140

 

45.1

%

10,083

 

20.9

%

General and administrative

 

22,288

 

23,280

 

26,033

 

(992

)

-4.3

%

(3,745

)

-14.4

%

Subadvisory fees

 

2,588

 

2,566

 

2,048

 

22

 

0.9

%

540

 

26.4

%

Depreciation

 

5,196

 

4,541

 

3,831

 

655

 

14.4

%

1,365

 

35.6

%

Intangible impairment

 

4,049

 

5,700

 

 

(1,651

)

-29.0

%

4,049

 

N/A

 

Total operating expenses

 

255,500

 

229,300

 

269,717

 

26,200

 

11.4

%

(14,217

)

-5.3

%

Operating Income

 

37,413

 

73,786

 

91,357

 

(36,373

)

-49.3

%

(53,944

)

-59.0

%

Investment and other income/(loss)

 

890

 

7,878

 

7,647

 

(6,988

)

-88.7

%

(6,757

)

-88.4

%

Interest expense

 

(2,786

)

(2,792

)

(2,772

)

6

 

-0.2

%

(14

)

0.5

%

Income before taxes

 

35,517

 

78,872

 

96,232

 

(43,355

)

-55.0

%

(60,715

)

-63.1

%

Provision for taxes

 

13,041

 

24,067

 

33,312

 

(11,026

)

-45.8

%

(20,271

)

-60.9

%

Net Income

 

22,476

 

54,805

 

62,920

 

(32,329

)

-59.0

%

(40,444

)

-64.3

%

Noncontrolling interests

 

59

 

978

 

 

(919

)

-94.0

%

59

 

N/A

 

Net Income Attributable to Waddell & Reed Financial, Inc.

 

$

22,417

 

$

53,827

 

$

62,920

 

$

(31,410

)

-58.4

%

$

(40,503

)

-64.4

%

Net income per share, basic and diluted:

 

0.27

 

0.65

 

0.76

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

82,783

 

82,834

 

82,873

 

 

 

 

 

 

 

 

 

Operating margin

 

12.8

%

24.3

%

25.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Distribution Cost Analysis

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

Dec. 31,

 

Sept. 30,

 

Dec. 31,

 

Sequential Qtr.

 

Year-over-Year Qtr.

 

($ in thousands)

 

2016

 

2016

 

2015

 

Change

 

%

 

Change

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Unaffiliated Distribution1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

26,991

 

$

29,991

 

$

43,091

 

$

(3,000

)

-10.0

%

$

(16,100

)

-37.4

%

U&D Expenses - Direct

 

(35,854

)

(39,489

)

(57,119

)

3,635

 

-9.2

%

21,265

 

-37.2

%

U&D Expenses - Indirect

 

(13,916

)

(10,643

)

(14,614

)

(3,273

)

30.8

%

698

 

-4.8

%

Net Distribution (Costs)

 

$

(22,779

)

$

(20,141

)

$

(28,642

)

(2,638

)

13.1

%

5,863

 

-20.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Broker-Dealer2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

105,931

 

$

105,787

 

$

117,291

 

$

144

 

0.1

%

$

(11,360

)

-9.7

%

U&D Expenses - Direct

 

(72,380

)

(72,276

)

(83,413

)

(104

)

0.1

%

11,033

 

-13.2

%

U&D Expenses - Indirect

 

(40,875

)

(30,591

)

(34,388

)

(10,284

)

33.6

%

(6,487

)

18.9

%

Net Distribution Excess/(Costs)

 

$

(7,324

)

$

2,920

 

$

(510

)

(10,244

)

-350.8

%

(6,814

)

1336.1

%

 


1 Retail Unaffiliated Distribution was previously referred to as the “Wholesale channel”

2 Retail Broker-Dealer was previously referred to as the “Advisors channel”

 

5



 

Unaudited Consolidated Statement of Income

($ in thousand, except per share data)

 

Year Ended

 

 

 

 

 

 

 

Dec. 31,
2016

 

Dec. 31,
2015

 

Change

 

%

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

557,112

 

$

709,562

 

$

(152,450

)

-21.5

%

Underwriting and distribution fees

 

561,670

 

663,998

 

(102,328

)

-15.4

%

Shareholder service fees

 

120,241

 

143,071

 

(22,830

)

-16.0

%

Total operating revenues

 

1,239,023

 

1,516,631

 

(277,608

)

-18.3

%

Operating Expenses:
Underwriting and distribution

 

671,105

 

769,781

 

(98,676

)

-12.8

%

Compensation and related costs

 

209,849

 

200,752

 

9,097

 

4.5

%

General and administrative

 

83,996

 

105,066

 

(21,070

)

-20.1

%

Subadvisory fees

 

9,572

 

9,134

 

438

 

4.8

%

Depreciation

 

18,359

 

16,046

 

2,313

 

14.4

%

Intangible impairment

 

9,749

 

 

9,749

 

N/A

 

Total operating expenses

 

1,002,630

 

1,100,779

 

(98,149

)

-8.9

%

Operating Income

 

236,393

 

415,852

 

(179,459

)

-43.2

%

Investment and other income/(loss)

 

(763

)

(5,244

)

4,481

 

-85.5

%

Interest expense

 

(11,122

)

(11,068

)

(54

)

0.5

%

Income before taxes

 

224,508

 

399,540

 

(175,032

)

-43.8

%

Provision for taxes

 

76,187

 

154,004

 

(77,817

)

-50.5

%

Net Income

 

148,321

 

245,536

 

(97,215

)

-39.6

%

Noncontrolling interests

 

1,414

 

 

1,414

 

N/A

 

Net Income Attributable to Waddell & Reed Financial, Inc.

 

$

146,907

 

$

245,536

 

$

(98,629

)

-40.2

%

Net income per share, basic and diluted:

 

1.78

 

2.94

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

82,668

 

83,499

 

 

 

 

 

Operating margin

 

19.1

%

27.4

%

 

 

 

 

 

 

Net Distribution Cost Analysis

 

Year Ended

 

 

 

 

 

($ in thousands)

 

Dec. 31,

 

Dec. 31,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

%

 

Retail Unaffiliated Distribution1

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

125,415

 

$

194,041

 

$

(68,626

)

-35.4

%

U&D Expenses - Direct

 

(164,641

)

(254,778

)

90,137

 

-35.4

%

U&D Expenses - Indirect

 

(52,847

)

(55,944

)

3,097

 

-5.5

%

Net Distribution (Costs)

 

$

(92,073

)

$

(116,681

)

24,608

 

-21.1

%

 

 

 

 

 

 

 

 

 

 

Retail Broker-Dealer2

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

436,255

 

$

469,957

 

$

(33,702

)

-7.2

%

U&D Expenses - Direct

 

(312,673

)

(335,032

)

22,359

 

-6.7

%

U&D Expenses - Indirect

 

(140,944

)

(124,027

)

(16,917

)

13.6

%

Net Distribution Excess/(Costs)

 

$

(17,362

)

$

10,898

 

(28,260

)

-259.3

%

 


1 Retail Unaffiliated Distribution was previously referred to as the “Wholesale channel”

2 Retail Broker-Dealer was previously referred to as the “Advisors channel”

 

6



 

Unaudited Condensed Balance Sheet

($ in thousands)

 

Dec. 31,
2016

 

Dec. 31,
2015

 

Assets

 

 

 

 

 

Cash & cash equivalents (unrestricted)

 

$

555,102

 

$

558,495

 

Investment securities

 

328,750

 

291,743

 

Other assets

 

271,401

 

441,360

 

Property and equipment, net

 

102,449

 

105,434

 

Goodwill and intangible assets

 

148,569

 

158,118

 

Total assets

 

$

1,406,271

 

$

1,555,150

 

Liabilities, redeemable noncontrolling interests and equity

 

 

 

 

 

Long-term debt

 

$

189,605

 

$

189,432

 

Other liabilities

 

362,011

 

519,263

 

Redeemable noncontrolling interests

 

10,653

 

 

Total equity

 

844,002

 

846,455

 

Liabilities, redeemable noncontrolling interests and equity

 

$

1,406,271

 

$

1,555,150

 

Shares outstanding (in millions)

 

83.1

 

82.9

 

 

Unaudited Condensed Cash Flow

 

 

 

Three Months Ended

 

Year Ended

 

($ in thousands)

 

Dec. 31,

 

Sept. 30,

 

Dec. 31,

 

Dec. 31,

 

Dec. 31,

 

Cash provided by (used in):

 

2016

 

2016

 

2015

 

2016

 

2015

 

Operating activities

 

$

57,588

 

$

47,613

 

$

3,377

 

$

123,647

 

$

233,950

 

Investing activities

 

6,590

 

53,973

 

(4,230

)

75,871

 

(22,595

)

Financing activities

 

(38,860

)

(39,260

)

(53,312

)

(202,911

)

(219,481

)

Net change during period

 

$

25,318

 

$

62,326

 

$

(54,165

)

$

(3,393

)

$

(8,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Year Ended

 

($ in thousands)

 

Dec. 31,

 

Sept. 30,

 

Dec. 31,

 

Dec. 31,

 

Dec. 31,

 

Shares repurchased

 

2016

 

2016

 

2015

 

2016

 

2015

 

Number of shares

 

90,692

 

28,537

 

520,154

 

2,320,726

 

1,955,509

 

Total cost

 

$

1,769

 

$

522

 

$

17,058

 

$

49,753

 

$

80,335

 

Dividend paid

 

 

 

 

 

 

 

 

 

 

 

Rate per share

 

$

0.46

 

$

0.46

 

$

0.46

 

$

1.84

 

$

1.75

 

Total paid

 

$

38,094

 

$

38,120

 

$

35,710

 

$

152,830

 

$

143,959

 

Capital returned to stockholders

 

$

39,863

 

$

38,642

 

$

52,768

 

$

202,583

 

$

224,294

 

 

On December 31, 2016, we granted 447,277 shares of restricted stock

In early January 2016, we granted an additional 1,131,538 shares of restricted stock

and an additional 1,131,538 cash-settled restricted stock units, which does not impact share count.

 

7



 

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

 

($ in thousands, except for per share data)

 

 

 

Three Months Ended

 

Three Months Ended

 

Year Ended

 

 

 

Dec. 31, 2016

 

Sept. 30, 2016

 

Dec, 31, 2016

 

 

 

GAAP

 

Adj.1

 

Adjusted

 

GAAP

 

Adj.2

 

Adjusted

 

GAAP

 

Adj.3

 

Adjusted

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

132,709

 

 

$

132,709

 

$

138,745

 

 

$

138,745

 

$

557,112

 

 

$

557,112

 

Underwriting and distribution fees

 

132,922

 

 

132,922

 

135,778

 

 

135,778

 

561,670

 

 

561,670

 

Shareholder service fees

 

27,282

 

 

27,282

 

28,563

 

 

28,563

 

120,241

 

 

120,241

 

Total operating revenues

 

292,913

 

 

292,913

 

303,086

 

 

303,086

 

1,239,023

 

 

1,239,023

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

163,025

 

(7,882

)

155,143

 

152,999

 

3,457

 

156,456

 

671,105

 

(15,599

)

655,506

 

Compensation and related costs

 

58,354

 

(14,334

)

44,020

 

40,214

 

3,752

 

43,966

 

209,849

 

(20,356

)

189,493

 

General and administrative

 

22,288

 

(1,748

)

20,540

 

23,280

 

(662

)

22,618

 

83,996

 

(2,410

)

81,586

 

Subadvisory fees

 

2,588

 

 

2,588

 

2,566

 

 

2,566

 

9,572

 

 

9,572

 

Depreciation

 

5,196

 

 

5,196

 

4,541

 

 

4,541

 

18,359

 

 

18,359

 

Intangible impairment

 

4,049

 

(4,049

)

 

5,700

 

(5,700

)

 

9,749

 

(9,749

)

 

Total operating expenses

 

255,500

 

(28,013

)

227,487

 

229,300

 

847

 

230,147

 

1,002,630

 

(48,114

)

954,516

 

Operating Income

 

37,413

 

28,013

 

65,426

 

73,786

 

(847

)

72,939

 

236,393

 

48,114

 

284,507

 

Investment and other income/(loss)

 

890

 

 

890

 

7,878

 

 

7,878

 

(763

)

 

(763

)

Interest expense

 

(2,786

)

 

(2,786

)

(2,792

)

 

(2,792

)

(11,122

)

 

(11,122

)

Income before taxes

 

35,517

 

28,013

 

63,530

 

78,872

 

(847

)

78,025

 

224,508

 

48,114

 

272,622

 

Provision for taxes

 

13,041

 

10,416

 

23,457

 

24,067

 

(316

)

23,751

 

76,187

 

17,886

 

94,073

 

Net Income

 

22,476

 

17,597

 

40,073

 

54,805

 

(531

)

54,274

 

148,321

 

30,228

 

178,549

 

Noncontrolling interests

 

59

 

 

59

 

978

 

 

978

 

1,414

 

 

1,414

 

Net Income Attributable to Waddell & Reed

 

$

22,417

 

$

17,597

 

$

40,014

 

$

53,827

 

$

(531

)

$

53,296

 

$

146,907

 

$

30,228

 

$

177,135

 

Financial, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic and diluted:

 

0.27

 

0.21

 

0.48

 

0.65

 

(0.01

)

0.64

 

1.78

 

0.37

 

2.14

 

Weighted average shares outstanding - basic and diluted

 

82,783

 

82,783

 

82,783

 

82,834

 

82,834

 

82,834

 

82,668

 

82,668

 

82,668

 

Operating margin

 

12.8

%

 

 

22.3

%

24.3

%

 

 

24.1

%

19.1

%

 

 

23.0

%

 


1 Adjustments during the fourth quarter were:

 

·                  $20.7 million related to a pension settlement charge.  $6.4 million in U&D indirect (unaffiliated distribution $0.9 million and broker-dealer $5.5 million) and $14.3 million in compensation;

·                  $4.0 million charge related to the impairment of an intangible asset;

·                  $1.7 million charge related to DOL preparation to G&A costs; and

·                  $1.5 million charge related to the implementation of Project E to U&D indirect costs (broker-dealer).

2 Adjustments during the third quarter were:

·                  $8.5 million related to a curtailment gain.  $4.7 million in U&D indirect (unaffiliated distribution $0.5 million and broker-dealer $4.2 million) 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 (broker-dealer); and

·                  $0.7 million charge related to DOL preparation to G&A costs.

3 Adjustments during the full year were:

·                  $20.7 million related to a pension settlement charge.  $6.4 million in U&D indirect (unaffiliated distribution $0.9 million and broker-dealer $5.5 million) and $14.3 million in compensation);

·                  $9.8 million for severance and related charges to compensation and related costs;

·                  $7.1 million for severance and related charges to U&D indirect costs (unaffiliated distribution $2.2 million; broker-dealer $4.9 million);

·                  $9.7 million charge related to the impairment of intangible assets;

·                  $8.5 million related to a curtailment gain.  $4.7 million in U&D indirect (unaffiliated distribution $0.5 million and broker-dealer $4.2 million) and $3.8 million in compensation);

·                  $5.4 million charge related to the implementation of Project E to U&D indirect costs (broker-dealer);

·                  $2.4 million charge related to DOL preparation to G&A costs; and

·                  $1.4 million related to the accelerated amortization of DAC to U&D direct costs (broker-dealer) due to a share class conversion.

 

8



 

Net Distribution Cost Analysis

Reconciliation to GAAP

 

($ in thousands)

 

Three Months Ended

 

Three Months Ended

 

Year Ended

 

 

 

Dec. 31, 2016

 

Sept. 30, 2016

 

Dec, 31, 2016

 

 

 

GAAP

 

Adj.

 

Adjusted

 

GAAP .

 

Adj

 

Adjusted

 

GAAP

 

Adj.

 

Adjusted

 

Retail Unaffiliated Distribution1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U&D Revenues

 

$

26,991

 

 

$

26,991

 

$

29,991