UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 51-0261715 |
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
6300 Lamar Avenue
Overland Park, Kansas66202
(Address, including zip code, of Registrant’s principal executive offices)
(913) (913) 236-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $.01 par value | WDR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.☐.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐.☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company ☐ |
| | |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.☒.
Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:
| | |
Class | | Outstanding as of October |
Class A common stock, $.01 par value | |
|
WADDELL & REED FINANCIAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Quarter Ended September 30, 20172020
| | | Page No. | |
| | | | |
| | |||
| | | | |
| | | ||
| | | | |
| | Consolidated Balance Sheets at September 30, | ||
| 3 | |||
| | | | |
| | |||
| 4 | |||
| | | | |
| | |||
| 5 | |||
| | | | |
| | |||
| 6 | |||
| | | | |
| | |||
| 7 | |||
| | | | |
| | | 8 | |
| | | | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 25 | |
| | | | |
| | 41 | ||
| | | | |
| | 41 | ||
| | | | |
| | |||
| | | | |
| | 42 | ||
| | | | |
| ||||
| 43 | |||
| | | | |
| ||||
| 44 | |||
| | | | |
| | | 45 |
2
PART I. FINANCIAL INFORMATION
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
(in thousands)
|
|
|
|
|
|
|
|
|
| September 30, |
|
|
|
| |
|
| 2017 |
|
| December 31, |
| |
|
| (Unaudited) |
|
| 2016 |
| |
Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 225,922 |
|
| 555,102 |
|
Cash and cash equivalents - restricted |
|
| 35,551 |
|
| 31,137 |
|
Investment securities |
|
| 697,138 |
|
| 328,750 |
|
Receivables: |
|
|
|
|
|
|
|
Funds and separate accounts |
|
| 22,510 |
|
| 27,181 |
|
Customers and other |
|
| 114,723 |
|
| 128,095 |
|
Prepaid expenses and other current assets |
|
| 22,943 |
|
| 21,574 |
|
Total current assets |
|
| 1,118,787 |
|
| 1,091,839 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 91,708 |
|
| 102,449 |
|
Goodwill and identifiable intangible assets |
|
| 147,069 |
|
| 148,569 |
|
Deferred income taxes |
|
| 20,457 |
|
| 31,430 |
|
Other non-current assets |
|
| 20,834 |
|
| 31,985 |
|
Total assets |
| $ | 1,398,855 |
|
| 1,406,272 |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 31,391 |
|
| 28,023 |
|
Payable to investment companies for securities |
|
| 50,320 |
|
| 53,691 |
|
Payable to third party brokers |
|
| 24,857 |
|
| 31,735 |
|
Payable to customers |
|
| 60,118 |
|
| 82,918 |
|
Short-term notes payable |
|
| 94,971 |
|
| — |
|
Accrued compensation |
|
| 49,680 |
|
| 41,672 |
|
Other current liabilities |
|
| 58,867 |
|
| 58,939 |
|
Total current liabilities |
|
| 370,204 |
|
| 296,978 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 94,765 |
|
| 189,605 |
|
Accrued pension and postretirement costs |
|
| 8,874 |
|
| 38,379 |
|
Other non-current liabilities |
|
| 24,071 |
|
| 26,655 |
|
Total liabilities |
|
| 497,914 |
|
| 551,617 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
| 30,636 |
|
| 10,653 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
Preferred stock—$1.00 par value: 5,000 shares authorized; none issued |
|
| — |
|
| — |
|
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 83,373 shares outstanding (83,118 at December 31, 2016) |
|
| 997 |
|
| 997 |
|
Additional paid-in capital |
|
| 296,116 |
|
| 291,908 |
|
Retained earnings |
|
| 1,112,374 |
|
| 1,135,694 |
|
Cost of 16,328 common shares in treasury (16,583 at December 31, 2016) |
|
| (509,870) |
|
| (531,268) |
|
Accumulated other comprehensive loss |
|
| (29,312) |
|
| (53,329) |
|
Total stockholders’ equity |
|
| 870,305 |
|
| 844,002 |
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable noncontrolling interests and stockholders’ equity |
| $ | 1,398,855 |
|
| 1,406,272 |
|
| | | | | | | |
| | September 30, | | | | | |
| | 2020 | | | December 31, | | |
| | (Unaudited) | | | 2019 | | |
Assets: |
| | |
| | |
|
Cash and cash equivalents | | $ | 165,259 |
| | 151,815 | |
Cash and cash equivalents - restricted | |
| 61,933 |
|
| 74,325 | |
Investment securities | |
| 579,344 |
|
| 688,346 | |
Receivables: | | | | | | | |
Funds and separate accounts | |
| 13,050 |
|
| 15,167 | |
Customers and other | |
| 57,781 |
|
| 80,089 | |
Prepaid expenses and other current assets | |
| 35,946 |
|
| 31,655 | |
Total current assets | |
| 913,313 |
|
| 1,041,397 | |
| | | | | | | |
Property and equipment, net | |
| 27,213 |
|
| 34,726 | |
Goodwill and identifiable intangible assets | |
| 145,869 |
|
| 145,869 | |
Deferred income taxes | |
| 15,676 |
|
| 14,418 | |
Other non-current assets | |
| 23,359 |
|
| 29,918 | |
Total assets | | $ | 1,125,430 |
| | 1,266,328 | |
| | | | | | | |
Liabilities: | | | | | | | |
Accounts payable | | $ | 17,509 |
| | 20,123 | |
Payable to investment companies for securities | |
| 17,443 |
|
| 36,883 | |
Payable to third party brokers | |
| 16,559 |
|
| 17,123 | |
Payable to customers | |
| 81,265 |
|
| 84,558 | |
Short-term notes payable | | | 94,980 | | | — | |
Accrued compensation | |
| 65,896 |
|
| 79,507 | |
Other current liabilities | |
| 56,515 |
|
| 71,001 | |
Total current liabilities | |
| 350,167 |
|
| 309,195 | |
| | | | | | | |
Long-term debt | |
| — |
|
| 94,926 | |
Accrued pension and postretirement costs | |
| 579 |
|
| 3,145 | |
Other non-current liabilities | |
| 27,173 |
|
| 30,960 | |
Total liabilities | |
| 377,919 |
|
| 438,226 | |
| | | | | | | |
Redeemable noncontrolling interests | | | — | | | 19,205 | |
| | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock—$1.00 par value: 5,000 shares authorized; NaN issued | |
| — |
|
| — | |
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 62,548 shares outstanding (68,847 at December 31, 2019) | |
| 997 |
|
| 997 | |
Additional paid-in capital | |
| 296,220 |
|
| 312,693 | |
Retained earnings | |
| 1,270,678 |
|
| 1,241,598 | |
Cost of 37,153 common shares in treasury (30,854 at December 31, 2019) | |
| (824,309) |
|
| (749,625) | |
Accumulated other comprehensive income | |
| 3,925 |
|
| 3,234 | |
Total stockholders’ equity | |
| 747,511 |
|
| 808,897 | |
| | | | | | | |
Total liabilities, redeemable noncontrolling interests and stockholders’ equity | | $ | 1,125,430 |
| | 1,266,328 | |
See accompanying notes to the unaudited consolidated financial statements.
3
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited, in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, |
| For the nine months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management fees |
| $ | 134,149 |
|
| 138,745 |
| $ | 395,463 |
|
| 424,403 |
|
Underwriting and distribution fees |
|
| 128,892 |
|
| 135,778 |
|
| 386,499 |
|
| 428,748 |
|
Shareholder service fees |
|
| 26,406 |
|
| 28,563 |
|
| 80,706 |
|
| 92,959 |
|
Total |
|
| 289,447 |
|
| 303,086 |
|
| 862,668 |
|
| 946,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution |
|
| 149,400 |
|
| 152,999 |
|
| 450,843 |
|
| 508,080 |
|
Compensation and related costs (including share-based compensation of $14,180, $12,425, $42,419 and $38,573, respectively) |
|
| 48,340 |
|
| 40,214 |
|
| 144,970 |
|
| 151,495 |
|
General and administrative |
|
| 27,832 |
|
| 23,280 |
|
| 81,709 |
|
| 61,708 |
|
Subadvisory fees |
|
| 3,566 |
|
| 2,566 |
|
| 9,457 |
|
| 6,984 |
|
Depreciation |
|
| 5,230 |
|
| 4,541 |
|
| 15,626 |
|
| 13,163 |
|
Intangible asset impairment |
|
| — |
|
| 5,700 |
|
| 1,500 |
|
| 5,700 |
|
Total |
|
| 234,368 |
|
| 229,300 |
|
| 704,105 |
|
| 747,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 55,079 |
|
| 73,786 |
|
| 158,563 |
|
| 198,980 |
|
Investment and other income (loss) |
|
| 7,236 |
|
| 7,878 |
|
| 11,386 |
|
| (1,653) |
|
Interest expense |
|
| (2,796) |
|
| (2,792) |
|
| (8,370) |
|
| (8,336) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
| 59,519 |
|
| 78,872 |
|
| 161,579 |
|
| 188,991 |
|
Provision for income taxes |
|
| 20,296 |
|
| 24,067 |
|
| 64,857 |
|
| 63,146 |
|
Net income |
|
| 39,223 |
|
| 54,805 |
|
| 96,722 |
|
| 125,845 |
|
Net income attributable to redeemable noncontrolling interests |
|
| 1,272 |
|
| 978 |
|
| 2,408 |
|
| 1,355 |
|
Net income attributable to Waddell & Reed Financial, Inc. |
| $ | 37,951 |
|
| 53,827 |
| $ | 94,314 |
|
| 124,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted: |
| $ | 0.45 |
|
| 0.65 |
| $ | 1.13 |
|
| 1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted: |
|
| 83,476 |
|
| 82,834 |
|
| 83,719 |
|
| 82,629 |
|
| | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | ||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||||
| | | | | | | | | | | | | |
Revenues: |
| |
|
| |
|
| | |
| | |
|
Investment management fees | | $ | 106,617 |
| | 111,806 | | $ | 307,660 |
| | 334,438 | |
Underwriting and distribution fees | |
| 139,456 |
| | 135,787 | | | 400,032 |
| | 395,527 | |
Shareholder service fees | |
| 21,597 |
| | 23,087 | | | 63,745 |
| | 70,279 | |
Total | |
| 267,670 |
| | 270,680 | | | 771,437 |
| | 800,244 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Distribution | |
| 122,195 |
| | 117,425 | | | 350,104 |
| | 343,696 | |
Compensation and benefits (including share-based compensation of $11,080, $11,580, $33,595, and $35,471 respectively) | |
| 62,416 |
| | 64,999 | | | 182,704 |
| | 191,718 | |
General and administrative | |
| 19,156 |
| | 16,680 | | | 58,278 |
| | 47,421 | |
Technology | | | 14,250 | | | 15,019 | | | 41,989 | | | 47,769 | |
Occupancy | | | 4,160 | | | 5,684 | | | 13,160 | | | 19,100 | |
Marketing and advertising | | | 1,370 | | | 2,134 | | | 4,385 | | | 6,497 | |
Depreciation | |
| 2,998 |
| | 4,833 | | | 9,720 |
| | 16,062 | |
Subadvisory fees | |
| 3,490 |
| | 3,882 | | | 10,444 |
| | 11,154 | |
Total | |
| 230,035 |
| | 230,656 | | | 670,784 |
| | 683,417 | |
| | | | | | | | | | | | | |
Operating income | |
| 37,635 |
| | 40,024 | | | 100,653 |
| | 116,827 | |
Investment and other income | |
| 5,449 |
| | 5,212 | | | 12,852 |
| | 23,690 | |
Interest expense | |
| (1,542) |
| | (1,562) | | | (4,630) |
| | (4,662) | |
| | | | | | | | | | | | | |
Income before provision for income taxes | |
| 41,542 |
| | 43,674 | | | 108,875 |
| | 135,855 | |
Provision for income taxes | |
| 10,296 |
| | 10,175 | | | 29,341 |
| | 35,036 | |
Net income | | | 31,246 |
| | 33,499 | | | 79,534 |
| | 100,819 | |
Net income attributable to redeemable noncontrolling interests | | | 723 | | | 445 | | | 2,201 | | | 1,763 | |
Net income attributable to Waddell & Reed Financial, Inc. | | $ | 30,523 | | | 33,054 | | $ | 77,333 | | | 99,056 | |
| | | | | | | | | | | | | |
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted: | | $ | 0.48 | | | 0.46 | | $ | 1.18 | | | 1.33 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding, basic and diluted: | |
| 64,240 | | | 72,387 | | | 65,795 | | | 74,446 | |
See accompanying notes to the unaudited consolidated financial statements.
4
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, |
| For the nine months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 39,223 |
|
| 54,805 |
| $ | 96,722 |
|
| 125,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $364, $1, $(1,310), and $2, respectively |
|
| 2,070 |
|
| (344) |
|
| 6,904 |
|
| 1,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefit, net of income tax expense (benefit) of $9,186, $(167), $10,080, and $1,018, respectively |
|
| 15,601 |
|
| (167) |
|
| 17,113 |
|
| 1,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
| 56,894 |
|
| 54,294 |
|
| 120,739 |
|
| 129,331 |
|
Comprehensive income attributable to redeemable noncontrolling interests |
|
| 1,272 |
|
| 978 |
|
| 2,408 |
|
| 1,355 |
|
Comprehensive income attributable to Waddell & Reed Financial, Inc. |
| $ | 55,622 |
|
| 53,316 |
| $ | 118,331 |
|
| 127,976 |
|
| | | | | | | | | | | | | |
|
| For the three months ended September 30, | | For the nine months ended September 30, | | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | | | | | | | | | | | | |
Net income | | $ | 31,246 |
| | 33,499 | | $ | 79,534 |
| | 100,819 | |
| | | | | | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Unrealized (loss) gain on available for sale investment securities during the period, net of income tax (benefit) expense of $(161), $92, $274 and $1,011, respectively | |
| (511) |
|
| 296 | |
| 842 |
|
| 3,235 | |
| | | | | | | | | | | | | |
Postretirement benefit, net of income tax benefit of $(16), $(30), $(50) and $(88), respectively | |
| (51) |
|
| (94) | |
| (151) |
|
| (283) | |
| | | | | | | | | | | | | |
Comprehensive income | | | 30,684 |
| | 33,701 | | | 80,225 |
| | 103,771 | |
Comprehensive income attributable to redeemable noncontrolling interests | | | 723 | | | 445 | | | 2,201 | | | 1,763 | |
Comprehensive income attributable to Waddell & Reed Financial, Inc. | | $ | 29,961 | | | 33,256 | | $ | 78,024 | | | 102,008 | |
See accompanying notes to the unaudited consolidated financial statements.
5
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated StatementStatements of Stockholders’ Equity and Redeemable Noncontrolling Interests
For the Nine Months Ended September 30, 2017
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | |||||||||||||||
| | | | | | | | | | | | | Accumulated | | | | Redeemable |
| | | | | | | Additional | | | | | | Other | | Total | | Non |
| | Common Stock | | Paid-In | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | |||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
| Interests | |
Balance at June 30, 2019 |
| 99,701 | | $ | 997 |
| 294,487 |
| 1,227,314 |
| (669,223) |
| 3,081 |
| 856,656 |
| 15,115 |
Net income |
| — | |
| — |
| — |
| 33,054 |
| — |
| — |
| 33,054 |
| 445 |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | 1,353 |
Recognition of equity compensation |
| — | |
| — |
| 8,024 |
| 57 |
| — |
| — |
| 8,081 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| 627 |
| — |
| (627) |
| — |
| — |
| — |
Dividends accrued, $0.25 per share |
| — | |
| — |
| — |
| (17,748) |
| — |
| — | | (17,748) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | (40,715) | | — |
| (40,715) |
| — |
Other comprehensive income |
| — | |
| — |
| — |
| — |
| — |
| 202 |
| 202 |
| — |
Balance at September 30, 2019 | | 99,701 | | $ | 997 |
| 303,138 |
| 1,242,677 |
| (710,565) |
| 3,283 |
| 839,530 |
| 16,913 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
Balance at June 30, 2020 |
| 99,701 | | $ | 997 |
| 289,439 |
| 1,255,770 |
| (783,990) |
| 4,487 |
| 766,703 |
| 25,857 |
Net income |
| — | |
| — |
| — |
| 30,523 |
| — |
| — |
| 30,523 |
| 723 |
Net deconsolidation of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | (26,580) |
Recognition of equity compensation |
| — | |
| — |
| 6,514 |
| 20 |
| — |
| — |
| 6,534 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| 267 |
| — |
| (267) |
| — |
| — |
| — |
Dividends accrued, $0.25 per share |
| — | |
| — |
| — |
| (15,635) |
| — |
| — | | (15,635) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | (40,052) | | — |
| (40,052) |
| — |
Other comprehensive loss |
| — | |
| — |
| — |
| — |
| — |
| (562) |
| (562) |
| — |
Balance at September 30, 2020 | | 99,701 | | $ | 997 |
| 296,220 |
| 1,270,678 |
| (824,309) |
| 3,925 |
| 747,511 |
| — |
| | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, | |||||||||||||||
| | | | | | | | | | | | | Accumulated | | | | Redeemable |
| | | | | | | Additional | | | | | | Other | | Total | | Non |
| | Common Stock | | Paid-In | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | |||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
| interest | |
Balance at December 31, 2018 |
| 99,701 | | $ | 997 |
| 311,264 |
| 1,198,445 |
| (627,587) |
| 331 |
| 883,450 |
| 11,463 |
Net income |
| — | |
| — |
| — |
| 99,056 |
| — |
| — |
| 99,056 |
| 1,763 |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | 3,687 |
Recognition of equity compensation |
| — | |
| — |
| 25,573 |
| 297 |
| — |
| — |
| 25,870 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| (33,699) |
| — |
| 33,699 |
| — |
| — |
| — |
Dividends accrued, $0.75 per share |
| — | |
| — |
| — |
| (55,121) |
| — |
| — | | (55,121) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | (116,677) | | — |
| (116,677) |
| — |
Other comprehensive income |
| — | |
| — |
| — |
| — |
| — |
| 2,952 |
| 2,952 |
| — |
Balance at September 30, 2019 | | 99,701 | | $ | 997 |
| 303,138 |
| 1,242,677 |
| (710,565) |
| 3,283 |
| 839,530 |
| 16,913 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
Balance at December 31, 2019 |
| 99,701 | | $ | 997 |
| 312,693 |
| 1,241,598 |
| (749,625) |
| 3,234 |
| 808,897 |
| 19,205 |
Net income | | — | |
| — |
| — |
| 77,333 |
| — |
| — |
| 77,333 |
| 2,201 |
Net deconsolidation of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | (21,406) |
Recognition of equity compensation | | — | |
| — |
| 20,895 |
| 110 |
| — |
| — |
| 21,005 |
| — |
Net issuance/forfeiture of nonvested shares | | — | | | — | | (37,368) | | | | 37,368 | | — | | — | | — |
Dividends accrued, $0.75 per share | | — | |
| — |
| — |
| (48,363) |
| — |
| — |
| (48,363) |
| — |
Repurchase of common stock | | — | |
| — |
| — |
| — |
| (112,052) |
| — |
| (112,052) |
| — |
Other comprehensive income | | — | |
| — |
| — |
| — |
| — |
| 691 |
| 691 |
| — |
Balance at September 30, 2020 | | 99,701 | | $ | 997 |
| 296,220 |
| 1,270,678 |
| (824,309) |
| 3,925 |
| 747,511 |
| — |
See accompanying notes to the unaudited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| Redeemable |
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
| Total |
| Non |
|
|
| Common Stock |
| Paid-In |
| Retained |
| Treasury |
| Comprehensive |
| Stockholders’ |
| Controlling |
| |||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
| interest |
| |
Balance at December 31, 2016 |
| 99,701 |
| $ | 997 |
| 291,908 |
| 1,135,694 |
| (531,268) |
| (53,329) |
| 844,002 |
| 10,653 |
|
Adoption of share-based compensation guidance on January 1, 2017 |
| — |
|
| — |
| 3,504 |
| (2,200) |
| — |
| — |
| 1,304 |
| — |
|
Net income |
| — |
|
| — |
| — |
| 94,314 |
| — |
| — |
| 94,314 |
| 2,408 |
|
Net subscription of redeemable noncontrolling interests in sponsored funds |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 17,575 |
|
Recognition of equity compensation |
| — |
|
| — |
| 37,737 |
| 374 |
| — |
| — |
| 38,111 |
| — |
|
Net issuance/forfeiture of nonvested shares |
| — |
|
| — |
| (37,033) |
|
|
| 37,033 |
|
|
| — |
| — |
|
Dividends accrued, $1.38 per share |
| — |
|
| — |
| — |
| (115,808) |
| — |
| — |
| (115,808) |
| — |
|
Repurchase of common stock |
| — |
|
| — |
| — |
| — |
| (15,635) |
| — |
| (15,635) |
| — |
|
Other comprehensive income |
| — |
|
| — |
| — |
| — |
| — |
| 24,017 |
| 24,017 |
| — |
|
Balance at September 30, 2017 |
| 99,701 |
| $ | 997 |
| 296,116 |
| 1,112,374 |
| (509,870) |
| (29,312) |
| 870,305 |
| 30,636 |
|
6
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| | | | | | | |
|
| For the nine months ended September 30, | | ||||
| | 2020 |
| 2019 |
| ||
| | | | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 79,534 |
| | 100,819 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 9,368 |
|
| 16,057 | |
Amortization of deferred sales commissions | |
| 1,180 |
|
| 1,492 | |
Share-based compensation | |
| 33,595 |
|
| 35,471 | |
Investments and derivatives loss (gain), net of collateral | |
| 1,688 |
|
| (15,250) | |
Net purchases, maturities, and sales of trading and equity securities | |
| 22,468 |
|
| (47,641) | |
Deferred income taxes | |
| (1,480) |
|
| 4,622 | |
Net change in equity securities and trading debt securities held by consolidated sponsored funds | | | (10,886) | | | 16,697 | |
Other | | | (1,096) | | | 1,273 | |
Changes in assets and liabilities: | | | | | | | |
Customer and other receivables | |
| 3,801 |
|
| 70,220 | |
Payable to investment companies for securities and payable to customers | |
| (22,733) |
|
| (105,953) | |
Receivables from funds and separate accounts | |
| 2,117 |
|
| 3,360 | |
Other assets | |
| 4,064 |
|
| 14,784 | |
Accounts payable and payable to third party brokers | |
| (6,383) |
|
| (10,243) | |
Other liabilities | |
| (23,265) |
|
| (1,477) | |
Net cash provided by operating activities | | $ | 91,972 |
|
| 84,231 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of available for sale and equity method securities | | | (28,286) | | | (149,835) | |
Proceeds from sales of available for sale and equity method securities | |
| 3,257 |
|
| 19,667 | |
Proceeds from maturities of available for sale securities | | | 96,420 | | | 116,197 | |
Proceeds from sale of property and equipment | | | 2,262 | | | — | |
Additions to property and equipment | |
| (7,445) |
|
| (4,189) | |
Net cash provided by (used in) investing activities | | $ | 66,208 |
|
| (18,160) | |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Dividends paid | |
| (49,939) |
|
| (56,560) | |
Repurchase of common stock | |
| (112,865) |
|
| (118,668) | |
Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds | | | 5,807 | | | 3,687 | |
Other | | | (131) | | | (168) | |
Net cash used in financing activities | | $ | (157,128) |
|
| (171,709) | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 1,052 |
|
| (105,638) | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 226,140 |
|
| 291,555 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 227,192 |
| | 185,917 | |
See accompanying notes to the unaudited consolidated financial statements.
6
7
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
| $ | 96,722 |
|
| 125,845 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 15,626 |
|
| 13,163 |
|
Write-down of impaired assets |
|
| 1,500 |
|
| 5,700 |
|
Amortization of deferred sales commissions |
|
| 3,799 |
|
| 21,842 |
|
Share-based compensation |
|
| 38,111 |
|
| 38,573 |
|
Investments gain, net |
|
| (9,157) |
|
| (13,834) |
|
Net purchases of trading securities |
|
| (36,643) |
|
| (24,353) |
|
Net change in trading securities held by consolidated sponsored funds |
|
| (123,865) |
|
| (57,444) |
|
Other |
|
| 4,473 |
|
| 3,131 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Cash and cash equivalents - restricted |
|
| (4,414) |
|
| 44,816 |
|
Customer and other receivables |
|
| 13,372 |
|
| 67,338 |
|
Payable to investment companies for securities and payable to customers |
|
| (26,171) |
|
| (131,120) |
|
Receivables from funds and separate accounts |
|
| 4,671 |
|
| 8,729 |
|
Other assets |
|
| 5,050 |
|
| (2,826) |
|
Accounts payable and payable to third party brokers |
|
| (3,510) |
|
| (21,738) |
|
Other liabilities |
|
| 3,856 |
|
| (11,763) |
|
Net cash (used in) provided by operating activities |
| $ | (16,580) |
|
| 66,059 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchases of available for sale and equity method securities |
|
| (291,539) |
|
| (71,852) |
|
Proceeds from sales of available for sale and equity method securities |
|
| 97,917 |
|
| 148,373 |
|
Additions to property and equipment |
|
| (5,358) |
|
| (13,933) |
|
Net cash of sponsored funds on consolidation |
|
| — |
|
| 6,887 |
|
Other |
|
| — |
|
| (194) |
|
Net cash (used in) provided by investing activities |
| $ | (198,980) |
|
| 69,281 |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Dividends paid |
|
| (115,691) |
|
| (114,736) |
|
Repurchase of common stock |
|
| (15,635) |
|
| (47,984) |
|
Net subscriptions, (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds |
|
| 17,575 |
|
| (3,695) |
|
Other |
|
| 131 |
|
| 2,364 |
|
Net cash used in financing activities |
| $ | (113,620) |
|
| (164,051) |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
| (329,180) |
|
| (28,711) |
|
Cash and cash equivalents at beginning of period |
|
| 555,102 |
|
| 558,495 |
|
Cash and cash equivalents at end of period |
| $ | 225,922 |
|
| 529,784 |
|
See accompanying notes to the unaudited consolidated financial statements.
7
WADDELL & REED FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business and Significant Accounting Policies |
1.Description of Business and Significant Accounting Policies
Waddell & Reed Financial, Inc. and Subsidiaries
Waddell & Reed Financial, Inc. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced the former Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time, we added additional mutual funds: Ivy Funds (the “Ivy Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college savings plan (“InvestEd”); and the Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”); and the Ivy Global Investors Société d’Investissement à Capital Variable (the “SICAV”) and its Ivy Global Investors sub‑funds (the “IGI Funds”), an undertaking for the collective investment in transferable securities (“UCITS”). In 2016, we introduced the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”). In the second quarter of 2017, we launched index funds in partnership with ProShares® Advisors LLC (“Ivy ProShares”) (collectively, the Advisors Funds, Ivy Funds, Ivy VIP, InvestEd IVH, Ivy NextShares and Ivy ProSharesIVH are referred to as the “Funds”). In addition to the Funds, our assets under management (“AUM”) include institutional managed accounts. As of September 30, 2017,2020, we had $80.9$67.9 billion in assets under management.AUM.
We derive our revenues from providing investment management investmentand advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds the IGI Funds, and institutional accounts. We also provide wealth management services, primarily to retail clients through Waddell & Reed, Inc. (“W&R”), and separately managed accounts.independent financial advisors associated with W&R (“Advisors”), who provide financial planning and advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues are based on the amountlevel of averageAUM and assets under managementadministration (“AUA”) and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee‑based asset allocation products and relatedfee-based advisory services, asset‑basedprograms, asset-based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940 as amended (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance products, and distribution fees on certain variable products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. Transfer agency fees, are asset-based and/or account-based revenues. Portfolio accounting and administration fees are asset-based revenues. Custodian fees from retirement plan accounts areis earned based on theclient AUM or number of client accounts. Our major expenses are for distribution of our products, compensation related costs, occupancy, general and administrative, and information technology.
The Company continues to proactively manage business continuity and safety considerations as circumstances of the coronavirus disease 2019 (“COVID-19”) evolve. Our leadership team’s priority is on ensuring the health and safety of all employees, clients, Advisors and communities, while also ensuring full continuity of service and access. The Company started transitioning to a work from home environment early in March 2020 and has been following the Centers for Disease Control and Prevention and local authorities’ recommendations on safe practices throughout this process. We have undertaken a number of steps to facilitate safety, security and full continuity of service, including:
● | Our Enterprise Preparedness Team and COVID-19 steering committee continue to meet regularly to assess developments and determine the best action to ensure business continuity and the safety of our employees and partners. |
● | We have adopted interim business practices, including restricting business travel, requiring meetings to take place via remote access tools, adopting safety protocols to limit the potential for exposure, adopting social distancing practices, implementing a clearly-defined approval process for reentry to any worksite, advising personnel on preventive measures and offering remote collaboration and productivity tools and training resources to our employees. |
● | We enhanced monitoring and capabilities of our systems to allow our remote workforce to function efficiently and have continued our educational and monitoring practices to ensure there are no compromises to confidentiality, privacy and cybersecurity requirements. |
● | The Ivy investment management and distribution teams transitioned seamlessly to remote working. Our teams have a strong heritage of active collaboration which has migrated to a virtual environment without compromise. |
8
● | Within our wealth management business, the majority of Advisors are working from temporary locations. We are demonstrating our differentiated service and support model by continuing regular communications with Advisors as well as delivering additional advisor and client focused resources. |
● | We have not initiated any layoffs, furloughs or reduced hours. As we implemented our business continuity plans, we have intentionally maintained the same pay practices for all of our employees based upon their regular work schedule, paid spot bonuses to certain employees, implemented a temporary hourly wage increase to designated client services personnel, increased certain benefit coverages for specific COVID-19 related treatments through December and increased our philanthropic contributions to local organizations to help support the COVID-19 responses in our community. |
Basis of Presentation
We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “20162019 (our “2019 Form 10-K”). Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation. Derivative activity was reclassified within operating activities on our consolidated statements of cash flows to provide a comprehensive view of the impact of the economic hedge program for our seed investment portfolio.
The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 1 to the consolidated financial statements included in our 20162019 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment and ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting” for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, all of which became effective January 1, 2017. As required by this ASU, excess tax benefits and tax shortfalls resulting from share-based compensation are recognized as income tax benefit or expense in the income statement on a prospective basis. Additionally, excess tax benefits or shortfalls recognized on share-based compensation are classified as an operating activity in the statement of cash flows. The Company has applied this provision prospectively, and thus, the prior period presented in the statement of cash flows has not been adjusted. This ASU allows entities to withhold shares issued during the settlement of a stock award or option, as a means of meeting minimum tax withholding due by the employee, in an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification of the award. The value of the withheld shares is then remitted by the Company in cash to the taxing
8
2020.
authorities on the employees’ behalf. The Company’s historical policy to withhold shares equivalent to the minimum individual tax rate is consistent with the thresholds meeting the classification of an equity award and, therefore, a retrospective classification adjustment was not required. This ASU requires that all cash payments made to taxing authorities on the employees’ behalf for withheld shares be presented as financing activities on the statement of cash flows. As this requirement is consistent with the Company’s historical accounting policy, a retrospective adjustment to presentation of the statement of cash flows was not required. This standard also allows for the option to account for forfeitures as they occur when determining the amount of share-based compensation expense to be recognized, rather than estimating expected forfeitures over the course of a vesting period. The Company elected to account for forfeitures as they occur. The net cumulative effect to the Company from the adoption of this ASU was an increase to additional paid-in capital of $3.5 million, a reduction to retained earnings of $2.2 million and an increase to the non-current deferred tax asset of $1.3 million as of January 1, 2017.
In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at September 30, 20172020 and the results of operations and cash flows for the three and nine months ended September 30, 20172020 and 20162019 in conformity with accounting principles generally accepted in the United States.
2.New Assets Held for Sale
Assets held for sale included real property related to our corporate headquarters move and aviation equipment. The nine months ended September 30, 2020 included asset impairment charges of $0.9 million on assets held for sale, which were recorded in general and administrative expenses in our consolidated statements of income. During the third quarter of 2020, the aviation equipment was sold. As of September 30, 2020, $3.8 million of buildings and $1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. As of December 31, 2019, $3.1 million of equipment, $3.8 million of buildings and $1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. The Company intends to actively pursue the sale of remaining assets held for sale at market prices as soon as reasonably possible.
Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
As of September 30, 2020, the Company had $5.3 million of capitalized implementation costs for hosting arrangements with $215 thousand of accumulated amortization in prepaid and other current assets on the consolidated balance sheet. Our hosting arrangements that are service contracts include internal and external costs related to various technology additions in support of our asset management and wealth management businesses. Amortization costs are recorded on a straight-line basis over the term of the hosting arrangement agreement.
9
2. | New Accounting Guidance |
Accounting Guidance Not Yet Adopted
In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2014-09, “Revenue from Contracts with Customers,”2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which requires an entity to recognizesimplifies and improves the amountconsistent application of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies the accounting for income taxes by removing certain costsexceptions to obtain or fulfill a contract with a customer. This ASU will supersede much of thegeneral principles and by clarifying and amending existing revenue recognition guidance in accounting principles generally accepted in the United States and is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; early application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. This ASU permits the use of either the retrospective or cumulative effect transition method. The Company has assessed its revenue streams to identify contracts that are subject to the requirements of the new standard. The Company plans to review the identified contracts and while we have not identified material changes in the timing of revenue recognition, we continue to evaluate the quantitative impact the ASU will have on the consolidated financial statements and related disclosures.
In February 2016, FASB issued ASU 2016-02, “Leases,” which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply.guidance. This ASU is effective for fiscal years, beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Although the Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company’s consolidated balance sheet for real estate operating leases.
In August 2016, FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” This ASU eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. This ASU designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017,2020, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
3. | Revenue Recognition |
In November 2016, FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash.” This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the periodAll revenue recognized in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all periods presented. Upon adoption of this ASU on January 1, 2018, we will include cash and cash equivalents – restricted
9
as a component of cash and cash equivalents on the Company’s consolidated statements of cash flows for all periods presented,income is considered to be revenue from contracts with customers. The vast majority of revenue is determined based on average assets and will remove the change in cashis earned daily or monthly or is transactional and cash equivalents-restricted as a component of net cash (used in) provided by operating activities.
In March 2017, FASB issued ASU 2017-07, “Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in a separate line item outside of operating items. In addition, only the service cost component is eligible for capitalization as part of an asset. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have no effect on our net income because it only impacts the classification of certain informationearned on the consolidated statementtrade date. As such, revenue from remaining performance obligations is not significant. The following table depicts the disaggregation of income. The service cost component of net periodic benefit cost was recognized in underwritingrevenue by product and distribution and compensation and related costs through September 30, 2017. An amendment to freeze our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) was approved effective September 30, 2017; therefore, after September 30, 2017 we will no longer incur service cost. The other components of net periodic cost will be reclassified to investment and other income (loss) on a retrospective basis.channel:
| | | | | | | | | | |
| | | | | | | | | | |
| | | Three months ended | | Nine months ended | | ||||
| | | 2020 | | 2019 | | 2020 | | 2019 | |
| | | (in thousands) | | (in thousands) | | ||||
Investment management fees: | | |
|
|
|
|
|
|
| |
Funds | | $ | 103,443 |
| 107,926 |
| 298,712 |
| 322,678 | |
Institutional | |
| 3,174 |
| 3,880 |
| 8,948 |
| 11,760 | |
Total investment management fees | | $ | 106,617 |
| 111,806 |
| 307,660 |
| 334,438 | |
Underwriting and distribution fees: | | | | | | | | | | |
Unaffiliated | | | | | | | | | | |
Service and distribution fees | | $ | 14,623 | | 16,286 | | 43,569 | | 49,366 | |
Sales commissions | | | 223 | | 364 | | 1,047 | | 1,300 | |
Other revenues | | | 82 | | 67 | | 308 | | 242 | |
Total unaffiliated distribution fees | | $ | 14,928 | | 16,717 | | 44,924 | | 50,908 | |
Wealth Management | | | | | | | | | | |
Advisory fees | | $ | 82,591 | | 73,356 | | 232,243 | | 208,806 | |
Service and distribution fees | | | 15,305 | | 16,143 | | 43,494 | | 47,589 | |
Sales commissions | | | 17,847 | | 20,544 | | 53,538 | | 60,959 | |
Other revenues | | | 8,785 | | 9,027 | | 25,833 | | 27,265 | |
Total wealth management distribution fees | | | 124,528 | | 119,070 | | 355,108 | | 344,619 | |
Total distribution fees | | $ | 139,456 | | 135,787 | | 400,032 | | 395,527 | |
Shareholder service fees: | | | | | | | | | | |
Total shareholder service fees | | $ | 21,597 |
| 23,087 |
| 63,745 |
| 70,279 | |
| |
| |
| |
| |
| | |
Total revenues | | $ | 267,670 |
| 270,680 |
| 771,437 |
| 800,244 | |
In May 2017, FASB issued ASU 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting.” This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, “Compensation – Stock Compensation Topic.” This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
10
4. | Investment Securities |
3.Investment Securities
Investment securities at September 30, 20172020 and December 31, 2016 are2019 were as follows:
| | | | | | | ||||||
| | September 30, | | December 31, | | |||||||
|
| 2020 |
| 2019 | | |||||||
|
|
|
|
|
|
| ||||||
|
| September 30, |
| December 31, |
| |||||||
|
| 2017 |
| 2016 |
| |||||||
|
|
| (in thousands) |
| ||||||||
| | | (in thousands) | | ||||||||
Available for sale securities: |
|
|
|
|
|
| | | | | | |
Certificates of deposit |
| $ | 13,004 |
| — |
| ||||||
Commercial paper |
|
| 29,882 |
| — |
| | $ | 9,714 | | 1,977 | |
Corporate bonds |
|
| 171,099 |
| — |
| | | 180,203 | | 254,291 | |
U.S. treasury bills |
|
| 19,937 |
| — |
| ||||||
Total available for sale securities | |
| 189,917 | | 256,268 | | ||||||
Trading debt securities: | | | | | | | ||||||
Commercial paper | | | 18,774 | | 1,977 | | ||||||
Corporate bonds | |
| 70,984 | | 84,920 | | ||||||
U.S. Treasury bills | | | — | | 5,979 | | ||||||
Mortgage-backed securities | |
| 1 | | 4 | | ||||||
Term loans | | | 44,994 | | 44,268 | | ||||||
Consolidated sponsored funds | |
| — | | 43,567 | | ||||||
Total trading securities | |
| 134,753 | | 180,715 | | ||||||
Equity securities: | | | | | | | ||||||
Common stock | |
| 34,206 | | 34,945 | | ||||||
Sponsored funds |
|
| 144,423 |
| 122,806 |
| | | 149,857 | | 178,386 | |
Sponsored privately offered funds |
|
| — |
| 570 |
| |
| 924 | | 845 | |
Total available for sale securities |
|
| 378,345 |
| 123,376 |
| ||||||
Trading securities: |
|
|
|
|
|
| ||||||
Certificates of deposit |
|
| 2,000 |
| — |
| ||||||
U.S. treasury bills |
|
| 4,964 |
| — |
| ||||||
Corporate bonds |
|
| 48,712 |
| — |
| ||||||
Mortgage-backed securities |
|
| 11 |
| 13 |
| ||||||
Common stock |
|
| 117 |
| 101 |
| ||||||
Consolidated sponsored funds |
|
| 191,932 |
| 145,710 |
| ||||||
Consolidated sponsored privately offered funds |
|
| 4,564 |
| — |
| ||||||
Sponsored funds |
|
| 13,456 |
| 29,541 |
| ||||||
Sponsored privately offered funds |
|
| 657 |
| — |
| ||||||
Total trading securities |
|
| 266,413 |
| 175,365 |
| ||||||
Total equity securities | | | 184,987 | | 214,176 | | ||||||
Equity method securities: |
|
|
|
|
|
| | | | | | |
Sponsored funds |
|
| 52,380 |
| 26,775 |
| |
| 69,687 | | 37,187 | |
Sponsored privately offered funds |
|
| — |
| 3,234 |
| ||||||
Total equity method securities |
|
| 52,380 |
| 30,009 |
| ||||||
Total securities |
| $ | 697,138 |
| 328,750 |
| | $ | 579,344 | | 688,346 | |
Certificates of deposit, commercialCommercial paper and corporate bonds and U.S. treasury bills accounted for as available for sale and held as of September 30, 20172020 mature as follows:
|
|
|
|
|
|
| Amortized |
|
|
|
| cost |
| Fair value |
|
| (in thousands) | ||
Within one year | $ | 75,335 |
| 75,349 |
After one year but within five years |
| 158,845 |
| 158,573 |
| $ | 234,180 |
| 233,922 |
| | | | |
| | Amortized | | |
| | cost |
| Fair value |
| | (in thousands) | ||
Within one year | $ | 64,321 | | 65,057 |
After one year but within five years | | 121,170 | | 124,860 |
| $ | 185,491 | | 189,917 |
Certificates of deposit, commercialCommercial paper, corporate bonds, and mortgage-backed securities and term loans accounted for as trading and held as of September 30, 20172020 mature as follows:
|
|
|
|
|
|
|
|
| Fair value |
|
|
|
| (in thousands) |
Within one year |
|
| $ | 10,084 |
After one year but within five years |
|
|
| 40,603 |
After 10 years |
|
|
| 5,000 |
|
|
| $ | 55,687 |
| | | | |
| | | | Fair value |
| | | | (in thousands) |
Within one year | | | $ | 29,580 |
After one year but within five years | | | | 83,508 |
After five years but within 10 years | | | | 21,665 |
| | | $ | 134,753 |
11
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at September 30, 2017:2020:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| |||||||||||
| | | | | | | | | | | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| |
| |||||||||||
| | cost | | gains | | losses | | Fair value |
| |||||||||||
|
| cost |
| gains |
| losses |
| Fair value |
| |||||||||||
|
| (in thousands) |
|
| (in thousands) | | ||||||||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Certificates of deposit |
| $ | 13,000 |
| 4 |
| — |
| 13,004 |
| ||||||||||
Commercial paper |
|
| 29,855 |
| 27 |
| — |
| 29,882 |
| | $ | 9,720 | | 3 | | (9) | | 9,714 | |
Corporate bonds |
|
| 171,306 |
| 34 |
| (241) |
| 171,099 |
| | | 175,771 |
| 4,432 | | — |
| 180,203 | |
U.S. treasury bills |
|
| 20,020 |
| — |
| (83) |
| 19,937 |
| ||||||||||
Sponsored funds |
|
| 144,886 |
| 1,961 |
| (2,424) |
| 144,423 |
| ||||||||||
|
| $ | 379,067 |
| 2,026 |
| (2,748) |
| 378,345 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | $ | 185,491 |
| 4,435 |
| (9) |
| 189,917 | |
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2016:2019:
|
|
|
|
|
|
|
|
|
|
|
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| |
|
| cost |
| gains |
| losses |
| Fair value |
| |
|
| (in thousands) |
| |||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
Sponsored funds |
| $ | 129,427 |
| 828 |
| (7,449) |
| 122,806 |
|
Sponsored privately offered funds |
|
| 265 |
| 305 |
| — |
| 570 |
|
|
| $ | 129,692 |
| 1,133 |
| (7,449) |
| 123,376 |
|
| | | | | | | | | | |
|
| Amortized |
| Unrealized |
| Unrealized |
| |
| |
| | cost | | gains | | losses | | Fair value |
| |
| | (in thousands) | | |||||||
Available for sale securities: | | | | | | | | | | |
Commercial paper | | $ | 1,976 | | 1 | | — | | 1,977 | |
Corporate bonds | | | 250,982 |
| 3,314 | | (5) |
| 254,291 | |
| | $ | 252,958 |
| 3,315 |
| (5) |
| 256,268 | |
A summary of available for sale investment securities with fair values below carrying values at September 30, 2017 and December 31, 20162020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
| 12 months or longer |
| Total | |||||||
|
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
September 30, 2017 |
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
|
| (in thousands) | |||||||||||
Corporate bonds |
| $ | 141,950 |
| (241) |
| — |
| — |
| 141,950 |
| (241) |
U.S. treasury bills |
|
| 19,937 |
| (83) |
| — |
| — |
| 19,937 |
| (83) |
Sponsored funds |
|
| 12,663 |
| (153) |
| 44,593 |
| (2,271) |
| 57,256 |
| (2,424) |
|
| $ | 174,550 |
| (477) |
| 44,593 |
| (2,271) |
| 219,143 |
| (2,748) |
| | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total | |||||||
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
|
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
| | (in thousands) | |||||||||||
Commercial paper | | $ | 2,420 | | (9) | | — | | — | | 2,420 | | (9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
| 12 months or longer |
| Total | |||||||
|
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
December 31, 2016 |
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
|
| (in thousands) | |||||||||||
Sponsored funds |
| $ | 71,051 |
| (1,834) |
| 34,182 |
| (5,615) |
| 105,233 |
| (7,449) |
Based upon our assessmentA summary of theseavailable for sale investment securities the time frame the investments have beenwith fair values below carrying values at December 31, 2019 is as follows:
| | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total | |||||||
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
|
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
| | (in thousands) | |||||||||||
Corporate bonds | | $ | 4,538 | | — | | 8,056 | | (5) | | 12,594 | | (5) |
The Company’s investment portfolio included 1 available for sale security in aan unrealized loss position and our intent to hold the investment securities until they have recovered, we determined that a write-down was not necessary at September 30, 2017.2020.
The Company evaluated available for sale securities in an unrealized loss position at September 30, 2020, including reviewing credit ratings, assessing the extent of losses, and considering the impact of market conditions for each individual security. The Company concluded no allowance for credit losses was necessary as it expects to recover the entire amortized cost basis of each security. The unrealized losses in the Company’s investment portfolio were primarily caused by changes in interest rates. At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.
For equity securities held at the end of the period, net unrealized gains of $7.3 million and net unrealized losses of $0.2 million were recognized for the three months ended September 30, 2020 and September 30, 2019, respectively and net unrealized losses of $0.5 million and net unrealized gains of $17.9 million were recognized for the nine months ended September 30, 2020 and September 30, 2019, respectively.
12
Sponsored Funds
The Company has classified its equity investments in the Ivy Funds, Ivy Nextshares, Ivy ProShares and IGI Funds as either trading, equity method investments (when the Company owns between 20% and 50% of the fund) or as available for sale investmentsequity securities measured at fair value through net income (when the Company owns less than 20% of the fund). These entities do not meet the criteria of a variable interest entity (“VIE”) and are considered to be voting interest entities (“VOE”). The Company has determined the Ivy Funds Ivy NextShares and Ivy ProShares are VOEs because the structure of the investment products is such that the voting rights held by the equity holders provide for equality among equity investors. The Company has determined that the IGI Funds are VOEs as their legal structure and the powers of their equity investors prevent the IGI Funds from meeting characteristics of being a VIE.
12
Sponsored Privately Offered Funds
The Company holds interestsan interest in a privately offered fundsfund structured in the form of a limited liability companies.company. The members of these entitiesthis entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote. These entities doThis entity does not meet the criteria of a VIE and areis considered to be VOEs.a VOE.
Consolidated Sponsored Funds
The following table details the balances related to consolidated sponsored funds at September 30, 2017,2020 and at December 31, 2016,2019, as well as the Company’s net interest in these funds:
| | | | | | | ||||||
| | September 30, | | | December 31, | |||||||
| | 2020 |
| | 2019 | |||||||
|
|
|
|
|
|
| ||||||
|
| September 30, |
|
| December 31, | |||||||
|
| 2017 |
|
| 2016 | |||||||
|
| (in thousands) | ||||||||||
|
| (in thousands) | ||||||||||
Cash |
| $ | 4,877 |
|
| 6,885 |
| $ | — | | | 1,530 |
Investments |
|
| 196,496 |
|
| 145,710 | |
| — | |
| 43,567 |
Other assets |
|
| 6,334 |
|
| 763 | |
| — | |
| 483 |
Other liabilities |
|
| (7,072) |
|
| (390) | |
| — | |
| — |
Redeemable noncontrolling interests |
|
| (30,636) |
|
| (10,653) | |
| — | |
| (19,205) |
Net interest in consolidated sponsored funds |
| $ | 169,999 |
|
| 142,315 |
| $ | — | | | 26,375 |
During the nine months ended September 30, 2017,third quarter of 2020, we consolidated certain of thedeconsolidated one Ivy Funds, Ivy NextShares and Ivy ProSharesFund in which we had provided initial seed capital at the time of the funds’ formation. When wefund’s formation due to no longer havehaving a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements. During the first nine months of 2017, we closed three IGI Funds and deconsolidated the Ivy ProShares, as we no longer have a controlling interest in the funds. Accordingly, we deconsolidated $2.6 million from cash and cash equivalents, $28.6 million from investments and $31.2 million from redeemable noncontrolling interests. Four IGI Funds remain consolidated as of September 30, 2017. There was no impact to the consolidated statements of income as a result of the closures and deconsolidations, as the funds were carried at fair value.fund.
Fair Value
Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset. An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation. The three-level hierarchy of inputs is summarized as follows:
| Level 1 – Investments are valued using quoted prices in active markets for identical securities. |
| Level 2 – Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities. |
| Level 3 – Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments. |
13
Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches evaluated differently depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makersdue to the short time between purchase and broker-dealers, current trades, bid-wants lists, offerings, market movements, the callabilityexpected maturity of the bond, stateinvestments. Depending on the nature of issuancethe inputs, these investments are generally classified as Level 1 or 2 within the fair value hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and benchmark yield curves.inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed tradestransactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. Term loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.
13
The following tables summarize our investment securities as of September 30, 20172020 and December 31, 20162019 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.
| | | | | | | | | | | | |
September 30, 2020 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value | | Total |
| |
| | (in thousands) |
| |||||||||
Cash equivalents: (1) | | | | | | | | | | | | |
Money market funds | | $ | 45,007 | | — | | — | | — | | 45,007 | |
Commercial paper | | | — | | 23,316 | | — | | — | | 23,316 | |
Total cash equivalents | | $ | 45,007 | | 23,316 | | — | | — | | 68,323 | |
Available for sale securities: | | | | | | | | | | | | |
Commercial paper | | $ | — | | 9,714 | | — | | — | | 9,714 | |
Corporate bonds | | $ | — | | 180,203 | | — | | — | | 180,203 | |
Trading debt securities: | | | | | | | | | | | | |
Commercial paper | | | — | | 18,774 | | — | | — | | 18,774 | |
Corporate bonds | | | — | | 70,984 | | — | | | | 70,984 | |
Mortgage-backed securities |
| | — |
| 1 |
| — |
| — | | 1 | |
Term loans | |
| — |
| 43,288 |
| 1,706 |
| — | | 44,994 | |
Equity securities: | | | | | | | | | | | | |
Common stock | | | 34,206 | | — | | — | | — | | 34,206 | |
Sponsored funds | | | 149,857 | | — | | — | | — | | 149,857 | |
Sponsored privately offered funds measured at net asset value (2) | | | — | | — | | — | | 924 | | 924 | |
Equity method securities: (3) | | | | | | | | | | | | |
Sponsored funds | | | 69,687 | | — | | — | | — | | 69,687 | |
Total investment securities | | $ | 253,750 | | 322,964 | | 1,706 | | 924 | | 579,344 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Not Held at Fair Value |
| Total |
| |
|
| (in thousands) |
| |||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
| $ | — |
| 13,004 |
| — |
| — |
| 13,004 |
|
Commercial paper |
|
| — |
| 29,882 |
| — |
| — |
| 29,882 |
|
Corporate bonds |
|
| — |
| 171,099 |
| — |
| — |
| 171,099 |
|
U.S. treasury bills |
|
| — |
| 19,937 |
| — |
| — |
| 19,937 |
|
Sponsored funds |
|
| 144,423 |
| — |
| — |
| — |
| 144,423 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
| — |
| 2,000 |
| — |
| — |
| 2,000 |
|
U.S. treasury bills |
|
| — |
| 4,964 |
| — |
| — |
| 4,964 |
|
Corporate bonds |
|
| — |
| 48,712 |
| — |
|
|
| 48,712 |
|
Mortgage-backed securities |
|
| — |
| 11 |
| — |
| — |
| 11 |
|
Common stock |
|
| 117 |
| — |
| — |
| — |
| 117 |
|
Consolidated sponsored funds |
|
| 114,707 |
| 77,225 |
| — |
| — |
| 191,932 |
|
Consolidated sponsored privately offered funds measured at net asset value (1) |
|
| — |
| — |
| — |
| 4,564 |
| 4,564 |
|
Sponsored funds |
|
| 13,456 |
| — |
| — |
| — |
| 13,456 |
|
Sponsored privately offered funds measured at net asset value (1) |
|
| — |
| — |
| — |
| 657 |
| 657 |
|
Equity method securities: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds |
|
| 52,380 |
| — |
| — |
| — |
| 52,380 |
|
Total |
| $ | 325,083 |
| 366,834 |
| — |
| 5,221 |
| 697,138 |
|
14
| | | | | | | | | | | | |
December 31, 2019 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value | | Total |
| |
| | (in thousands) |
| |||||||||
Cash equivalents: (1) | | | | | | | | | | | | |
Money market funds | | $ | 4,203 | | — | | — | | — | | 4,203 | |
Commercial paper | | | — | | 38,143 | | — | | — | | 38,143 | |
Total cash equivalents | | $ | 4,203 | | 38,143 | | — | | — | | 42,346 | |
Available for sale securities: | | | | | | | | | | | | |
Commercial paper | | $ | — | | 1,977 | | — | | — | | 1,977 | |
Corporate bonds | | | — | | 254,291 | | — | | — | | 254,291 | |
Trading debt securities: | | | | | | | | | | | | |
Commercial paper | | | — | | 1,977 | | — | | — | | 1,977 | |
Corporate bonds | | | — | | 84,920 | | — | | | | 84,920 | |
U.S. Treasury bills | | | — | | 5,979 | | — | | — | | 5,979 | |
Mortgage-backed securities |
| | — |
| 4 |
| — |
| — | | 4 | |
Term loans | | | — | | 40,368 | | 3,900 | | — | | 44,268 | |
Consolidated sponsored funds | | | — | | 43,567 | | — | | — | | 43,567 | |
Equity securities: | | | | | | | | | | | | |
Common stock | |
| 34,942 |
| — |
| 3 |
| — | | 34,945 | |
Sponsored funds | |
| 178,386 |
| — |
| — |
| — | | 178,386 | |
Sponsored privately offered funds measured at net asset value (2) | | | — | | — | | — | | 845 | | 845 | |
Equity method securities: (3) | | | | | | | | | | | | |
Sponsored funds | | | 37,187 | | — | | — | | — | | 37,187 | |
Total investment securities | | $ | 250,515 | | 433,083 | | 3,903 | | 845 | | 688,346 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Not Held at Fair Value |
| Total |
| |
|
| (in thousands) |
| |||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds |
| $ | 122,806 |
| — |
| — |
| — |
| 122,806 |
|
Sponsored privately offered funds measured at net asset value (1) |
|
| — |
| — |
| — |
| 570 |
| 570 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
| — |
| 13 |
| — |
| — |
| 13 |
|
Common stock |
|
| 101 |
| — |
| — |
| — |
| 101 |
|
Consolidated sponsored funds |
|
| 100,847 |
| 44,863 |
| — |
| — |
| 145,710 |
|
Sponsored funds |
|
| 29,541 |
| — |
| — |
| — |
| 29,541 |
|
Equity method securities: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds |
|
| 26,775 |
| — |
| — |
| — |
| 26,775 |
|
Sponsored privately offered funds measured at net asset value (1) |
|
| — |
| — |
| — |
| 3,234 |
| 3,234 |
|
Total |
| $ | 280,070 |
| 44,876 |
| — |
| 3,804 |
| 328,750 |
|
(1) |
|
(2) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. |
(3) |
|
|
14
15
The following table summarizes the activity of investments categorized as Level 3 for the nine months ended September 30, 2020:
4.Derivative Financial Instruments
| | | |
|
| For the nine months ended | |
| | September 30, 2020 | |
| | (in thousands) | |
Level 3 assets at December 31, 2019 | | $ | 3,903 |
Additions | |
| 6,501 |
Transfers in to level 3 | | | 11,086 |
Transfers out of level 3 | | | (15,622) |
Losses in Investment and other income | |
| (1,026) |
Redemptions/Paydowns | | | (3,136) |
Level 3 assets at September 30, 2020 | | $ | 1,706 |
| | | |
Change in unrealized losses for Level 3 assets held at | | $ | (9) |
In 2016, the
5. | Derivative Financial Instruments |
The Company implementedhas in place an economic hedge program that uses total return swap contracts to hedge market risk withrelated to its investments in certain sponsored funds. Certain of the consolidated sponsored funds may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives. We do not hedge for speculative purposes.
Excluding derivative financial instruments held in certain consolidated sponsored funds, theThe Company was party to seven10 total return swap contracts with a combined notional value of $208.5$271.2 million and three14 total return swap contracts with a combined notional value of $160.2$228.2 million as of September 30, 20172020 and December 31, 2016,2019, respectively. These derivative financial instruments are not designated as hedges for accounting purposes. Changes in fair value of the total return swap contracts are recognized in investmentInvestment and other income (loss), net onin the Company’s consolidated statementstatements of income.
The counterparties of the total return swap contracts posted $3.2 million in cash collateral with the Company as of September 30, 2020, which is included in accounts payable in the Company’s consolidated balance sheet. The Company posted $9.2 million and $7.1$3.7 million in cash collateral with the counterparties of the total return swap contracts as of September 30, 2017 and December 31, 2016, respectively. The cash collateral 2019, whichis included in customers and other receivables onin the Company’s consolidated balance sheet. The Company does not record its fair value in derivative transactions against the posted collateral.
The following table presents the fair value of the derivative financial instruments excluding derivative financial instruments held in certain consolidated sponsored funds as of September 30, 20172020 and December 31, 2016:2019 and is calculated based on Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
|
| December 31, |
|
|
|
|
| 2017 |
|
| 2016 |
|
| Balance sheet |
|
|
|
|
|
|
|
| location |
| Fair value |
| Fair value | ||
|
|
|
| (in thousands) | ||||
Total return swap contracts |
| Other current liabilities |
| $ | 811 |
|
| 475 |
| | | | | | | | |
| | | | | September 30, | | | December 31, |
| | Balance sheet | | | 2020 | | | 2019 |
|
| location |
| Fair value |
| Fair value | ||
| | |
| (in thousands) | ||||
Total return swap contracts |
| Prepaid expenses and other current assets | | $ | 2,017 | | | — |
Total return swap contracts | | Other current liabilities | | | — | | | 3,990 |
Net total return swap asset (liability) | | |
| $ | 2,017 | | | (3,990) |
The following is a summary of net losses(losses) gains recognized in income for the three and nine months ended September 30, 20172020 and September 30, 2016:2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended | ||||
|
| Income statement |
| September 30, |
| September 30, | ||||
|
| location |
|
| 2017 | 2016 |
|
| 2017 | 2016 |
|
|
|
| (in thousands) |
| (in thousands) | ||||
Total return swap contracts |
| Investment and other (loss) |
| $ | (8,855) | (8,837) |
|
| (27,321) | (30,767) |
| | | | | | | | | | | |
| | | | Three months ended | | Nine months ended | |||||
| | Income statement | | September 30, | | September 30, | |||||
|
| location |
| | 2020 | 2019 |
| | 2020 | | 2019 |
| | |
| (in thousands) | | (in thousands) | |||||
Total return swap contracts |
| Investment and other income |
| $ | (14,191) | 135 | | $ | (2,571) | | (25,728) |
5.Goodwill and Identifiable Intangible Assets
16
6. | Goodwill and Identifiable Intangible Assets |
Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business. Our goodwill is not deductible for tax purposes. The Company performs an annual goodwill impairment assessment during the second quarter of each year and identified 0 impairment during the current year’s assessment. Goodwill and identifiable intangible assets (all considered indefinite lived) at September 30, 20172020 and December 31, 20162019 are as follows:
| | | | | | | ||||||
| | September 30, | | December 31, |
| |||||||
| | 2020 | | 2019 | | |||||||
|
|
|
|
|
|
| ||||||
|
| September 30, |
| December 31, |
| |||||||
|
| 2017 |
| 2016 |
| |||||||
|
| (in thousands) |
| |||||||||
| | (in thousands) | | |||||||||
Goodwill |
| $ | 106,970 |
| 106,970 |
|
| $ | 106,970 |
| 106,970 |
|
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
Mutual fund management advisory contracts |
|
| 38,699 |
| 38,699 |
| |
| 38,699 |
| 38,699 | |
Mutual fund management subadvisory contract |
|
| 1,200 |
| 2,700 |
| ||||||
Other |
|
| 200 |
| 200 |
| |
| 200 |
| 200 | |
Total identifiable intangible assets |
|
| 40,099 |
| 41,599 |
| |
| 38,899 |
| 38,899 | |
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
Total |
| $ | 147,069 |
| 148,569 |
| | $ | 145,869 |
| 145,869 | |
6.Indebtedness
7. | Indebtedness |
Debt is reported at its carrying amount in the consolidated balance sheet.sheets. The fair value, calculated based on Level 2 inputs, of the Company’s senior unsecured notes maturing January 13, 2018 is $95.82021 was $96.2 million at September 30, 20172020 compared to the carrying value net of
15
debt issuance costs of $95.0 million, which is listed under short-term notes payable in the consolidated balance sheet. The fair value of the Company’s senior unsecured notes maturing January 13, 2021 is $102.9 million at September 30, 2017 compared to the carrying value net of debt issuance costs of $94.8 million, which is listed under long-term debt in the consolidated balance sheet. Fair value is calculated based on Level 2 inputs.
On October 20, 2017,2020, we entered into a three-year364-day unsecured revolving credit facility (the “New Credit Facility”) with various lenders, which initially provides for borrowings of up to $100.0 million and may be expanded to $200.0 million. The New Credit Facility replaced the prior credit facility, which was set to terminate in June 2018.October 2020. The covenants in the New Credit Facility are consistent with the covenants in the prior credit facility, including the required consolidated leverage ratio and the consolidated interest coverage ratio.
8. | Income Tax Uncertainties |
7.Income Tax Uncertainties
As of January 1, 2017 and September 30, 2017, the Company had unrecognized tax benefits, including penalties and interest, of $11.5 million ($8.4 million net of federal benefit) and $11.2 million ($7.9 million net of federal benefit), respectively, that, if recognized, would impact the Company’s effective tax rate. In the accompanying consolidated balance sheet,sheets, unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable;other current liabilities; unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to non-current deferred income taxes.
The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. As of January 1, 2017,September 30, 2020 and December 31, 2019, the total amount of accrued interest and penalties related to uncertain tax positions recognized in theCompany’s consolidated balance sheet was $3.8sheets included unrecognized tax benefits, including penalties and interest, of $2.1 million ($3.11.8 million net of federal benefit). The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the nine month period ended September 30, 2017 was $0.3 million. The total amount of accrued penalties and interest related to uncertain tax positions at September 30, 2017 of $4.1$2.0 million ($3.21.7 million net of federal benefit) is included in, respectively, that if recognized, would impact the total unrecognizedCompany’s effective tax benefits described above.rate.
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The 2015 and 2016Company does not expect the resolution or settlement of any open audits, federal or state, to materially impact the consolidated financial statements.
Our 2016-2019 federal income tax returns are open tax years that remain subject to potential future audit. StateOur state income tax returns for all years after 20122015 and, in certain states, income tax returns for 2012,2015, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
17
During the current quarter, the Company closed an Internal Revenue Service auditTable of the 2014 tax year. This audit was settled with no significant adjustments. Additionally, the Company is currently under audit in various state and local jurisdictions in which it operates. It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period. The Company’s liability for unrecognized tax benefits, including penalties and interest, is not expected to decrease significantly upon settlement of these audits. Additionally, such settlements are not anticipated to have a significant impact on the results of operations.Contents
8.Pension Plan and Postretirement Benefits Other Than Pension
9. | Pension Plan and Postretirement Benefits Other Than Pension |
Benefits payable under the Pension Plan areour noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) were based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved an amendment to freeze the Pension Plan, effective September 30, 2017. After September 30, 2017, participants in the Pension Plan will not accrueceased accruing additional benefits for future service or compensation. Participants will retainretained benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. DuringThe Compensation Committee approved the first nine monthstermination of 2017, wethe Pension Plan, effective June 1, 2019. The Company is currently performing the administrative actions required to terminate the Pension Plan in a standard termination, as defined by the Pension Benefit Guaranty Corporation.
In connection with the termination of the Pension Plan, in July 2020, the Company contributed $10.0$3.7 million dollars to the Pension Plan. In accordance with applicable accounting standards,Payments were made in July 2020 from the Pension Plan’s assetsPlan to participants, beneficiaries and liabilities were remeasured as of July 31, 2017,alternate payees that elected to receive a lump sum distribution and to the date participants were notifiedselected annuity provider that has assumed the liabilities of the freeze. This resulted in a reductionPension Plan. As part of the accruedassumption of Pension Plan liabilities by the annuity provider, the Company relieved the pension liability on its balance sheet and recorded settlement losses in the amount of approximately $30.0 million.$1.3 million during the third quarter of 2020.
We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as financial advisors licensed with Waddell & Reed, Inc.Advisors. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were grandfathered when suchthis plan was established. During the third quarter of 2016,
16
the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016.
The components of net periodic pension costs and other postretirement costs related to these plans were as follows:are reflected in the table below. Net periodic pension costs are recorded in investment and other income on the Company’s consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
| Other |
| ||||
|
| Pension Benefits |
| Postretirement Benefits |
| Pension Benefits |
| Postretirement Benefits |
| ||||||||||
|
| Three months ended September 30, |
| Three months ended September 30, |
| Nine months ended September 30, |
| Nine months ended September 30, |
| ||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||
|
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
| 2,726 |
| 3,050 |
| — |
| 185 |
|
| 8,178 |
| 9,149 |
| — |
| 555 |
|
Interest cost |
|
| 1,654 |
| 2,358 |
| 15 |
| 91 |
|
| 4,962 |
| 7,074 |
| 44 |
| 275 |
|
Expected return on plan assets |
|
| (2,559) |
| (3,482) |
| — |
| — |
|
| (7,677) |
| (10,445) |
| — |
| — |
|
Actuarial (gain) loss amortization |
|
| 1,265 |
| 1,554 |
| (45) |
| (38) |
|
| 3,795 |
| 4,661 |
| (135) |
| (115) |
|
Prior service cost (credit) amortization |
|
| 31 |
| 93 |
| (1) |
| 1 |
|
| 93 |
| 280 |
| (3) |
| 3 |
|
Transition obligation amortization |
|
| 1 |
| 1 |
| — |
| (8,475) |
|
| 3 |
| 3 |
| — |
| (8,475) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
| $ | 3,118 |
| 3,574 |
| (31) |
| (8,236) |
|
| 9,354 |
| 10,722 |
| (94) |
| (7,757) |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Other | | | | | | | Other | | ||||||
| | Pension Benefits | | Postretirement Benefits | | Pension Benefits | | Postretirement Benefits | | ||||||||||||
| | Three months ended September 30, | | | Three months ended September 30, | | Nine months ended September 30, | | | Nine months ended September 30, | | ||||||||||
| | 2020 | | 2019 | | | 2020 | | 2019 | | 2020 | | 2019 | | | 2020 | | 2019 | | ||
| | | (in thousands) | | | (in thousands) | | ||||||||||||||
Components of net periodic benefit cost: |
| |
|
|
|
|
|
|
|
|
| | |
| |
| | |
| |
|
Interest cost | | $ | 439 |
| 1,537 | | $ | 4 |
| 9 | | $ | 3,071 |
| 4,610 |
| $ | 12 |
| 25 | |
Expected return on plan assets | |
| (374) |
| (1,579) | |
| — |
| — | |
| (2,618) |
| (4,736) |
|
| — |
| — | |
Actuarial gain amortization | |
| — |
| — | |
| (67) |
| (124) | |
| — |
| — |
|
| (201) |
| (371) | |
Settlement loss | | | 1,272 | | — | | | — | | — | | | 1,272 | | — | | | — | | — | |
Total | | $ | 1,337 | | (42) | | $ | (63) | | (115) | | $ | 1,725 | | (126) | | $ | (189) | | (346) | |
18
10. |
|
|
9.Stockholders’ Equity
Earnings per Share
The components of basic and diluted earnings per share were as follows:
| | | | | | | | | | | | |||||||||||
| | Three months ended | | Nine months ended | | |||||||||||||||||
| | September 30, | | September 30, | | |||||||||||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Three months ended |
| Nine months ended |
| |||||||||||||||||
|
| September 30, |
| September 30, |
| |||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||
|
| (in thousands, except per share amounts) |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | (in thousands, except per share amounts) | | |||||||||||||||||||
Net income attributable to Waddell & Reed Financial, Inc. |
| $ | 37,951 |
| 53,827 |
| $ | 94,314 |
| 124,490 |
|
| $ | 30,523 |
| 33,054 |
| $ | 77,333 |
| 99,056 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
Weighted average shares outstanding, basic and diluted |
|
| 83,476 |
| 82,834 |
|
| 83,719 |
| 82,629 |
| |
| 64,240 | | 72,387 | |
| 65,795 | | 74,446 | |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
Earnings per share, basic and diluted |
| $ | 0.45 |
| 0.65 |
| $ | 1.13 |
| 1.51 |
| | $ | 0.48 | | 0.46 | | $ | 1.18 | | 1.33 | |
Dividends
On July 26, 2017,During the quarter, the Board of Directors approveddeclared a quarterly dividend on our common stock in the amount of $0.46 per share to stockholders of record on October 11, 2017. The total dividend to be paid on November 1, 2017 is approximately $38.4 million and was included in other current liabilities as of September 30, 2017.
On October 18, 2017, the Board of Directors approved a dividend on ourClass A common stock in the amount of $0.25 per share payablewith a November 2, 2020 payment date and an October 12, 2020 record date. The total dividend to be paid on February 1, 2018 to stockholders of record on January 11, 2018.November 2, 2020 is $15.6 million.
17
Common Stock Repurchases
The Board of Directors has authorized the repurchase of our Class A common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including issuing shares to employees in our stock-based compensation programs.
There were 190,0562,617,108 shares and 28,5372,480,019 shares repurchased in the open market or privately during the three months ended September 30, 20172020 and 2016,2019, respectively, which includes 5619 shares and 28,537 shares, respectively, repurchased from employees who tendered shares to cover their minimum income tax withholdings with respect to vesting of stock awards during these same reporting periods.the three months ended September 30, 2019. There were 904,4107,892,913 shares and 2,230,0346,849,238 shares repurchased in the open market or privately during the nine months ended September 30, 20172020 and 2016,2019, respectively, which includes 239,410451,245 shares and 333,034440,002 shares, respectively, repurchased from employees who tendered shares to cover their minimum income tax withholdings with respect to the vesting of stock awards during each of these two reporting periods.
19
Accumulated Other Comprehensive LossIncome
The following tables summarize accumulated other comprehensive lossincome activity for the three and nine months ended September 30, 20172020 and September 30, 2016.2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
|
|
|
| |
|
|
|
|
| valuation |
|
|
|
|
| |
|
|
|
|
| allowance for |
|
|
|
|
| |
|
|
|
|
| unrealized |
| Pension and |
| Total |
| |
|
| Unrealized |
| gains |
| postretirement |
| accumulated |
| ||
|
| gains (losses) |
| (losses) on |
| benefits |
| other |
| ||
|
| on investment |
| investment |
| unrealized |
| comprehensive |
| ||
Three months ended September 30, 2017 |
| securities |
| securities |
| gains (losses) |
| income (loss) |
| ||
|
| (in thousands) |
| ||||||||
Balance at June 30, 2017 |
| $ | (1,986) |
|
| (540) |
| (44,457) |
| (46,983) |
|
Other comprehensive income before reclassification |
|
| 1,968 |
|
| 800 |
| 14,958 |
| 17,726 |
|
Amount reclassified from accumulated other comprehensive income (loss) |
|
| (438) |
|
| (260) |
| 643 |
| (55) |
|
Net current period other comprehensive income |
|
| 1,530 |
|
| 540 |
| 15,601 |
| 17,671 |
|
Balance at September 30, 2017 |
| $ | (456) |
| $ | — |
| (28,856) |
| (29,312) |
|
| | | | | | | |
| | For the three months ended September 30, | |||||
| | | | | | Total | |
| | Unrealized | | Postretirement | | accumulated | |
| | gains (losses) on | | benefits | | other | |
| | AFS investment | | unrealized | | comprehensive | |
| | securities | | gains (losses) | | income (loss) | |
| | (in thousands) | |||||
Balance at June 30, 2020 |
| $ | 3,874 |
| 613 |
| 4,487 |
Other comprehensive loss before reclassification |
|
| (371) | | — |
| (371) |
Amount reclassified from accumulated other comprehensive income |
|
| (140) | | (51) |
| (191) |
Net current period other comprehensive loss |
|
| (511) | | (51) |
| (562) |
Balance at September 30, 2020 | | $ | 3,363 |
| 562 |
| 3,925 |
| | | | | | | |
| | | | | | | |
Balance at June 30, 2019 |
| $ | 2,142 |
| 939 |
| 3,081 |
Other comprehensive income before reclassification |
|
| 379 |
| — |
| 379 |
Amount reclassified from accumulated other comprehensive income |
|
| (83) |
| (94) |
| (177) |
Net current period other comprehensive income (loss) |
|
| 296 | | (94) |
| 202 |
Balance at September 30, 2019 | | $ | 2,438 |
| 845 |
| 3,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
|
|
|
| |
|
|
|
|
| valuation |
|
|
|
|
| |
|
|
|
|
| allowance for |
|
|
|
|
| |
|
|
|
|
| unrealized |
| Pension and |
| Total |
| |
|
| Unrealized |
| gains |
| postretirement |
| accumulated |
| ||
|
| gains (losses) |
| (losses) on |
| benefits |
| other |
| ||
|
| on investment |
| investment |
| unrealized |
| comprehensive |
| ||
Three months ended September 30, 2016 |
| securities |
| securities |
| gains (losses) |
| income (loss) |
| ||
|
| (in thousands) |
| ||||||||
Balance at June 30, 2016 |
| $ | (2,498) |
|
| (2,511) |
| (52,499) |
| (57,508) |
|
Other comprehensive income (loss) before reclassification |
|
| 1,660 |
|
| 1,022 |
| (1,222) |
| 1,460 |
|
Amount reclassified from accumulated other comprehensive income (loss) |
|
| (1,871) |
|
| (1,155) |
| 1,055 |
| (1,971) |
|
Net current period other comprehensive loss |
|
| (211) |
|
| (133) |
| (167) |
| (511) |
|
Balance at September 30, 2016 |
| $ | (2,709) |
| $ | (2,644) |
| (52,666) |
| (58,019) |
|
| | | | | | | |
| | For the nine months ended September 30, | |||||
| | | | | | Total | |
| | Unrealized | | Postretirement | | accumulated | |
| | gains (losses) | | benefits | | other | |
| | on investment | | unrealized | | comprehensive | |
| | securities | | gains (losses) | | income (loss) | |
| | (in thousands) | |||||
Balance at December 31, 2019 |
| $ | 2,521 |
| 713 |
| 3,234 |
Other comprehensive income before reclassification |
| | 1,344 |
| — |
| 1,344 |
Amount reclassified from accumulated other comprehensive income |
| | (502) |
| (151) |
| (653) |
Net current period other comprehensive income (loss) |
| | 842 | | (151) |
| 691 |
Balance at September 30, 2020 | | $ | 3,363 |
| 562 |
| 3,925 |
| | | | | | | |
| | | | | | | |
Balance at December 31, 2018 |
| $ | (797) |
| 1,128 |
| 331 |
Other comprehensive income before reclassification | | | 3,413 | | — | | 3,413 |
Amount reclassified from accumulated other comprehensive income |
| | (178) | | (283) |
| (461) |
Net current period other comprehensive income (loss) |
| | 3,235 | | (283) |
| 2,952 |
Balance at September 30, 2019 | | $ | 2,438 |
| 845 |
| 3,283 |
18
|
|
|
|
| Change in valuation |
|
|
|
|
| |
|
|
|
|
| allowance for |
|
|
|
|
| |
|
|
|
|
| unrealized |
| Pension and |
| Total |
| |
|
| Unrealized |
| gains |
| postretirement |
| accumulated |
| ||
|
| gains (losses) |
| (losses) on |
| benefits |
| other |
| ||
|
| on investment |
| investment |
| unrealized |
| comprehensive |
| ||
Nine months ended September 30, 2017 |
| securities |
| securities |
| gains (losses) |
| income (loss) |
| ||
|
| (in thousands) |
| ||||||||
Balance at December 31, 2016 |
| $ | (3,972) |
|
| (3,388) |
| (45,969) |
| (53,329) |
|
Other comprehensive income before reclassification |
|
| 4,113 |
|
| 3,743 |
| 14,958 |
| 22,814 |
|
Amount reclassified from accumulated other comprehensive income (loss) |
|
| (597) |
|
| (355) |
| 2,155 |
| 1,203 |
|
Net current period other comprehensive income |
|
| 3,516 |
|
| 3,388 |
| 17,113 |
| 24,017 |
|
Balance at September 30, 2017 |
| $ | (456) |
| $ | — |
| (28,856) |
| (29,312) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
|
|
|
| |
|
|
|
|
| valuation |
|
|
|
|
| |
|
|
|
|
| allowance for |
|
|
|
|
| |
|
|
|
|
| unrealized |
| Pension and |
| Total |
| |
|
| Unrealized |
| gains |
| postretirement |
| accumulated |
| ||
|
| (gains) losses |
| (losses) on |
| benefits |
| other |
| ||
|
| on investment |
| investment |
| unrealized |
| comprehensive |
| ||
Nine months ended September 30, 2016 |
| securities |
| securities |
| gains (losses) |
| income (loss) |
| ||
|
| (in thousands) |
| ||||||||
Balance at December 31, 2015 |
| $ | (3,729) |
|
| (3,240) |
| (54,536) |
| (61,505) |
|
Other comprehensive income (loss) before reclassification |
|
| 3,207 |
|
| 1,938 |
| (1,222) |
| 3,923 |
|
Amount reclassified from accumulated other comprehensive income (loss) |
|
| (2,187) |
|
| (1,342) |
| 3,092 |
| (437) |
|
Net current period other comprehensive income |
|
| 1,020 |
|
| 596 |
| 1,870 |
| 3,486 |
|
Balance at September 30, 2016 |
| $ | (2,709) |
| $ | (2,644) |
| (52,666) |
| (58,019) |
|
Reclassifications from accumulated other comprehensive lossincome (loss) and included in net income are summarized in the tables that follow.
| | | | | | | | | |
| | | | | Tax | | | | |
For the three months ended September 30, 2020 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | 184 |
| (44) | | 140 |
| Investment and other income |
Amortization of postretirement benefits | | | 67 |
| (16) |
| 51 |
| Compensation and benefits |
Total | | $ | 251 |
| (60) |
| 191 | | |
| | | | | | | | | |
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2017 |
|
|
| ||||
|
|
|
|
| Tax |
|
|
|
|
|
|
|
|
|
| (expense) |
|
|
|
|
|
|
| Pre-tax |
| benefit |
| Net of tax |
| Statement of income line item |
| |
|
| (in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment gains |
| $ | 698 |
| (260) |
| 438 |
| Investment and other income (loss) |
|
Valuation allowance |
|
| — |
| 260 |
| 260 |
| Provision for income taxes |
|
Amortization of pension and postretirement benefits |
|
| (952) |
| 309 |
| (643) |
| Underwriting and distribution expense and Compensation and related costs |
|
Total |
| $ | (254) |
| 309 |
| 55 |
|
|
|
20
| | | | | Tax | | | | |
For the three months ended September 30, 2019 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | 109 |
| (26) | | 83 |
| Investment and other income |
Amortization of postretirement benefits | | $ | 124 |
| (30) |
| 94 |
| Compensation and benefits |
Total | | $ | 233 |
| (56) |
| 177 | | |
| | | | | | | | | |
| | | | | Tax | | | | |
For the nine months ended September 30, 2020 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | 661 |
| (159) |
| 502 |
| Investment and other income |
Amortization of postretirement benefits | | | 201 |
| (50) |
| 151 |
| Compensation and benefits |
Total | | $ | 862 |
| (209) |
| 653 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | Tax | | | | |
For the nine months ended September 30, 2019 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | 234 |
| (56) |
| 178 |
| Investment and other income |
Amortization of postretirement benefits | |
| 371 |
| (88) |
| 283 |
| Compensation and benefits |
Total | | $ | 605 |
| (144) |
| 461 | | |
11. | Leases |
The Company has operating and finance leases for corporate office space and equipment. Our leases have remaining lease terms of less than one year to six years, some of which include options to extend leases for up to 20 years, and some of which include options to terminate the leases within one year. Certain leases include variable lease payments in future periods based on a market index or rate. We determine if an arrangement is a lease at inception (or the effective date of ASU 2016-02, Leases). Operating lease assets and liabilities are included in other non-current assets, other current liabilities, and other non-current liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated balance sheets.
Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date (or the effective date of ASU 2016-02, Leases) based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate based on the information available at the commencement date (or the effective date of ASU 2016-02, Leases) in determining the present value of lease payments. The ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which we have elected not to separate.
During January 2020, we signed a fifteen-year lease, which we expect to commence during 2022, relating to the development of a new 260,000 square foot innovative, distinctive and sustainably-designed corporate headquarters building in the heart of downtown Kansas City, Missouri. The lease will be recognized in the Company’s consolidated financial statements during the period that includes the lease’s commencement date.
21
The components of lease expense were as follows:
| | | | | | |
| | Three months ended September 30, | ||||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Operating Lease Cost | | $ | 2,903 |
| $ | 4,189 |
| | | | | | |
Finance Lease Cost: | | | | | | |
Amortization of ROU assets | | $ | 42 |
| $ | 80 |
Interest on lease liabilities | | | 2 |
| | 8 |
Total | | $ | 44 | | $ | 88 |
| | | | | | |
| | Nine months ended September 30, | ||||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Operating Lease Cost | | $ | 9,164 |
| $ | 14,472 |
| | | | | | |
Finance Lease Cost: | | | | | | |
Amortization of ROU assets | | $ | 149 |
| $ | 224 |
Interest on lease liabilities | | | 15 |
| | 23 |
Total | | $ | 164 | | $ | 247 |
Supplemental cash flow information related to leases was as follows:
| | | | | | |
| | Nine months ended September 30, | ||||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| |
|
Operating cash flows from operating leases | | $ | 9,106 |
| $ | 13,661 |
Operating cash flows from finance leases | |
| 15 |
|
| 23 |
Financing cash flows from finance leases | | | 185 | | | 222 |
| | | | | | |
ROU assets obtained in exchange for lease obligations: | | | | | | |
Operating leases | | | 665 | | | 2,410 |
Finance leases | | | 10 | | | 40 |
22
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2016 |
|
|
| |||||
|
|
|
|
| Tax |
|
|
|
|
|
|
|
|
|
| (expense) |
|
|
|
|
|
|
| Pre-tax |
| benefit |
| Net of tax |
| Statement of income line item |
| |
|
| (in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment gains |
| $ | 2,980 |
| (1,109) |
| 1,871 |
| Investment and other income (loss) |
|
Valuation allowance |
|
| — |
| 1,155 |
| 1,155 |
| Provision for income taxes |
|
Amortization of pension and postretirement benefits |
|
| (1,611) |
| 556 |
| (1,055) |
| Underwriting and distribution expense and Compensation and related costs |
|
Total |
| $ | 1,369 |
| 602 |
| 1,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 |
|
|
| ||||
|
|
|
|
| Tax |
|
|
|
|
|
|
|
|
|
| (expense) |
|
|
|
|
|
|
| Pre-tax |
| benefit |
| Net of tax |
| Statement of income line item |
| |
|
| (in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment gains |
| $ | 952 |
| (355) |
| 597 |
| Investment and other income (loss) |
|
Valuation allowance |
|
| — |
| 355 |
| 355 |
| Provision for income taxes |
|
Amortization of pension and postretirement benefits |
|
| (3,359) |
| 1,204 |
| (2,155) |
| Underwriting and distribution expense and Compensation and related costs |
|
Total |
| $ | (2,407) |
| 1,204 |
| (1,203) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2016 |
|
|
| |||||
|
|
|
|
| Tax |
|
|
|
|
|
|
|
|
|
| (expense) |
|
|
|
|
|
|
| Pre-tax |
| benefit |
| Net of tax |
| Statement of income line item |
| |
|
| (in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment gains |
| $ | 3,483 |
| (1,296) |
| 2,187 |
| Investment and other income (loss) |
|
Valuation allowance |
|
| — |
| 1,342 |
| 1,342 |
| Provision for income taxes |
|
Amortization of pension and postretirement benefits |
|
| (4,833) |
| 1,741 |
| (3,092) |
| Underwriting and distribution expense and Compensation and related costs |
|
Total |
| $ | (1,350) |
| 1,787 |
| 437 |
|
|
|
10.Contingencies
Supplemental balance sheet information related to leases was as follows:
| | | | | | |
| | September 30, 2020 | | December 31, 2019 | ||
| | (in thousands, except lease term and discount rate) | ||||
Operating Leases: |
| |
|
| |
|
Operating lease ROU assets (Other non-current assets) | | $ | 15,181 |
| $ | 23,457 |
| | | | | | |
Other current liabilities | | $ | 7,403 | | $ | 10,479 |
Other non-current liabilities | | | 9,632 | | | 14,694 |
Total operating lease liabilities | | $ | 17,035 | | $ | 25,173 |
| | | | | | |
| | | | | | |
Finance Leases: | | | | | | |
Property and equipment, gross | | $ | 476 | | $ | 985 |
Accumulated depreciation | | | (391) | | | (737) |
Property and equipment, net | | $ | 85 | | $ | 248 |
| | | | | | |
Other current liabilities | | $ | 65 | | $ | 203 |
Other non-current liabilities | | | 13 | | | 55 |
Total finance lease liabilities | | $ | 78 | | $ | 258 |
| | | | | | |
| | | | | | |
Weighted average remaining lease term: | | | | | | |
Operating leases | | | 4 years | | | 4 years |
Finance leases | | | 1 year | | | 1 year |
| | | | | | |
Weighted average discount rate: | | | | | | |
Operating leases | | | 4.04% | | | 4.32% |
Finance leases | | | 6.00% | | | 6.00% |
Maturities of lease liabilities are as follows:
| | | | | | |
| | Operating | | | Finance | |
| | Leases | | | Leases | |
| | (in thousands) | ||||
Year ended December 31, | | | | | | |
2020 (excluding the nine months ended September 30, 2020) |
| $ | 2,413 |
| | 28 |
2021 | | | 6,669 | | | 44 |
2022 | |
| 2,563 |
| | 10 |
2023 | |
| 2,122 |
| | — |
2024 | | | 2,090 | | | — |
Thereafter | |
| 2,613 |
| | — |
Total lease payments | |
| 18,470 |
| | 82 |
Less imputed interest | | | (1,435) | | | (4) |
Total | | $ | 17,035 |
| | 78 |
12. | Contingencies |
The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.
The Company establishes reserves for litigation and similar matters when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies”Contingencies.” These amounts are not reduced by amounts that may be recovered under insurance or claims against
23
third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.
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In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan and Audrey Ohman v. Ivy Investment Management Company, et. al. (Case No. I6CV02338 Div. 4), two individuals who allegedly purchased shares of two affiliated registered investment companies (mutual funds) for which two of the Company’s subsidiaries provide investment management services filed a putative derivative action on behalf of the two nominal defendant affiliated mutual fund trusts alleging breach of fiduciary duty and breach of contract claims relating to investments held in the affiliated mutual funds by the Company's registered investment adviser subsidiaries, the two nominal defendant trusts, the current trustees and three retired trustees of the nominal defendant trusts, and an officer of the Company (who plaintiffs subsequently voluntarily dismissed). On behalf of the nominal defendant trusts, plaintiffs seek monetary damages and demand a jury trial. On April 6, 2017, the court granted one of the nominal defendant trust’s motion to dismiss the claims of plaintiff Ohman for lack of standing, without leave to amend. On May 2, 2017, the remaining nominal defendant filed a motion to stay the litigation pending the investigation and recommendation of special litigation committees of each of the nominal defendant trusts, a special committee of independent trustees established by the board of each trust and empowered to, among other things, investigate the claims alleged in the complaint; examine, and make recommendations to the board of trustees regarding, the merits of such alleged claims; and to make a recommendation to the court concerning the proper resolution of the litigation. On June 13, 2017, the court granted a 60-day stay until August 12, 2017. Formal discovery has commenced. Trial is currently set for July 16, 2018 through August 10, 2018, although there can be no assurance that the trial will take place on those dates. The Company denies that any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment management agreement with, the nominal defendant trusts.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company's dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent. While the ultimate resolution of this matter is uncertain, an adverse determination against the Company could have a material adverse impact on our business, financial condition and results of operations.
In an action filed on June 23, 2017 and amended on June 26, 2017 in the U.S. District Court for the District of Kansas, Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.), Stacy Schapker, a participant in the Company’s 401(k) and Thrift Plan, as amended and restated (the “401(k) Plan”), filed a lawsuit against the Company, the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and unnamed Jane and John Doe Defendants 1-25. The amended complaint, which is filed on behalf of the 401(k) Plan and a proposed class of 401(k) Plan participants, purports to assert claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) based on the 401(k) Plan’s offering of investments managed by the Company or its affiliates from June 23, 2011 to present. The amended complaint seeks, among other things, an order compelling the disgorgement of fees paid to the Company and its affiliates by the 401(k) Plan and the restoration of losses to the 401(k) Plan arising from defendants alleged ERISA violations, attorneys’ fees and other injunctive and equitable relief. The Company believes the allegations are without merit and intends to vigorously defend this matter. On October 6, 2017, the defendants filed a motion to dismiss the amended complaint.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company’s dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements included elsewhere in this report. Unless otherwise indicated or the context otherwise requires all references to the “Company,” “we,” “our” or “is” refer to Waddell & Reed Financial, Inc. and its consolidated subsidiaries.
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,AUM and AUA, 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 thosethe impact of the COVID-19 pandemic and related economic conditions, as well as the factors 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, 2016,2019, which include, without limitation:
| The loss of existing distribution |
| A reduction in |
| 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 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 due to various factors, including fee pressure, the level of our |
| 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 |
| 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. |
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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 (the “SEC”), 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, 20162019 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2017.2020. 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.
Overview
Overview
We are one of the oldest mutual fund and asset management firms in the country, 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 and client activity. 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 and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds, the IGI Funds, and institutional and separately managed accounts. Investment management and/or advisory 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 fees earned on fee-based asset allocation products and related advisory services, Rule 12b-1 asset-based service and distribution fees, 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 dollar 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 for commissions, employee compensation, field services, dealer services and information technology.
One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our retail products are distributed through our retail unaffiliated distribution channel, or through our retail broker-dealerwealth management channel and independent Waddell and Reed, Inc. (“W&R”) financial advisors.by Advisors. Through our institutional channel, we distribute a varietyan array of investment styles forto a variety of clients.
Through our retail unaffiliated distribution channel, we distribute mutual funds through broker-dealers, retirement platforms and registered investment advisers and various retirement platforms through a team of external and internal wholesalers, as well as a team dedicated to home office relationship coverage.wholesalers.
In our retail broker-dealerwealth management channel, 1,481 independentwe had 921 Advisors and 392 licensed advisor associates as of September 30, 2020, for a total of 1,313 licensed individuals associated with W&R financial advisorswho operate out of offices located throughout the United States and provide financial advice for retirement, education funding, estate planning and other financial needs for clients. A distinguishing aspect of this channel is its low redemption rate, which can be attributed to the personal and customized nature in which W&R advisors provide service to clients by focusing on meeting their long term financial objectives; this, in turn, leads to a more stable asset base for the channel.
Through our institutional channel, weWe manage assets in a variety of investment styles for a varietyin our institutional channel. Most of types of institutions, as well as the IGI Funds. The largest percentage of our clients in this channel are other asset managers that hire us to act as a subadviser for their branded products; they are typically domestic orand foreign distributors of investment products who lack scale or the track record to manage internally, or choose to market multi-manager styles. Our diverse client list also includes pension funds, Taft Hartley plans and endowments.
Company Developments
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● | Revenues of $267.7 million during the third quarter of 2020 decreased 1% compared to the third quarter of 2019. Operating expenses of $230.0 million during the third quarter of 2020 held steady compared to the same quarter in 2019. The operating margin was 14.1% during the third quarter of 2020, compared to 14.8% during the third quarter of 2019. Excluding severance expense related to the outsourcing of our transfer agency transactional processing operations during the third quarter of 2019, adjusted operating expenses1 were $227.6 million and the adjusted operating margin1 was 15.9%. |
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1 Adjusted net income, adjusted net income per diluted share, adjusted operating expenses and adjusted operating margin are non-GAAP financial measures. See Non-GAAP Financial Measures and Reconciliation of GAAP to non-GAAP Financial Measures on pages 40 and 41.
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● | Continued execution of strategic initiatives in Asset Management |
o | Both sales and redemptions improved vs. the same quarter in 2019, particularly in institutional and unaffiliated |
o | Continued progress in strategic pricing evaluation, with 75% of AUM at or better than competitor median fees |
o | AUM ended the quarter at $67.9 billion, a decrease of 1% compared to the third quarter of 2019 due to net outflows partially offset by market appreciation. |
● | Successful quarter for Wealth Management recruiting and asset growth |
o | AUA ended the quarter at $62.7 billion, a 10% increase compared to the third quarter of 2019 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by an ongoing migration away from Non-advisory AUA |
o | Net new AUA continue to improve, and net new Advisory AUA were positive for the 7th consecutive quarter |
o | Since January 1, 2020, 32 Advisors have affiliated with W&R with combined prior firm AUA totaling over $1.9 billion |
o | $474 thousand average trailing 12-month productivity per Advisor for the third quarter of 2020 improved 12% compared to the third quarter of 2019 |
● | Robust balance sheet continued to support investment in strategic growth and meaningful capital return |
o | $744.6 million in cash and investments |
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o | $56.3 million was returned to |
● | Hired two executives focused on strategic growth – one to lead the technology teams dedicated to leveraging technology as a strategic asset across the organization, and one to develop and lead strategies in support of |
Vision and Growth Strategy
24We remain committed to steadily executing on our long-term vision and growth strategy, which consists of six key, strategic focus areas: (1) competitive products and pricing; (2) continued focus on strong core processes and performance metrics; (3) the ability to leverage technology and analytics as a strategic asset across the organization; (4) having a growth culture and a more agile organization; (5) sharpening our brand awareness in the marketplace; and finally, (6) effectively allocating capital through internal investment initiatives, as well as taking advantage of potential dislocations and acquisition opportunities in the asset management and wealth management industries. Over the quarter, we made progress on these key focus areas as outlined below.
Within product and pricing, we introduced a series of enhancements to our InvestEd products, increasing the number of portfolios(including age-based and static options) and adding two ETFs and three Ivy Funds as underlying investments in those options, all designed to provide flexibility and best meet investor needs as they save for education. Additionally, effective October 1, we reduced load fees on all Class A shares for the Ivy Funds. These reductions, which include various breakpoints on all funds at certain purchase levels, are a further illustration of our desire to maintain competitive pricing across our lineup.
Within core processes and performance, we continue to streamline processes as we incorporate ongoing efficiencies. In our asset management business, our institutional distribution model has benefited from new technology that brings a more seamless client experience to further support sales and retention efforts and leverage data analytics insights. In our wealth management business, we appointed an industry veteran to lead our Advisor & Client Experience initiatives. This role will collaborate with key stakeholders across the business to improve Advisor and client journeys, creating new, innovative experiences, increasing loyalty and driving advocacy. This role will also work to develop and lead strategies in support of best-in-class client and Advisor experience processes and procedures while acting on opportunities for innovative investment, growth and expansion.
Within technology & analytics, we appointed a new Chief Technology Officer, who is a member of our executive leadership team and is leading efforts to leverage technology as a strategic asset across the organization, overseeing areas
27
including enterprise technology architecture and infrastructure, cybersecurity, application development, data integration, and service delivery management. In our asset management business, we continue to progress on our data strategy, with the rollout of an RIA targeting and segmentation tool. We have also continued with our wealth management and asset management technology platform initiatives with the long-term objectives of improved Advisor and client experiences, enhanced sales enablement and improved internal operations. Specifically, within our wealth management business, we are expanding the capabilities of our WaddellOne digital platform with the introduction of OnePath, a digital account opening and maintenance tool that will reduce the time required to open an account through a data-driven, dynamic workflow process. We plan to launch a pilot program for OnePath during the fourth quarter of 2020, with full implementation by early 2021. OnePath is designed to simplify and enhance workflow for Advisors serving their clients by accelerating straight through processing, reducing clicks, improving e-signature capabilities and providing transparency for Advisors into the status of work in-progress.
Within growth culture and a more agile organization, we took additional steps to enhance our culture, including diversity and inclusion initiatives. We have made great strides to ensure we have a true culture of belonging within our organization. In recognition of some of the steps we have taken this year, the Company was recently named a finalist for the Diversity Champions award by InvestmentNews. We were proud to be recognized, along with other firms, for our ability to inspire others from diverse backgrounds to join, flourish and bring their authentic selves to work in the financial services industry.
Within brand awareness, we continue to execute a full brand review that includes all three of our brands across the enterprise. This is a multi-year effort, launched during the second quarter of 2020 and progressing to date, in partnership with a premiere, well respected global brand agency on the assessment and execution strategies.
Within capital allocation, our balance sheet enables us to maintain regular capital return to shareholders by way of dividends and share buybacks, while also positioning us to pursue strategic acquisitions if opportunities arise. Inorganic growth is a key component of our strategy and we continue to evaluate acquisition opportunities across both our wealth management and asset management businesses.
Impact of COVID-19
The market volatility that began in March 2020, as a result of the reaction to COVID-19 and its impact on the global economy, resulted in significant depreciation in the stock markets. In the second and third quarters of 2020, the markets rebounded, benefiting our measures of AUM and AUA for these periods. Both ending and average AUM and AUA increased during the third quarter of 2020, resulting in increased revenue as compared to the prior quarter.
Some of our expenses, particularly certain distribution expenses, are directly correlated with revenue, and we saw increases in these expenses in line with the revenue increases during the third quarter. In regard to controllable expenses, defined as Compensation and benefits, General and administrative, Technology, Occupancy and Marketing and advertising, while the Company took several incremental actions to reduce these expenses through the first nine months of 2020, we continue to take a long-term view and invest in the areas we think will allow us to come out of the pandemic in a stronger position and drive our long-term growth strategy. We expect controllable expenses to be higher in the fourth quarter of 2020 than in the third quarter of 2020 due to strategic project activity and the absence of meeting expense reductions we experienced in the third quarter of 2020. Our continued discipline on controllable expenses, particularly with increases in revenue, provides operating leverage that enables us to continue to invest in growth.
We transitioned most of our workforce and Advisors to a work from home environment early in March 2020. By late March, 98% of our employees were working remotely, with negligible downtime. The remote work environment has continued through the third quarter of 2020. Our steady and proactive response has allowed our asset management and wealth management businesses to maintain full continuity of service and the access that our clients need and expect. With a successful transition to a remote working environment, we plan to closely monitor developments and reintroduce employees to the workplace only when it is safe to do so. The transition of employees to a work from home environment did not result in any material incremental expenses during the first three quarters of 2020, and we do not expect to incur any material incremental expenses in future periods. For additional discussion regarding steps we have taken to facilitate safety, security and full continuity of service, please see Part I – Item 1 – “Financial Statements (unaudited), Note 1 – Description of Business and Accounting Policies”, of this Quarterly Report on Form 10-Q.
We continue to maintain a strong balance sheet without any significant leverage and ended the quarter with
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$744.6 million in cash and investments. Our exceptionally strong balance sheet allows us to continue to execute our long-term growth strategies while retaining our focus on controlling expenses.
For additional discussion regarding the risks that can impact our business, results of operations and financial condition due to COVID-19 and the related economic conditions, please see Part II – Item 1A – “Risk Factors”.
Assets Under Management
During the third quarter of 2017, assets under management2020, AUM increased 0.6%4% to $80.9$67.9 billion from $80.4$65.0 billion at June 30, 20172020 due to market appreciation of $3.3$4.7 billion, partially offset bynet outflows of $2.8$1.8 billion.Sales of $1.8 billion during the current quarter increased 2% compared to the third quarter of 2019. Redemptions decreased 19% compared to the third quarter of 2019.
Change in Assets Under Management (1)
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| | Three months ended September 30, 2020 |
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| Institutional |
| Total |
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Beginning Assets |
| $ | 30,307 |
| 43,084 |
| 7,036 |
| 80,427 |
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| $ | 23,724 |
| 2,997 |
| 38,245 |
| 64,966 | |
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Sales (2) |
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| 1,790 |
| 1,024 |
| 68 |
| 2,882 |
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Sales (3) | |
| 1,127 |
| 59 |
| 634 |
| 1,820 | | ||||||||||
Redemptions |
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| (2,049) |
| (1,139) |
| (5,674) |
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| (1,977) |
| (165) |
| (1,488) |
| (3,630) | |
Net Exchanges |
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| 213 |
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| — |
| — |
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| 239 |
| — |
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| — | |
Net Flows |
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| (483) |
| (1,238) |
| (1,071) |
| (2,792) |
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| (611) |
| (106) |
| (1,093) |
| (1,810) | |
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Market Action |
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| 1,238 |
| 1,626 |
| 400 |
| 3,264 |
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| 1,755 |
| 297 |
| 2,661 |
| 4,713 | |
Ending Assets |
| $ | 31,062 |
| 43,472 |
| 6,365 |
| 80,899 |
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| $ | 24,868 |
| 3,188 |
| 39,813 |
| 67,869 | |
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| Third Quarter 2016 |
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| Retail Broker- |
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| Dealer |
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Beginning Assets |
| $ | 35,197 |
| 42,261 |
| 8,993 |
| 86,451 |
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Sales (2) |
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| 1,320 |
| 1,024 |
| 180 |
| 2,524 |
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Redemptions |
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Net Exchanges |
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| 161 |
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| 33 |
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Net Flows |
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Market Action |
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| 1,436 |
| 1,621 |
| 440 |
| 3,497 |
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Ending Assets |
| $ | 33,290 |
| 43,170 |
| 8,595 |
| 85,055 |
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Beginning Assets |
| $ | 27,545 |
| 3,887 |
| 40,444 |
| 71,876 | |
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Sales (3) | |
| 999 | | 49 |
| 744 |
| 1,792 | |
Redemptions | |
| (2,684) |
| (230) |
| (1,542) |
| (4,456) | |
Net Exchanges | |
| 334 |
| — |
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| — | |
Net Flows | |
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| (181) |
| (1,132) |
| (2,664) | |
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Market Action | |
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| (29) |
| (64) |
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Ending Assets |
| $ | 25,857 |
| 3,677 |
| 39,248 |
| 68,782 | |
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Over2020, AUM decreased 3% to $67.9 billion from $70.0 billion at December 31, 2019 due to net outflows of $5.5 billion, partially offset by market appreciation of $3.4 billion. Sales of $6.5 billion during the nine months ended September 30, 2017, assets under management remained relatively stable, moving from $80.5 billion at December 31, 20162020 increased 2% compared to $80.9 billion atthe nine months ended September 30, 2017 as outflows2019. Redemptions during the nine months ended September 30, 2020 decreased 9% compared to the same period of $8.6 billion were offset by market appreciation2019.
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| | Nine months ended September 30, 2020 |
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| | | | | | Wealth | | |
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| Unaffiliated(2) | | Institutional | | Management | | Total | | |
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Beginning Assets |
| $ | 26,264 |
| 3,096 |
| 40,598 |
| 69,958 | |
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Sales (3) | |
| 4,197 |
| 153 |
| 2,178 |
| 6,528 | |
Redemptions | |
| (7,175) |
| (546) |
| (4,335) |
| (12,056) | |
Net Exchanges | |
| 770 |
| 22 |
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| — | |
Net Flows | |
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Market Action | |
| 812 |
| 463 |
| 2,164 |
| 3,439 | |
Ending Assets |
| $ | 24,868 |
| 3,188 |
| 39,813 |
| 67,869 | |
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| | Nine months ended September 30, 2019 |
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| | | | | | Wealth | | |
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| Unaffiliated(2) | | Institutional | | Management | | Total | | |
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Beginning Assets |
| $ | 24,977 |
| 3,655 |
| 37,177 |
| 65,809 | |
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Sales (3) | |
| 3,883 |
| 244 |
| 2,286 |
| 6,413 | |
Redemptions | |
| (7,431) |
| (1,027) |
| (4,776) |
| (13,234) | |
Net Exchanges | |
| 914 |
| 25 |
| (939) |
| — | |
Net Flows | |
| (2,634) |
| (758) |
| (3,429) |
| (6,821) | |
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Market Action | |
| 3,514 |
| 780 |
| 5,500 |
| 9,794 | |
Ending Assets |
| $ | 25,857 |
| 3,677 |
| 39,248 |
| 68,782 | |
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| Year to Date 2017 |
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| Retail |
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| Retail Broker |
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| Distribution |
| Dealer |
| Institutional |
| Total |
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Beginning Assets |
| $ | 30,295 |
| 42,322 |
| 7,904 |
| 80,521 |
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|
|
Sales (2) |
|
| 5,667 |
| 3,143 |
| 290 |
| 9,100 |
|
Redemptions |
|
| (9,078) |
| (5,727) |
| (2,925) |
| (17,730) |
|
Net Exchanges |
|
| 684 |
| (690) |
| 6 |
| — |
|
Net Flows |
|
| (2,727) |
| (3,274) |
| (2,629) |
| (8,630) |
|
|
|
|
|
|
|
|
|
|
|
|
Market Action |
|
| 3,494 |
| 4,424 |
| 1,090 |
| 9,008 |
|
Ending Assets |
| $ | 31,062 |
| 43,472 |
| 6,365 |
| 80,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year to Date 2016 |
| |||||||
|
| Retail |
|
|
|
|
|
|
| |
|
| Unaffiliated |
| Retail Broker |
|
|
|
|
| |
|
| Distribution |
| Dealer |
| Institutional |
| Total |
| |
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets |
| $ | 45,641 |
| 43,344 |
| 15,414 |
| 104,399 |
|
|
|
|
|
|
|
|
|
|
|
|
Sales (2) |
|
| 4,990 |
| 3,186 |
| 823 |
| 8,999 |
|
Redemptions |
|
| (18,047) |
| (4,068) |
| (7,818) |
| (29,933) |
|
Net Exchanges |
|
| 446 |
| (529) |
| 83 |
| — |
|
Net Flows |
|
| (12,611) |
| (1,411) |
| (6,912) |
| (20,934) |
|
|
|
|
|
|
|
|
|
|
|
|
Market Action |
|
| 260 |
| 1,237 |
| 93 |
| 1,590 |
|
Ending Assets |
| $ | 33,290 |
| 43,170 |
| 8,595 |
| 85,055 |
|
(1) |
| Includes all activity of the |
(2) |
|
(3) |
|
30
Average Assets Under Management
Average assets under management,AUM, which are generally more indicative of trends in revenue for providingfrom investment management services than the change in ending assets under management,AUM, are presented below.
| | | | | | | | | | | |
| | Three months ended September 30, 2020 |
| ||||||||
| | | | | | Wealth | | | |
| |
|
| Unaffiliated | | Institutional | | Management | | Total | | ||
|
| (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 19,849 |
| 3,199 |
| 29,857 |
| $ | 52,905 | |
Fixed Income | |
| 4,468 |
| — |
| 8,695 | |
| 13,163 | |
Money Market | |
| 147 |
| — |
| 1,731 | |
| 1,878 | |
Total |
| $ | 24,464 |
| 3,199 |
| 40,283 |
| $ | 67,946 | |
| | | | | | | | | | | |
| | Three months ended September 30, 2019 | | ||||||||
| | | | | | Wealth | | | | | |
| | Unaffiliated | | Institutional | | Management | | Total | | ||
| | (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 20,988 |
| 3,808 |
| 29,642 |
| $ | 54,438 | |
Fixed Income | |
| 5,210 |
| 3 |
| 9,256 | |
| 14,469 | |
Money Market | |
| 97 |
| — |
| 1,523 | |
| 1,620 | |
Total |
| $ | 26,295 |
| 3,811 |
| 40,421 |
| $ | 70,527 | |
| | | | | | | | | | | |
| | Nine months ended September 30, 2020 |
| ||||||||
| | | | | | Wealth | | | |
| |
|
| Unaffiliated | | Institutional | | Management | | Total | | ||
|
| (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 18,866 |
| 2,977 |
| 28,412 |
| $ | 50,255 | |
Fixed Income | |
| 4,542 |
| — |
| 8,647 | |
| 13,189 | |
Money Market | |
| 135 |
| — |
| 1,693 | |
| 1,828 | |
Total |
| $ | 23,543 |
| 2,977 |
| 38,752 |
| $ | 65,272 | |
| | | | | | | | | | | |
| | Nine months ended September 30, 2019 | | ||||||||
| | | | | | Wealth | | | | | |
| | Unaffiliated | | Institutional | | Management | | | Total | ||
| | (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 21,237 |
| 3,851 |
| 29,396 |
| $ | 54,484 | |
Fixed Income | |
| 5,217 |
| 14 |
| 9,281 | |
| 14,512 | |
Money Market | |
| 100 |
| — |
| 1,571 | |
| 1,671 | |
Total |
| $ | 26,554 |
| 3,865 |
| 40,248 |
| $ | 70,667 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter 2017 |
| ||||||||
|
| Retail |
|
|
|
|
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
|
|
|
|
| |
|
| Distribution |
| Dealer |
| Institutional |
| Total |
| ||
|
| (in millions) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class: |
|
|
|
|
|
|
|
|
|
|
|
Equity |
| $ | 23,477 |
| 31,268 |
| 6,385 |
| $ | 61,130 |
|
Fixed Income |
|
| 6,659 |
| 10,432 |
| 331 |
|
| 17,422 |
|
Money Market |
|
| 102 |
| 1,834 |
| — |
|
| 1,936 |
|
Total |
| $ | 30,238 |
| 43,534 |
| 6,716 |
| $ | 80,488 |
|
31
Performance
We have seen an increase from the prior quarter in trailing one- and five-year performance, while trailing three-year performance remained consistent as measured by the percentage of funds ranked in the top half of their respective Morningstar universes. As measured by percentage of assets, one-year performance declined slightly while three- and five-year performance improved.Our relative performance across the complex improved during the quarter, but we continue to see opportunities to improve performance in the future.Our commitment to institutional caliber processes means that while we are mindful of short-term market dynamics, we remain focused on the long term and on maintaining discipline and consistency in volatile times such as we have seen throughout 2020.
The following table is a summary of Morningstar rankings and ratings as of September 30, 2020:
| | | | | | | |
MorningStar Fund Rankings1 |
| 1 Year |
| 3 Years |
| 5 Years |
|
Funds ranked in top half |
| 49 | % | 49 | % | 39 | % |
Assets ranked in top half |
| 43 | % | 52 | % | 47 | % |
| | | | | | | |
MorningStar Ratings1 |
| Overall |
| 3 Years |
| 5 Years |
|
Funds with 4/5 stars |
| 26 | % | 28 | % | 19 | % |
Assets with 4/5 stars |
| 40 | % | 42 | % | 35 | % |
32
Assets Under Administration
AUA includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R and held in direct to fund accounts, brokerage accounts or within our fee-based advisory programs. AUA as of September 30, 2020 increased 10% as compared to September 30, 2019 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by an ongoing migration away from Non-advisory AUA. Average AUA increased 7% for the three months ended September 30, 2020 and increased 5% for the nine months ended September 30, 2020, compared to the same periods in 2019. Starting in the second quarter of 2020, we updated our definition of net new AUA to include dividends and interest to be more consistent with peers and have reflected this new definition for all periods presented in the table below. This quarter marked the 7th straight quarter of positive Advisory AUA net flows. We continue to see increased average productivity per Advisor due to our efforts to transform W&R into a fully competitive and profitable aspect of our business model, with a focus on higher producing Advisors.
| | | | | | | |
| | | September 30, 2020 | | | September 30, 2019 | |
| | (in millions) | | ||||
Ending AUA | | | | | | | |
Advisory AUA | | $ | 29,330 | | | 25,107 | |
Non-advisory AUA | |
| 33,364 | | | 32,006 | |
Total ending AUA | | $ | 62,694 | | | 57,113 | |
| | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | ||||||||
| | | 2020 | | | 2019 | | | | 2020 | | | 2019 | |
| | (in millions, except percentage data) | | |||||||||||
Average AUA (1) | | | | | | | | | | | | | | |
Advisory AUA (1) | | $ | 28,502 | | | 24,921 | |
| $ | 26,737 | | | 23,732 | |
Non-advisory AUA (1) | |
| 32,898 | | | 32,490 | |
|
| 31,846 | | | 32,038 | |
Total average AUA (1) | | $ | 61,400 | | | 57,411 | | | $ | 58,583 | | | 55,770 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net new Advisory AUA (2) | | $ | 437 | | | 328 | | | $ | 1,068 | | | 977 | |
Net new Non-advisory AUA (2), (3) | |
| (475) | | | (720) | |
|
| (1,479) | | | (2,240) | |
Total net new AUA (2), (3) | | $ | (38) | | | (392) | |
| $ | (411) | | | (1,263) | |
| | | | | | | | | | | | | | |
Annualized Advisory AUA growth (4) | | | 6.4 | % | | 5.3 | % | | | 5.3 | % | | 6.1 | % |
Annualized AUA growth (4) | | | (0.3) | % | | (2.7) | % | | | (0.9) | % | | (3.3) | % |
| | | | | | |
| | | September 30, 2020 | | | September 30, 2019 |
Advisors and advisor associates | |
| 1,313 | | | 1,344 |
Average trailing 12-month production per Advisor (5) (in thousands) | | $ | 474 | | | 422 |
(1) | Average AUA are calculated as the average of the beginning of month AUA during each reporting period. |
(2) | Net new AUA are calculated as total client deposits and net transfers less client withdrawals. Client deposits include dividends and interest. |
(3) | Excludes activity related to products held outside of our wealth management platform. These assets represent less than 10% of total AUA. |
(4) | Annualized growth is calculated as annualized total net new AUA divided by beginning AUA. |
(5) | Production per Advisor is calculated as trailing 12-month Total Underwriting and distribution fees less “other” underwriting and distribution fees divided by the average number of Advisors. “Other” underwriting and distribution fees predominantly include fees paid by Advisors for programs and services. |
33
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter 2016 |
| ||||||||
|
| Retail |
|
|
|
|
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
|
|
|
|
| |
|
| Distribution |
| Dealer |
| Institutional |
| Total |
| ||
|
| (in millions) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class: |
|
|
|
|
|
|
|
|
|
|
|
Equity |
| $ | 26,732 |
| 31,408 |
| 8,521 |
| $ | 66,661 |
|
Fixed Income |
|
| 7,424 |
| 10,057 |
| 492 |
|
| 17,973 |
|
Money Market |
|
| 149 |
| 1,991 |
| — |
|
| 2,140 |
|
Total |
| $ | 34,305 |
| 43,456 |
| 9,013 |
| $ | 86,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year to Date 2017 |
| ||||||||
|
| Retail |
|
|
|
|
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
|
|
|
|
| |
|
| Distribution |
| Dealer |
| Institutional |
| Total |
| ||
|
| (in millions) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class: |
|
|
|
|
|
|
|
|
|
|
|
Equity |
| $ | 23,256 |
| 31,311 |
| 6,924 |
| $ | 61,491 |
|
Fixed Income |
|
| 6,801 |
| 10,201 |
| 365 |
|
| 17,367 |
|
Money Market |
|
| 107 |
| 1,887 |
| — |
|
| 1,994 |
|
Total |
| $ | 30,164 |
| 43,399 |
| 7,289 |
| $ | 80,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year to Date 2016 |
| ||||||||
|
| Retail |
|
|
|
|
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
|
|
|
|
| |
|
| Distribution |
| Dealer |
| Institutional |
|
| Total | ||
|
| (in millions) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class: |
|
|
|
|
|
|
|
|
|
|
|
Equity |
| $ | 29,464 |
| 30,683 |
| 10,828 |
| $ | 70,975 |
|
Fixed Income |
|
| 7,362 |
| 9,774 |
| 801 |
|
| 17,937 |
|
Money Market |
|
| 168 |
| 2,010 |
| — |
|
| 2,178 |
|
Total |
| $ | 36,994 |
| 42,467 |
| 11,629 |
| $ | 91,090 |
|
Results of Operations — Three and Nine Months Ended September 30, 20172020 as Compared with Three and Nine Months Ended September 30, 20162019
Total Revenues
Total revenues decreased 5%1% to $289.4$267.7 million for the three months ended September 30, 20172020 compared to the three months ended September 30, 2016 primarily due to a decrease in average assets under management of 7% driven by net outflows.2019. For the nine months ended September 30, 2017,2020, total revenues decreased $83.4$28.8 million, or 9%4%, compared to the same period in the prior year2019. For both comparative periods, the decreases were due to a decrease in investment management fees and shareholder service fees, partially offset by increases in underwriting and distribution fees. The decreases in investment management fees were due to lower average assets underAUM and lower effective management of 11% driven primarily by net outflowsfee rates related to targeted fee reductions on certain products made in previous periods and money market fee waivers. The decreases in shareholder service fees were due to a lesser extentreduction in fund reimbursement revenues related to the share class conversion that occurredoutsourcing of our transfer agency transactional processing operations as well as lower assets and number of accounts. The increases in July 2016.underwriting and distribution fees were due to increases in advisory fees due to higher average Advisory AUA and were partially offset by decreases in service and distribution fees due to lower assets and lower sales commissions.
| | | | | | | | | ||||||||
| | Three months ended | | | | |||||||||||
| | September 30, | | | | |||||||||||
|
| 2020 |
| 2019 |
| Variance |
| |||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Three months ended |
|
|
| |||||||||||
|
| September 30, |
|
|
| |||||||||||
|
| 2017 |
| 2016 |
| Variance |
| |||||||||
|
| (in thousands, except percentage data) |
| |||||||||||||
| | (in thousands, except percentage data) | | |||||||||||||
Investment management fees |
| $ | 134,149 |
| 138,745 |
| (3) | % | | $ | 106,617 |
| 111,806 |
| (5) | % |
Underwriting and distribution fees |
|
| 128,892 |
| 135,778 |
| (5) | % | |
| 139,456 |
| 135,787 |
| 3 | % |
Shareholder service fees |
|
| 26,406 |
| 28,563 |
| (8) | % | |
| 21,597 |
| 23,087 |
| (6) | % |
Total revenues |
| $ | 289,447 |
| 303,086 |
| (5) | % | | $ | 267,670 |
| 270,680 |
| (1) | % |
| | | | | | | | |
| | Nine months ended | | | | |||
| | September 30, | | | | |||
|
| 2020 |
| 2019 |
| Variance |
| |
| | (in thousands, except percentage data) | | |||||
Investment management fees | | $ | 307,660 |
| 334,438 |
| (8) | % |
Underwriting and distribution fees | |
| 400,032 |
| 395,527 |
| 1 | % |
Shareholder service fees | |
| 63,745 |
| 70,279 |
| (9) | % |
Total revenues | | $ | 771,437 |
| 800,244 |
| (4) | % |
27
|
|
|
|
|
|
|
|
|
|
| Nine months ended |
|
|
| |||
|
| September 30, |
|
|
| |||
|
| 2017 |
| 2016 |
| Variance |
| |
|
| (in thousands, except percentage data) |
| |||||
Investment management fees |
| $ | 395,463 |
| 424,403 |
| (7) | % |
Underwriting and distribution fees |
|
| 386,499 |
| 428,748 |
| (10) | % |
Shareholder service fees |
|
| 80,706 |
| 92,959 |
| (13) | % |
Total revenues |
| $ | 862,668 |
| 946,110 |
| (9) | % |
Investment Management Fee Revenues
Investment management fee revenues for the third quarter of 20172020 decreased $4.6$5.2 million, or 3%5%, from last year’sthe third quarter.quarter of 2019. For the nine monthnine-month period endedending September 30, 2017,2020, investment management fee revenues decreased $28.9$26.8 million, or 7%8%, compared to the same period in 2016.
On October 16,2017, nine Advisors Funds merged into Ivy Funds with substantially similar objectives2019. For both comparative periods, the decrease was due to a decrease in average assets and strategies. The Company intends to recommend that the mutual fund Board of Trustees approve the merger of the remaining Advisors Funds into Ivy Funds. Assuming necessary approvals are received, these additional mergers are expected to close in early 2018. Thereafter, the Company anticipates investmenta lower effective management fee revenuerate, which was primarily due to targeted pricing reductions on certain products made in 2018 to decrease between $10 millionprevious periods and $11 million. money market fee waivers.
The following table summarizestables summarize investment management fee revenues, related average assets under management,AUM, fee waivers and investment management fee rates for the three and nine months ended September 30, 20172020 and 2016.2019.
| | | | | | | | | | |
| | Three months ended September 30, | | | | | ||||
|
| 2020 |
| 2019 |
| | Variance |
| ||
| | (in thousands, except for management fee rate and average assets) | | | | | ||||
Investment management fees (net) | | $ | 103,443 | | | 107,926 | | | (4) | % |
Average assets (in millions) | | $ | 64,747 | | | 66,716 | | | (3) | % |
Management fee rate (net) | |
| 0.6356 | % | | 0.6418 | % | | | |
Total fee waivers | | $ | 9,171 | | | 8,154 | | | 12 | % |
Institutional investment management fees (net) | | $ | 3,174 | | | 3,880 | | | (18) | % |
Institutional average assets (in millions) | | $ | 3,199 | |
| 3,811 | |
| (16) | % |
Institutional management fee rate (net) | |
| 0.3945 | % |
| 0.4040 | % |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
|
|
|
| ||||
|
| 2017 |
| 2016 |
|
| Variance |
| ||
|
| (in thousands, except for management fee rate and average assets) |
|
|
|
| ||||
Retail investment management fees (net) |
| $ | 128,078 |
|
| 131,139 |
|
| (2) | % |
Retail average assets (in millions) |
|
| 73,772 |
|
| 77,761 |
|
| (5) | % |
Retail management fee rate (net) |
|
| 0.6888 | % |
| 0.6709 | % |
|
|
|
Money market fee waivers |
|
| 31 |
|
| 562 |
|
| (94) | % |
Other fee waivers |
|
| 1,795 |
|
| 1,051 |
|
| 71 | % |
Total fee waivers |
| $ | 1,826 |
|
| 1,613 |
|
| 13 | % |
Institutional investment management fees (net) |
| $ | 6,071 |
|
| 7,606 |
|
| (20) | % |
Institutional average assets (in millions) |
|
| 6,716 |
|
| 9,013 |
|
| (25) | % |
Institutional management fee rate (net) |
|
| 0.3871 | % |
| 0.3546 | % |
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
|
|
|
| ||||
|
| 2017 |
| 2016 |
|
| Variance |
| ||
|
| (in thousands, except for management fee rate and average assets) |
|
|
|
| ||||
Retail investment management fees (net) |
| $ | 376,563 |
|
| 395,208 |
|
| (5) | % |
Retail average assets (in millions) |
|
| 73,563 |
|
| 79,461 |
|
| (7) | % |
Retail management fee rate (net) |
|
| 0.6844 | % |
| 0.6644 | % |
|
|
|
Money market fee waivers |
|
| 218 |
|
| 2,947 |
|
| (93) | % |
Other fee waivers |
|
| 5,797 |
|
| 3,158 |
|
| 84 | % |
Total fee waivers |
| $ | 6,015 |
|
| 6,105 |
|
| (1) | % |
Institutional investment management fees (net) |
| $ | 18,900 |
|
| 29,195 |
|
| (35) | % |
Institutional average assets (in millions) |
|
| 7,289 |
|
| 11,629 |
|
| (37) | % |
Institutional management fee rate (net) |
|
| 0.3722 | % |
| 0.3500 | % |
|
|
|
| | | | | | | | | | |
| | Nine months ended September 30, | | | | | ||||
|
| 2020 |
| 2019 |
| | Variance |
| ||
| | (in thousands, except for management fee rate and average assets) | | | | | ||||
Investment management fees (net) | | $ | 298,712 | | | 322,678 | | | (7) | % |
Average assets (in millions) | |
| 62,295 | | | 66,802 | | | (7) | % |
Management fee rate (net) | |
| 0.6405 | % | | 0.6458 | % | | | |
Total fee waivers | | $ | 23,804 | | | 22,127 | | | 8 | % |
Institutional investment management fees (net) | | $ | 8,948 | | | 11,760 | | | (24) | % |
Institutional average assets (in millions) | |
| 2,977 | |
| 3,865 | |
| (23) | % |
Institutional management fee rate (net) | |
| 0.4013 | % |
| 0.4068 | % |
| | |
Revenues from investment management services provided to our affiliated retail mutual funds, which are distributed through the retail unaffiliated distribution and retail broker-dealerwealth management channels, decreased $3.1 million4% in the third quarter of
28
2017 compared to the third quarter of 2016. For 2020 and decreased 7% for the nine months ended September 30, 2017, revenues from investment management services provided to our affiliated retail mutual funds decreased $18.6 million, compared to the first nine months of 2016. For both comparative periods, affiliated investment management revenue in the retail channel declined less on a percentage basis than the related average assets under management due to an increase in the average management fee rate. A mix-shift in the retail asset base has resulted in increased average management fee rates in 2017 compared to 2016. Money market fee waivers for the three and nine months ending September 30, 2017 were lower2020, compared to the same periodperiods in 20162019. These decreases were due to federal interestdecreases in average AUM and a lower effective management fee rate increases. Other fee waivers have increased during both periods due to certain Funds increasingpricing reductions. Effective April 1, 2020, new fee waiversreductions were made on our large cap growth and core bond products, which we expect to maintain expense ratios, and the launching of new Funds. Fee waivers for the Funds are recorded as an offsethave a one to investment management fees up to the amount of fees earned.two cent annualized impact on earnings per share.
Institutional account revenues in the third quarter of 20172020 decreased $1.5$0.7 million compared to the third quarter of 2016.2019. For the nine month periodmonths ended September 30, 2017,2020, institutional account revenues decreased $10.3$2.8 million compared to the same period in 2016.2019. These decreases were due to a decrease in average AUM and a slight decrease in effective management fee rate.
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| ||||||||||
|
| Annualized long-term redemption rates |
| |||||||||||||||||
|
| (excludes money market redemptions) |
| |||||||||||||||||
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| ||||||||||
Retail Unaffiliated Distribution channel |
| 33.0 | % | 56.2 | % |
| 40.8 | % | 65.6 | % | ||||||||||
Retail Broker-Dealer channel |
| 16.4 | % | 12.1 | % |
| 15.4 | % | 10.7 | % | ||||||||||
| | | | | | | | | | | ||||||||||
| | Annualized long-term redemption rates | | |||||||||||||||||
| | (excludes money market redemptions) | | |||||||||||||||||
| | Three months ended | | | Nine months ended | | ||||||||||||||
| | September 30, | | | September 30, | | ||||||||||||||
|
| 2020 |
| 2019 |
| | 2020 |
| 2019 |
| ||||||||||
Unaffiliated channel |
| 32.3 | % | 40.9 | % | | 41.0 | % | 37.8 | % | ||||||||||
Institutional channel |
| 67.3 | % | 46.4 | % |
| 53.7 | % | 89.8 | % |
| 20.5 | % | 23.9 | % | | 24.5 | % | 35.5 | % |
Wealth Management channel |
| 13.1 | % | 13.4 | % | | 13.2 | % | 13.9 | % | ||||||||||
Total |
| 27.1 | % | 33.3 | % |
| 28.5 | % | 43.5 | % |
| 20.5 | % | 24.3 | % | | 23.8 | % | 24.2 | % |
The decreasedlong-term redemption rate for both the three and nine month periods endingmonths ended September 30, 20172020 decreased in the retail unaffiliated distribution channel was driven primarily by improved redemption rates inas compared to the Ivy Asset Strategy Fund, Ivy VIP Asset Strategy Fund and Waddell & Reed Advisors Asset Strategy Fund (prior to being renamed in May 2017) (the “Asset Strategy funds”).three months ended September 30, 2019. Redemptions in the Asset Strategy funds represented approximately 14% of the retail unaffiliated distribution channel’s redemptionsdecreased during the third quarter, of 2017, reduced from 30%particularly in the third quarter of 2016. Forour International Core Equity and High Income funds. The long-term redemption rate for the nine months ended September 30, 2017, redemptions2020 increased in the Asset Strategy funds represented approximately 21% of the retail unaffiliated distribution channel’s redemptions, which was reduced from 40% duringchannel as compared to the same period in 2016.2019. Increased market volatility during the first half of 2020 led to more redemptions in this channel, particularly in our International Core Equity and High Income funds. The increasedlong-term redemption rate decreased in the institutional channel, primarily due to elevated client redemptions from our Core Equity and Large Cap Growth strategies during the first nine months of 2019. In the wealth management channel, the long-term redemption rate decreased for both periods in the retail broker-dealer channel is primarily related to an increase in outflows related to the launch of the MAP Navigator product in May of 2017. Use of this open architecture fee-based asset allocation product by W&R financial advisors accelerated during the third quarter of 2017. We anticipate that MAP Navigator will continue to add pressure on our retail broker-dealer redemption rates. In the Institutional channel, approximately $558 million and $253 million was redeemed in our core equity strategy and core fixed income strategies, respectively, during the third quarter of 2017. A client in our Institutional channel notified us in April of 2017 of its intent to redeem its $806 million position in our domestic large cap core strategy. Approximately $500 million was redeemed in April of 2017 with the balance intended to be redeemed before the end of the year.comparative periods. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods.
Our overall current year-to-date redemption rate of 28.5% is higher than theThe current year-to-date industry average of approximately 23.7%,redemption rate, based on data fromprovided by the Investment Company Institute.Institute, was 30.8%, versus our rate of 23.8%.
35
29
Underwriting and Distribution Fee Revenues and Expenses
The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution channel:
|
|
|
|
|
|
|
|
|
| Third Quarter 2017 | |||||
|
| Retail |
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Revenue |
| $ | 22,892 |
| 106,000 |
| 128,892 |
Expenses - Direct |
|
| (31,779) |
| (71,119) |
| (102,898) |
Expenses - Indirect |
|
| (9,648) |
| (36,854) |
| (46,502) |
Net Distribution Costs |
| $ | (18,535) |
| (1,973) |
| (20,508) |
|
|
|
|
|
|
|
|
|
|
| Third Quarter 2016 | ||||
|
| Retail |
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Revenue |
| $ | 29,991 |
| 105,787 |
| 135,778 |
Expenses - Direct |
|
| (39,489) |
| (72,276) |
| (111,765) |
Expenses - Indirect |
|
| (10,643) |
| (30,591) |
| (41,234) |
Net Distribution (Costs)/Excess |
| $ | (20,141) |
| 2,920 |
| (17,221) |
|
|
|
|
|
|
|
|
|
| Year to Date 2017 | |||||
|
| Retail |
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Revenue |
| $ | 71,305 |
| 315,194 |
| 386,499 |
Expenses - Direct |
|
| (98,685) |
| (213,631) |
| (312,316) |
Expenses - Indirect |
|
| (29,376) |
| (109,151) |
| (138,527) |
Net Distribution Costs |
| $ | (56,756) |
| (7,588) |
| (64,344) |
|
|
|
|
|
|
|
|
|
|
| Year to Date 2016 | ||||
|
| Retail |
|
|
|
| |
|
| Unaffiliated |
| Retail Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Revenue |
| $ | 98,424 |
| 330,324 |
| 428,748 |
Expenses - Direct |
|
| (128,787) |
| (240,293) |
| (369,080) |
Expenses - Indirect |
|
| (38,931) |
| (100,069) |
| (139,000) |
Net Distribution Costs |
| $ | (69,294) |
| (10,038) |
| (79,332) |
30
The following tables summarize the significant components of underwriting and distribution fee revenues segregated by distribution channel:
|
|
|
|
|
|
|
|
|
| Third Quarter 2017 | |||||
|
| Retail |
| Retail |
|
| |
|
| Unaffiliated |
| Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees |
| $ | 22,322 |
| 19,026 |
| 41,348 |
Fee-based asset allocation product revenues |
|
| — |
| 61,115 |
| 61,115 |
Sales commissions on front-end load mutual fund and variable annuity products |
|
| 353 |
| 12,941 |
| 13,294 |
Sales commissions on other products |
|
| — |
| 7,974 |
| 7,974 |
Other revenues |
|
| 217 |
| 4,944 |
| 5,161 |
Total |
| $ | 22,892 |
| 106,000 |
| 128,892 |
| | | | | | | |
| | For the three months ended September 30, 2020 | |||||
|
| |
| Wealth | | | |
|
| Unaffiliated |
| Management | | Total | |
|
| (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees | | $ | — |
| 82,591 |
| 82,591 |
Service and distribution fees |
| | 14,623 |
| 15,305 |
| 29,928 |
Sales commissions | |
| 223 |
| 17,847 |
| 18,070 |
Other revenues | |
| 82 |
| 8,785 |
| 8,867 |
Total |
| $ | 14,928 |
| 124,528 |
| 139,456 |
|
|
|
|
|
|
|
|
|
| Third Quarter 2016 | |||||
|
| Retail |
| Retail |
|
| |
|
| Unaffiliated |
| Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees |
| $ | 29,432 |
| 19,462 |
| 48,894 |
Fee-based asset allocation product revenues |
|
| — |
| 57,269 |
| 57,269 |
Sales commissions on front-end load mutual fund and variable annuity products |
|
| — |
| 16,941 |
| 16,941 |
Sales commissions on other products |
|
| — |
| 7,203 |
| 7,203 |
Other revenues |
|
| 559 |
| 4,912 |
| 5,471 |
Total |
| $ | 29,991 |
| 105,787 |
| 135,778 |
| | | | | | | |
| | For the three months ended September 30, 2019 | |||||
| | |
| Wealth | | | |
| | Unaffiliated |
| Management | | Total | |
| | (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees |
| $ | — |
| 73,356 |
| 73,356 |
Service and distribution fees | |
| 16,286 |
| 16,143 |
| 32,429 |
Sales commissions | |
| 364 |
| 20,544 |
| 20,908 |
Other revenues | |
| 67 |
| 9,027 |
| 9,094 |
Total |
| $ | 16,717 |
| 119,070 |
| 135,787 |
|
|
|
|
|
|
|
|
|
| Year to Date 2017 | |||||
|
| Retail |
| Retail |
|
| |
|
| Unaffiliated |
| Broker- |
|
| |
|
| Distribution |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees |
| $ | 69,191 |
| 56,544 |
| 125,735 |
Fee-based asset allocation product revenues |
|
| — |
| 176,184 |
| 176,184 |
Sales commissions on front-end load mutual fund and variable annuity products |
|
| 1,118 |
| 41,796 |
| 42,914 |
Sales commissions on other products |
|
| — |
| 23,671 |
| 23,671 |
Other revenues |
|
| 996 |
| 16,999 |
| 17,995 |
Total |
| $ | 71,305 |
| 315,194 |
| 386,499 |
| | | | | | | |
| | For the nine months ended September 30, 2020 | |||||
|
| |
| Wealth | | | |
|
| Unaffiliated |
| Management | | Total | |
|
| (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees |
| | — | | 232,243 | | 232,243 |
Service and distribution fees | | | 43,569 | | 43,494 | | 87,063 |
Sales commissions | | | 1,047 | | 53,538 | | 54,585 |
Other revenues | | | 308 | | 25,833 | | 26,141 |
Total |
| | 44,924 | | 355,108 | | 400,032 |
| | | | | | | |
| | For the nine months ended September 30, 2019 | |||||
| | |
| Wealth | | | |
| | Unaffiliated |
| Management | | Total | |
| | (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees |
| $ | — |
| 208,806 |
| 208,806 |
Service and distribution fees | |
| 49,366 |
| 47,589 |
| 96,955 |
Sales commissions | |
| 1,300 |
| 60,959 |
| 62,259 |
Other revenues | |
| 242 |
| 27,265 |
| 27,507 |
Total |
| $ | 50,908 |
| 344,619 |
| 395,527 |
In connection with funding employee income tax withholding obligations arising from the implementationvesting of our new capital return policy and based on our current financial forecast, we intend to repurchase $250 million our common stock over the next two years, inclusive of buybacks to offset dilution of our equity grants.restricted shares.
39
43
| Exhibits |
| | |
10.1 | | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1** | | |
| | |
32.2** | | |
| | |
101* | | Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith
** Furnished herewith
40
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 27th30th day of October 2017.2020.
| WADDELL & REED FINANCIAL, INC. | |
| | |
| By: | /s/ Philip J. Sanders |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: |
|
| ||
| ||
| /s/ Benjamin R. Clouse | |
| | Senior Vice President and Chief (Principal Financial Officer) |
| By: | /s/ Michael J. Daley |
| | Vice President, Chief Accounting Officer, Investor Relations and Treasurer (Principal Accounting Officer) |
4145