Waddell & Reed Financial, Inc. Reports Second Quarter Results

Waddell & Reed Financial, Inc. (NYSE: WDR) today reported second quarter net income of $52.0 million, or $0.61 per diluted share, compared to net income of $53.9 million, or $0.63 per diluted share during the previous quarter, and net income from continuing operations of $41.2 million, or $0.48 per diluted share during the second quarter of 2012.

The current quarter included a charge of $8.6 million ($5.4 million net of taxes), or $0.06 per diluted share, for costs incurred during the launch of the Ivy High Income Opportunities Fund (NYSE: IVH), our first closed-end fund. Excluding these costs, second quarter adjusted net income would have been $57.3 million, or $0.67 per diluted share. The use of non-GAAP adjusted figures is presented for the purpose of providing comparative results to other periods. The table on page 2 provides a breakdown of expenses associated with the launch of the Ivy High Income Opportunities Fund and a reconciliation to GAAP .

Operating revenues were $332 million, an improvement of 5% compared to the previous quarter and 15% compared to the same period last year. The operating margin was 25.6%; however, excluding the above referenced costs associated with the launch of our closed-end fund, the operating margin was 28.2%, a multi-year high.

On July 2, we internalized the management of the Global Natural Resources funds after the portfolio manager’s retirement from Mackenzie Financial Corporation, the subadvisor. By managing the Global Natural Resources funds in-house, the company will realize a decline in future subadvisory costs.

Assets under management were $104 billion at quarter-end, a sequential increase of 1% and a year-over-year increase of 17%. Net inflows were $935 million, compared to $2.1 billion during the previous quarter and $376 million during the second quarter of 2012.
     

Reconciliation to GAAP

Summary Income Statement
 
As reported IVH Adjusted
(Amounts in thousands, except for per share data) (GAAP) Expenses (Non-GAAP)
Total Operating Revenues $ 331,706 $ - $ 331,706
 
Operating Expenses:
U&D Direct 127,488 (1,288 ) 126,200
U&D Indirect     37,356       (536 )     36,820  
Underwriting and distribution (total) 164,844 (1,824 ) 163,020
General and administrative 26,938 (6,728 ) 20,210
All other operating expenses     54,889       -       54,889  
Total Operating Expenses     246,671       (8,552 )     238,119  
Operating Income 85,035 8,552 93,587
Non-operating expenses     (1,856 )     -       (1,856 )
Income before provision for income taxes 83,179 8,552 91,731
Provision for income taxes     31,222       3,177       34,399  
Net Income   $ 51,957     $ 5,375     $ 57,332  
Net income per share     0.61       0.06       0.67  
Weighted average shares outstanding - diluted     85,869       85,869       85,869  
Operating margin     25.6 %     N/A       28.2 %
 

Business Discussion

Management commentary

“We continue to make progress toward our objective of improving the operating margin,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “We have been able to improve margins through careful expense management, consistent organic growth, and the benefit of positive market action on our business model.”

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