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, 20182019
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 every Interactive Data File required to be submitted 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 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, 20182019
| | | 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 | | 23 | |
| | | | |
| | 37 | ||
| | | | |
| | 37 | ||
| | | | |
| | |||
| | | | |
| | 37 | ||
| | | | |
| ||||
| 38 | |||
| | | | |
| ||||
| 39 | |||
| | | | |
| | | 40 |
2
PART I. FINANCIAL INFORMATION
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
(in thousands)
|
|
|
|
|
|
|
|
|
| September 30, |
|
|
|
| |
|
| 2018 |
|
| December 31, |
| |
|
| (Unaudited) |
|
| 2017 |
| |
Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 270,478 |
|
| 207,829 |
|
Cash and cash equivalents - restricted |
|
| 29,175 |
|
| 28,156 |
|
Investment securities |
|
| 588,407 |
|
| 700,492 |
|
Receivables: |
|
|
|
|
|
|
|
Funds and separate accounts |
|
| 22,319 |
|
| 25,664 |
|
Customers and other |
|
| 121,822 |
|
| 131,108 |
|
Prepaid expenses and other current assets |
|
| 27,762 |
|
| 25,593 |
|
Total current assets |
|
| 1,059,963 |
|
| 1,118,842 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 69,340 |
|
| 87,667 |
|
Goodwill and identifiable intangible assets |
|
| 145,869 |
|
| 147,069 |
|
Deferred income taxes |
|
| 8,241 |
|
| 13,308 |
|
Other non-current assets |
|
| 9,382 |
|
| 17,476 |
|
Total assets |
| $ | 1,292,795 |
|
| 1,384,362 |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 40,479 |
|
| 38,998 |
|
Payable to investment companies for securities |
|
| 37,941 |
|
| 43,422 |
|
Payable to third party brokers |
|
| 22,284 |
|
| 25,153 |
|
Payable to customers |
|
| 57,917 |
|
| 66,830 |
|
Short-term notes payable |
|
| — |
|
| 94,996 |
|
Accrued compensation |
|
| 58,467 |
|
| 47,643 |
|
Other current liabilities |
|
| 45,556 |
|
| 44,797 |
|
Total current liabilities |
|
| 262,644 |
|
| 361,839 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 94,836 |
|
| 94,783 |
|
Accrued pension and postretirement costs |
|
| 9,472 |
|
| 15,137 |
|
Other non-current liabilities |
|
| 16,200 |
|
| 25,210 |
|
Total liabilities |
|
| 383,152 |
|
| 496,969 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
| 16,133 |
|
| 14,509 |
|
|
|
|
|
|
|
|
|
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; 78,904 shares outstanding (82,687 at December 31, 2017) |
|
| 997 |
|
| 997 |
|
Additional paid-in capital |
|
| 312,213 |
|
| 301,410 |
|
Retained earnings |
|
| 1,170,785 |
|
| 1,092,394 |
|
Cost of 20,797 common shares in treasury (17,014 at December 31, 2017) |
|
| (589,391) |
|
| (522,441) |
|
Accumulated other comprehensive (loss) income |
|
| (1,094) |
|
| 524 |
|
Total stockholders’ equity |
|
| 893,510 |
|
| 872,884 |
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable noncontrolling interests and stockholders’ equity |
| $ | 1,292,795 |
|
| 1,384,362 |
|
| | | | | | | |
| | September 30, | | | | | |
| | 2019 | | | December 31, | | |
| | (Unaudited) | | | 2018 | | |
Assets: |
| | |
| | |
|
Cash and cash equivalents | | $ | 162,567 |
| | 231,997 | |
Cash and cash equivalents - restricted | |
| 23,350 |
|
| 59,558 | |
Investment securities | |
| 691,616 |
|
| 617,135 | |
Receivables: | | | | | | | |
Funds and separate accounts | |
| 14,752 |
|
| 18,112 | |
Customers and other | |
| 98,667 |
|
| 151,515 | |
Prepaid expenses and other current assets | |
| 20,464 |
|
| 27,164 | |
Total current assets | |
| 1,011,416 |
|
| 1,105,481 | |
| | | | | | | |
Property and equipment, net | |
| 49,785 |
|
| 63,429 | |
Goodwill and identifiable intangible assets | |
| 145,869 |
|
| 145,869 | |
Deferred income taxes | |
| 6,775 |
|
| 12,321 | |
Other non-current assets | |
| 41,261 |
|
| 16,979 | |
Total assets | | $ | 1,255,106 |
| | 1,344,079 | |
| | | | | | | |
Liabilities: | | | | | | | |
Accounts payable | | $ | 17,095 |
| | 26,253 | |
Payable to investment companies for securities | |
| 31,022 |
|
| 100,085 | |
Payable to third party brokers | |
| 18,036 |
|
| 19,891 | |
Payable to customers | |
| 49,294 |
|
| 86,184 | |
Accrued compensation | |
| 67,432 |
|
| 54,129 | |
Other current liabilities | |
| 87,946 |
|
| 51,580 | |
Total current liabilities | |
| 270,825 |
|
| 338,122 | |
| | | | | | | |
Long-term debt | |
| 94,908 |
|
| 94,854 | |
Accrued pension and postretirement costs | |
| 822 |
|
| 798 | |
Other non-current liabilities | |
| 32,108 |
|
| 15,392 | |
Total liabilities | |
| 398,663 |
|
| 449,166 | |
| | | | | | | |
Redeemable noncontrolling interests | | | 16,913 | | | 11,463 | |
| | | | | | | |
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; 71,211 shares outstanding (76,790 at December 31, 2018) | |
| 997 |
|
| 997 | |
Additional paid-in capital | |
| 303,138 |
|
| 311,264 | |
Retained earnings | |
| 1,242,677 |
|
| 1,198,445 | |
Cost of 28,490 common shares in treasury (22,911 at December 31, 2018) | |
| (710,565) |
|
| (627,587) | |
Accumulated other comprehensive income | |
| 3,283 |
|
| 331 | |
Total stockholders’ equity | |
| 839,530 |
|
| 883,450 | |
| | | | | | | |
Total liabilities, redeemable noncontrolling interests and stockholders’ equity | | $ | 1,255,106 |
| | 1,344,079 | |
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, |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management fees |
| $ | 129,302 |
|
| 134,149 |
| $ | 393,385 |
|
| 395,463 |
|
Underwriting and distribution fees |
|
| 140,308 |
|
| 128,892 |
|
| 416,222 |
|
| 386,499 |
|
Shareholder service fees |
|
| 25,508 |
|
| 26,406 |
|
| 78,464 |
|
| 80,706 |
|
Total |
|
| 295,118 |
|
| 289,447 |
|
| 888,071 |
|
| 862,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
| 116,591 |
|
| 106,878 |
|
| 345,376 |
|
| 324,375 |
|
Compensation and benefits (including share-based compensation of $12,856, $14,180, $42,526 and $42,419, respectively) |
|
| 64,561 |
|
| 69,636 |
|
| 199,174 |
|
| 202,003 |
|
General and administrative |
|
| 17,559 |
|
| 23,400 |
|
| 56,240 |
|
| 68,882 |
|
Technology |
|
| 15,414 |
|
| 16,039 |
|
| 49,293 |
|
| 50,796 |
|
Occupancy |
|
| 7,148 |
|
| 7,645 |
|
| 21,081 |
|
| 22,978 |
|
Marketing and advertising |
|
| 2,461 |
|
| 3,197 |
|
| 7,638 |
|
| 9,072 |
|
Depreciation |
|
| 8,141 |
|
| 5,230 |
|
| 19,262 |
|
| 15,626 |
|
Subadvisory fees |
|
| 3,767 |
|
| 3,566 |
|
| 11,158 |
|
| 9,457 |
|
Intangible asset impairment |
|
| — |
|
| — |
|
| 1,200 |
|
| 1,500 |
|
Total |
|
| 235,642 |
|
| 235,591 |
|
| 710,422 |
|
| 704,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 59,476 |
|
| 53,856 |
|
| 177,649 |
|
| 157,979 |
|
Investment and other income |
|
| 1,697 |
|
| 33,293 |
|
| 5,354 |
|
| 39,302 |
|
Interest expense |
|
| (1,555) |
|
| (2,796) |
|
| (4,908) |
|
| (8,370) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
| 59,618 |
|
| 84,353 |
|
| 178,095 |
|
| 188,911 |
|
Provision for income taxes |
|
| 13,105 |
|
| 29,499 |
|
| 41,355 |
|
| 74,988 |
|
Net income |
|
| 46,513 |
|
| 54,854 |
|
| 136,740 |
|
| 113,923 |
|
Net income (loss) attributable to redeemable noncontrolling interests |
|
| 208 |
|
| 1,272 |
|
| (380) |
|
| 2,408 |
|
Net income attributable to Waddell & Reed Financial, Inc. |
| $ | 46,305 |
|
| 53,582 |
| $ | 137,120 |
|
| 111,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted: |
| $ | 0.58 |
|
| 0.64 |
| $ | 1.69 |
|
| 1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted: |
|
| 79,595 |
|
| 83,476 |
|
| 81,372 |
|
| 83,719 |
|
| | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | ||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | | ||||
| | | | | | | | | | | | | |
Revenues: |
| |
|
| |
|
| | |
| | |
|
Investment management fees | | $ | 111,806 |
| | 129,302 | | $ | 334,438 |
| | 393,385 | |
Underwriting and distribution fees | |
| 135,787 |
| | 140,308 | | | 395,527 |
| | 416,222 | |
Shareholder service fees | |
| 23,087 |
| | 25,508 | | | 70,279 |
| | 78,464 | |
Total | |
| 270,680 |
| | 295,118 | | | 800,244 |
| | 888,071 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Distribution | |
| 117,425 |
| | 116,591 | | | 343,696 |
| | 345,376 | |
Compensation and benefits (including share-based compensation of $11,580, $12,856, $35,471, and $42,526, respectively) | |
| 64,999 |
| | 64,561 | | | 191,718 |
| | 199,174 | |
General and administrative | |
| 16,680 |
| | 17,559 | | | 47,421 |
| | 56,240 | |
Technology | | | 15,019 | | | 15,414 | | | 47,769 | | | 49,293 | |
Occupancy | | | 5,684 | | | 7,148 | | | 19,100 | | | 21,081 | |
Marketing and advertising | | | 2,134 | | | 2,461 | | | 6,497 | | | 7,638 | |
Depreciation | |
| 4,833 |
| | 8,141 | | | 16,062 |
| | 19,262 | |
Subadvisory fees | |
| 3,882 |
| | 3,767 | | | 11,154 |
| | 11,158 | |
Intangible asset impairment | | | — | | | — | | | — | | | 1,200 | |
Total | |
| 230,656 |
| | 235,642 | | | 683,417 |
| | 710,422 | |
| | | | | | | | | | | | | |
Operating income | |
| 40,024 |
| | 59,476 | | | 116,827 |
| | 177,649 | |
Investment and other income | |
| 5,212 |
| | 1,697 | | | 23,690 |
| | 5,354 | |
Interest expense | |
| (1,562) |
| | (1,555) | | | (4,662) |
| | (4,908) | |
| | | | | | | | | | | | | |
Income before provision for income taxes | |
| 43,674 |
| | 59,618 | | | 135,855 |
| | 178,095 | |
Provision for income taxes | |
| 10,175 |
| | 13,105 | | | 35,036 |
| | 41,355 | |
Net income | | | 33,499 |
| | 46,513 | | | 100,819 |
| | 136,740 | |
Net income (loss) attributable to redeemable noncontrolling interests | | | 445 | | | 208 | | | 1,763 | | | (380) | |
Net income attributable to Waddell & Reed Financial, Inc. | | $ | 33,054 | | | 46,305 | | $ | 99,056 | | | 137,120 | |
| | | | | | | | | | | | | |
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted: | | $ | 0.46 | | | 0.58 | | $ | 1.33 | | | 1.69 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding, basic and diluted: | |
| 72,387 | | | 79,595 | | | 74,446 | | | 81,372 | |
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, |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 46,513 |
|
| 54,854 |
| $ | 136,740 |
|
| 113,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $80, $364, $(218) and $(1,310), respectively |
|
| 262 |
|
| 2,070 |
|
| (700) |
|
| 6,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit, net of income tax benefit of $(7), $(16), $(22) and $(51), respectively |
|
| (24) |
|
| (30) |
|
| (70) |
|
| (87) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
| 46,751 |
|
| 56,894 |
|
| 135,970 |
|
| 120,740 |
|
Comprehensive income (loss) attributable to redeemable noncontrolling interests |
|
| 208 |
|
| 1,272 |
|
| (380) |
|
| 2,408 |
|
Comprehensive income attributable to Waddell & Reed Financial, Inc. |
| $ | 46,543 |
|
| 55,622 |
| $ | 136,350 |
|
| 118,332 |
|
| | | | | | | | | | | | | |
|
| For the three months ended September 30, | | For the nine months ended September 30, | | ||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
| | | | | | | | | | | | | |
Net income | | $ | 33,499 |
| | 46,513 | | $ | 100,819 |
| | 136,740 | |
| | | | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Unrealized gain (loss) on available for sale investment securities during the period, net of income tax expense (benefit) of $92, $80, $1,011 and $(218), respectively | |
| 296 |
|
| 262 | |
| 3,235 |
|
| (700) | |
| | | | | | | | | | | | | |
Postretirement benefit, net of income tax benefit of $(30), $(7), $(88) and $(22), respectively | |
| (94) |
|
| (24) | |
| (283) |
|
| (70) | |
| | | | | | | | | | | | | |
Comprehensive income | | | 33,701 |
| | 46,751 | | | 103,771 |
| | 135,970 | |
Comprehensive income (loss) attributable to redeemable noncontrolling interests | | | 445 | | | 208 | | | 1,763 | | | (380) | |
Comprehensive income attributable to Waddell & Reed Financial, Inc. | | $ | 33,256 | | | 46,543 | | $ | 102,008 | | | 136,350 | |
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, 2018
(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 |
| interest | |
Balance at June 30, 2018 |
| 99,701 | | $ | 997 |
| 302,144 |
| 1,144,090 |
| (560,181) |
| (1,332) |
| 885,718 |
| 17,052 |
Net income |
| — | |
| — |
| — |
| 46,305 |
| — |
| — |
| 46,305 |
| 208 |
Net redemption of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | (1,127) |
Recognition of equity compensation |
| — | |
| — |
| 9,228 |
| 78 |
| — |
| — |
| 9,306 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| 841 |
| — |
| (841) |
| — |
| — |
| — |
Dividends accrued, $0.25 per share |
| — | |
| — |
| — |
| (19,688) |
| — |
| — | | (19,688) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | (28,369) | | — |
| (28,369) |
| — |
Other comprehensive income |
| — | |
| — |
| — |
| — |
| — |
| 238 |
| 238 |
| — |
Balance at September 30, 2018 | | 99,701 | | $ | 997 |
| 312,213 |
| 1,170,785 |
| (589,391) |
| (1,094) |
| 893,510 |
| 16,133 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
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 |
| | | | | | | | | | | | | | | | | |
| | 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, 2017 |
| 99,701 | | $ | 997 |
| 301,410 |
| 1,092,394 |
| (522,441) |
| 524 |
| 872,884 |
| 14,509 |
Adoption of recognition and measurement of financial assets and liabilities guidance (ASU 2016-01) on | | — | | | — | | — | | 812 | | — | | (812) | | — | | — |
Adoption of reclassification of tax effects from accumulated other comprehensive income (loss) guidance (ASU 2018-02) on January 1, 2018 |
| — | |
| — |
| — |
| 36 |
| — |
| (36) |
| — |
| — |
Net income (loss) |
| — | |
| — |
| — |
| 137,120 |
| — |
| — |
| 137,120 |
| (380) |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | 2,004 |
Recognition of equity compensation |
| — | |
| — |
| 32,871 |
| 991 |
| — |
| — |
| 33,862 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| (22,068) |
| — |
| 22,068 |
| — |
| — |
| — |
Dividends accrued, $0.75 per share |
| — | |
| — |
| — |
| (60,568) |
| — |
| — | | (60,568) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | (89,018) | | — |
| (89,018) |
| — |
Other comprehensive loss |
| — | |
| — |
| — |
| — |
| — |
| (770) |
| (770) |
| — |
Balance at September 30, 2018 | | 99,701 | | $ | 997 |
| 312,213 |
| 1,170,785 |
| (589,391) |
| (1,094) |
| 893,510 |
| 16,133 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
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 |
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, 2017 |
| 99,701 |
| $ | 997 |
| 301,410 |
| 1,092,394 |
| (522,441) |
| 524 |
| 872,884 |
| 14,509 |
|
Adoption of recognition and measurement of financial assets and liabilities guidance (ASU 2016-01) on January 1, 2018 |
| — |
|
| — |
| — |
| 812 |
| — |
| (812) |
| — |
| — |
|
Adoption of reclassification of tax effects from accumulated other comprehensive income (loss) guidance (ASU 2018-02) on January 1, 2018 |
|
|
|
|
|
|
|
| 36 |
|
|
| (36) |
| — |
| — |
|
Net income (loss) |
| — |
|
| — |
| — |
| 137,120 |
| — |
| — |
| 137,120 |
| (380) |
|
Net subscription of redeemable noncontrolling interests in sponsored funds |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 2,004 |
|
Recognition of equity compensation |
| — |
|
| — |
| 32,871 |
| 991 |
| — |
| — |
| 33,862 |
| — |
|
Net issuance/forfeiture of nonvested shares |
| — |
|
| — |
| (22,068) |
|
|
| 22,068 |
|
|
| — |
| — |
|
Dividends accrued, $0.75 per share |
| — |
|
| — |
| — |
| (60,568) |
| — |
| — |
| (60,568) |
| — |
|
Repurchase of common stock |
| — |
|
| — |
| — |
| — |
| (89,018) |
| — |
| (89,018) |
| — |
|
Other comprehensive loss |
| — |
|
| — |
| — |
| — |
| — |
| (770) |
| (770) |
| — |
|
Balance at September 30, 2018 |
| 99,701 |
| $ | 997 |
| 312,213 |
| 1,170,785 |
| (589,391) |
| (1,094) |
| 893,510 |
| 16,133 |
|
6
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| | | | | | | |
|
| For the nine months ended September 30, | | ||||
| | 2019 |
| 2018 |
| ||
| | | | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 100,819 |
| | 136,740 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 16,057 |
|
| 19,262 | |
Write-down of impaired assets | |
| — |
|
| 1,200 | |
Amortization of deferred sales commissions | |
| 1,492 |
|
| 2,682 | |
Share-based compensation | |
| 35,471 |
|
| 42,526 | |
Investments (gain) loss, net | |
| (25,916) |
|
| 2,521 | |
Net purchases, maturities, and sales of trading and equity securities | |
| (47,641) |
|
| (4,387) | |
Deferred income taxes | |
| 4,622 |
|
| 5,307 | |
Net change in equity securities and trading debt securities held by consolidated sponsored funds | | | 16,697 | | | 71,452 | |
Other | | | 1,273 | | | 2,973 | |
Changes in assets and liabilities: | | | | | | | |
Customer and other receivables | |
| 74,807 |
|
| 9,286 | |
Payable to investment companies for securities and payable to customers | |
| (105,953) |
|
| (14,394) | |
Receivables from funds and separate accounts | |
| 3,360 |
|
| 3,345 | |
Other assets | |
| 19,599 |
|
| 7,650 | |
Accounts payable and payable to third party brokers | |
| (11,013) |
|
| (1,388) | |
Other liabilities | |
| 557 |
|
| (21,042) | |
Net cash provided by operating activities | | $ | 84,231 |
|
| 263,733 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of available for sale and equity method securities | | | (149,835) | | | (56,840) | |
Proceeds from sales of available for sale and equity method securities | |
| 19,667 |
|
| 1,157 | |
Proceeds from maturities of available for sale securities | | | 116,197 | | | 100,085 | |
Additions to property and equipment | |
| (4,189) |
|
| (1,831) | |
Net cash (used in) provided by investing activities | | $ | (18,160) |
|
| 42,571 | |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Dividends paid | |
| (56,560) |
|
| (61,531) | |
Repurchase of common stock | |
| (118,668) |
|
| (88,166) | |
Repayment of short-term debt, net of debt issuance costs | | | — | | | (94,943) | |
Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds | | | 3,687 | | | 2,004 | |
Other | | | (168) | | | — | |
Net cash used in financing activities | | $ | (171,709) |
|
| (242,636) | |
| | | | | | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | |
| (105,638) |
|
| 63,668 | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 291,555 |
|
| 235,985 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 185,917 |
| | 299,653 | |
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, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
| $ | 136,740 |
|
| 113,923 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 19,262 |
|
| 15,626 |
|
Write-down of impaired assets |
|
| 1,200 |
|
| 1,500 |
|
Amortization of deferred sales commissions |
|
| 2,682 |
|
| 3,799 |
|
Share-based compensation |
|
| 42,526 |
|
| 42,419 |
|
Investments loss (gain), net |
|
| 2,521 |
|
| (9,157) |
|
Net purchases of trading securities |
|
| (4,387) |
|
| (36,643) |
|
Deferred income taxes |
|
| 5,307 |
|
| 13,638 |
|
Net change in equity securities and trading debt securities held by consolidated sponsored funds |
|
| 71,452 |
|
| (123,865) |
|
Other |
|
| 2,973 |
|
| (30,793) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Customer and other receivables |
|
| 9,286 |
|
| 13,372 |
|
Payable to investment companies for securities and payable to customers |
|
| (14,394) |
|
| (26,171) |
|
Receivables from funds and separate accounts |
|
| 3,345 |
|
| 4,671 |
|
Other assets |
|
| 7,650 |
|
| 5,050 |
|
Accounts payable and payable to third party brokers |
|
| (1,388) |
|
| (3,510) |
|
Other liabilities |
|
| (21,042) |
|
| 3,975 |
|
Net cash provided by (used in) operating activities |
| $ | 263,733 |
|
| (12,166) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchases of available for sale and equity method securities |
|
| (56,840) |
|
| (291,539) |
|
Proceeds from sales of available for sale and equity method securities |
|
| 1,157 |
|
| 92,936 |
|
Proceeds from maturities of available for sale securities |
|
| 100,085 |
|
| 4,981 |
|
Additions to property and equipment |
|
| (1,831) |
|
| (5,358) |
|
Net cash provided by (used in) investing activities |
| $ | 42,571 |
|
| (198,980) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Dividends paid |
|
| (61,531) |
|
| (115,691) |
|
Repurchase of common stock |
|
| (88,166) |
|
| (15,635) |
|
Repayment of short-term debt, net of debt issuance costs |
|
| (94,943) |
|
| — |
|
Net subscriptions, (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds |
|
| 2,004 |
|
| 17,575 |
|
Other |
|
| — |
|
| 131 |
|
Net cash used in financing activities |
| $ | (242,636) |
|
| (113,620) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 63,668 |
|
| (324,766) |
|
Cash, cash equivalents, and restricted cash at beginning of period |
|
| 235,985 |
|
| 586,239 |
|
Cash, cash equivalents, and restricted cash at end of period |
| $ | 299,653 |
|
| 261,473 |
|
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”). In 2016, we introduced the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”), which were liquidated in the third quarter of 2019 (collectively, Ivy Funds, Ivy VIP, InvestEd, IVH, and Ivy NextShares are referred to as the “Funds”). On February 26, 2018, we completedIn addition to the merger of Advisor Funds, into Ivy Funds with substantially similar objectives and strategies.our assets under management (“AUM”) include institutional managed accounts. As of September 30, 2018,2019, we had $79.5$68.8 billion in assets under management.AUM.
We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the 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/orand 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‑basedfee-based asset allocation programs and related advisory services, asset‑basedasset-based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940 Act (“Rule 12b-1”), 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 managementclient AUM or number of client accounts. Our major expenses are for commissions, employeedistribution of our products, compensation field services, dealer services,related costs, occupancy, general and administrative, and information technology, occupancy and marketing and advertising.technology.
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, 2017 (the “20172018 (our “2018 Form 10-K”). Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation.
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 20172018 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts from Customers,2016-02, “Leases” ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” ASU 2017-07, “Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” and ASU 2018-02, 2018-07, “ReclassificationCompensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting,” both of Certain Tax Effects from Accumulated Other Comprehensive Income,” which all became effective January 1, 2018.
8
The implementation of2019, and ASU 2014-09 did not have a material impact on the measurement or recognition of revenue from prior periods. See Note 32018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Revenue Recognition, for additional accounting policy information and the additional disclosures required by this ASU. Upon adoption of ASU 2016-01, we reclassified net unrealized holding gains, net of taxes, related to our available for sale investment portfolio from accumulated other comprehensive income to retained earnings. See consolidated statement of stockholders’ equity and redeemable noncontrolling interests for the financial statement reclassification impact of adopting this ASU. Upon adoption of ASU 2016-18, the Cash and cash equivalents – restricted financial statement line item was included as a component of cash and cash equivalents on the Company’s consolidated statements of cash flows for all periods presented. The adoption of ASU 2017-07 changed the income statement presentation of our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, mark-to-market gains and losses, curtailments and settlements, etc.). In addition, only the service cost component is eligible for capitalization as part of an asset. The adoption of this ASU had no effect on our net income because it only impacted the classification of certain information on the consolidated statements of income. An amendment to freeze the Pension Plan was approved effective September 30, 2017; therefore, after September 30, 2017, we no longer incur service costs. The service cost component of net periodic benefit cost was recognized in compensation and related costs through September 30, 2017. The other components of net periodic cost were reclassified to investment and other income (loss) on a retrospective basis. Upon early adoption of ASU 2018-02 tax effects that were stranded in other comprehensive income dueChanges to the Tax Reform Act were reclassified from accumulated other comprehensive income to retained earnings. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures. See consolidated statement of stockholders’ equity and redeemable noncontrolling interestsDisclosure Requirements for the financial statement reclassification impact of adopting this ASU.
Additionally,Fair Value Measurement,” which was early adopted during the firstsecond quarter of 2018, we changed the presentation of certain line items in the consolidated statements of income that were intended to improve the transparency of the Company’s financial statements through clearer alignment of operating expenses with financial statement captions. Specifically, the Company revised its accounting policy related to the reporting of indirect underwriting and distribution expenses in the former underwriting and distribution caption and certain expenses historically reported as general and administrative. Expenses previously recorded as Underwriting and distribution expenses were retrospectively reclassified into (a) the following existing operating expense captions: Compensation and benefits and General and administrative, and (b) the following newly created operating expense captions: Distribution, Technology, Occupancy, and Marketing and advertising. Certain expenses historically reported as general and administrative were retrospectively reclassified into the following newly created operating expense captions: Technology, Occupancy, and Marketing and advertising. The Company considered the change in policy to be preferable and did not consider the change to be material to its consolidated financial statements. These changes were applied retrospectively to all periods presented and did not affect net income attributable to the Company.2019.
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, 20182019 and the results of operations and cash flows for the three and nine months ended September 30, 20182019 and 20172018 in conformity with accounting principles generally accepted in the United States.
8
2.New Accounting Guidance
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which increases transparency and comparability among organizations by establishing a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet with additional disclosures of key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and certain practical expedients are available. The Company will adopt the provisions of this guidance on January 1, 2019. We expect to elect the ‘package of practical expedients’, which allows us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also expect to elect a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets. Additionally, we currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company has identified its population of impacted leasesand continues to evaluate the impact that the ASU will have on its consolidated financial statements and related disclosures. While we continue to assess all of the effects of adoption, we currently believe the most significant effects on our financial statements relate to the recognition of new right-of-use assets and lease liabilities on our balance sheet for our real estate operating leases and providing new disclosures about our leasing activities.
In June 2018, FASB issued ASU 2018-07, Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company will adopt the provisions of this guidance on January 1, 2019. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.
In August 2018, FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.
In August 2018, FASB issued 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, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluatingThe Company will adopt the impactprovisions of this guidance on January 1, 2020 and expects to elect the prospective adoption approach, which does not require the restatement of prior years. While we continue to assess all of the effects of adoption, we currently believe the adoption of this ASU will not have a material impact on our operating income or net income as requirements under the standard are generally consistent with our current accounting for cloud computing arrangements, with the primary difference being the classification of certain information in our consolidated financial statements and related disclosures.
3. | Revenue Recognition |
3.Revenue Recognition
As of January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” and all subsequent ASUs that modified Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” The Company elected to apply the standard utilizing the cumulative effect approach. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue.
10
Investment Management and Advisory Fees
We recognize investment management fees as earned over the period in which investment management services are provided. While our investment management contracts are long-term in nature, the performance obligations are generally satisfied daily or monthly based on assets under management. We calculate investment management fees from the Funds daily based upon average daily net assets under management in accordance with investment management agreements between the Funds and the Company. The majority of investment and/or advisory fees earned from institutional and separate accounts are calculated either monthly or quarterly based upon an average of net assets under management in accordance with such investment management agreements. The Company may waive certain fees for investment management services at its discretion, or in accordance with contractual expense limitations, and these waivers are reflected as a reduction to investment management fees on the consolidated statements of income.
The Company has contractual arrangements with third parties to provide subadvisory services. Investment advisory fees are recorded gross of any subadvisory payments and are included in investment management fees based on management’s determination that the Company is acting in the capacity of principal service provider with respect to its relationship with the Funds. Any corresponding fees paid to subadvisors are included in operating expenses.
Underwriting, Distribution and Shareholder Service Fees
Fee‑based asset allocation revenues are calculated monthly based upon average daily net assets under management. For certain types of investment products, primarily variable annuities, distribution revenues are generally calculated based upon average daily net assets under management. Fees collected from independent financial advisors associated with Waddell & Reed, Inc. for various services are recorded in underwriting and distribution fees on a gross basis, as the Company is the principal in these arrangements.
Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net assets under management for Ivy Funds Class C, E and Y shares for expenses paid to broker-dealers and other sales professionals in connection with providing ongoing services to the Funds’ shareholders and/or maintaining the Funds’ shareholder accounts, with the exception of the Funds’ Class R shares, for which the maximum fee is 0.50%. The Funds’ Class C shares may charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan to broker-dealers and other sales professionals for their services in connection with distributing shares of that class. The Funds’ Class A shares may charge a maximum fee of 0.25% of the average daily net assets under management under a Rule 12b-1 service and distribution plan for expenses detailed previously. The Rule 12b-1 plans are subject to annual approval by the Funds’ board of trustees, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. All Funds may terminate the service and distribution plans at any time with approval of fund trustees or portfolio shareholders (a majority of either) without penalty.
Underwriting and distribution commission revenues resulting from the sale of investment products are recorded upon satisfaction of performance obligations, which occurs on the trade date. When a client purchases Class A or Class E shares (front-end load), the client pays an initial sales charge of up to 5.75% of the amount invested. The sales charge for Class A or Class E shares typically declines as the investment amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a reduced sales charge. When a client invests in a fee-based asset allocation product, Class I or Y shares are purchased at net asset value, and we do not charge an initial sales charge.
Underwriting and distribution revenues resulting from payments from independent financial advisors for office space, compliance oversight and affiliation fees are earned over the period in which the service is provided, which is generally monthly and is based on a fee schedule.
11
Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. Transfer agency fees and portfolio accounting and administration fees are asset‑based revenues or account‑based revenues, while custodian fees from retirement plan accounts are based on the number of client accounts. Custodian fees, transfer agency fees and portfolio accounting and administration fees are earned upon completion of the service when all performance obligations have been satisfied.
All revenue recognized in the consolidated statements of income is considered to be revenue from contracts with customers. The vast majority of revenue is determined based on average assets and is earned daily or monthly or is transactional and is earned on the trade date. As such, revenue from remaining performance obligations is not significant. The following table depicts the disaggregation of revenue by product and distribution channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Three months ended |
| Nine months ended |
| Nine months ended |
|
|
|
| (in thousands) |
| (in thousands) |
| ||||
Investment management fees: |
|
|
|
|
|
|
|
|
|
|
Funds |
| $ | 123,764 |
| 128,078 |
| 376,193 |
| 376,563 |
|
Institutional |
|
| 5,538 |
| 6,071 |
| 17,192 |
| 18,900 |
|
Total investment management fees |
| $ | 129,302 |
| 134,149 |
| 393,385 |
| 395,463 |
|
Underwriting and distribution fees: |
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
|
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees |
| $ | 19,707 |
| 22,322 |
| 60,734 |
| 69,191 |
|
Sales commissions on front-end load mutual fund and variable annuity sales |
|
| 441 |
| 353 |
| 1,418 |
| 1,118 |
|
Other revenues |
|
| 126 |
| 217 |
| 459 |
| 996 |
|
Total unaffiliated distribution fees |
| $ | 20,274 |
| 22,892 |
| 62,611 |
| 71,305 |
|
Broker-Dealer |
|
|
|
|
|
|
|
|
|
|
Fee-based asset allocation product revenues |
| $ | 69,468 |
| 61,115 |
| 201,565 |
| 176,184 |
|
Rule 12b-1 service and distribution fees |
|
| 18,106 |
| 19,026 |
| 54,591 |
| 56,544 |
|
Sales commissions on front-end load mutual fund and variable annuity sales |
|
| 13,651 |
| 12,941 |
| 41,900 |
| 41,796 |
|
Sales commissions on other products |
|
| 9,111 |
| 7,974 |
| 26,632 |
| 23,671 |
|
Other revenues |
|
| 9,698 |
| 4,944 |
| 28,923 |
| 16,999 |
|
Total broker-dealer distribution fees |
|
| 120,034 |
| 106,000 |
| 353,611 |
| 315,194 |
|
Total distribution fees |
| $ | 140,308 |
| 128,892 |
| 416,222 |
| 386,499 |
|
Shareholder service fees: |
|
|
|
|
|
|
|
|
|
|
Total shareholder service fees |
| $ | 25,508 |
| 26,406 |
| 78,464 |
| 80,706 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 295,118 |
| 289,447 |
| 888,071 |
| 862,668 |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | |
| | | | | | | | | |
| | | Three months ended | | Three months ended | | Nine months ended | | Nine months ended |
| | | (in thousands) | | (in thousands) | ||||
Investment management fees: | | |
|
|
|
|
|
|
|
Funds | | $ | 107,926 |
| 123,764 |
| 322,678 |
| 376,193 |
Institutional | |
| 3,880 |
| 5,538 |
| 11,760 |
| 17,192 |
Total investment management fees | | $ | 111,806 |
| 129,302 |
| 334,438 |
| 393,385 |
Underwriting and distribution fees: | | | | | | | | | |
Unaffiliated | | | | | | | | | |
Rule 12b-1 service and distribution fees | | $ | 16,003 | | 19,707 | | 48,514 | | 60,734 |
Sales commissions on front-end load mutual fund and variable annuity sales | | | 361 | | 441 | | 1,287 | | 1,418 |
Other revenues | | | 67 | | 126 | | 242 | | 459 |
Total unaffiliated distribution fees | | $ | 16,431 | | 20,274 | | 50,043 | | 62,611 |
Wealth Management | | | | | | | | | |
Fee-based asset allocation product revenues | | $ | 73,356 | | 69,468 | | 208,806 | | 201,565 |
Rule 12b-1 service and distribution fees | | | 16,426 | | 18,106 | | 48,441 | | 54,591 |
Sales commissions on front-end load mutual fund and variable annuity sales | | | 12,523 | | 13,651 | | 36,845 | | 41,900 |
Sales commissions on other products | | | 8,024 | | 9,111 | | 24,127 | | 26,632 |
Other revenues | | | 9,027 | | 9,698 | | 27,265 | | 28,923 |
Total wealth management distribution fees | | | 119,356 | | 120,034 | | 345,484 | | 353,611 |
Total distribution fees | | $ | 135,787 | | 140,308 | | 395,527 | | 416,222 |
Shareholder service fees: | | | | | | | | | |
Total shareholder service fees | | $ | 23,087 |
| 25,508 |
| 70,279 |
| 78,464 |
| |
| |
| |
| |
| |
Total revenues | | $ | 270,680 |
| 295,118 |
| 800,244 |
| 888,071 |
12
9
4. | Investment Securities |
4.Investment Securities
Investment securities at September 30, 20182019 and December 31, 2017 are2018 were as follows:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| |
|
| 2018 |
| 2017 |
| |
|
|
| (in thousands) |
| ||
Available for sale securities: |
|
|
|
|
|
|
Certificates of deposit |
| $ | 5,002 |
| 12,999 |
|
Commercial paper |
|
| 7,920 |
| 34,978 |
|
Corporate bonds |
|
| 180,780 |
| 197,442 |
|
U.S. Treasury bills |
|
| 25,445 |
| 19,779 |
|
Total available for sale securities |
|
| 219,147 |
| 265,198 |
|
Trading debt securities: |
|
|
|
|
|
|
Certificates of deposit |
|
| — |
| 1,999 |
|
Commercial paper |
|
| 1,981 |
| — |
|
Corporate bonds |
|
| 58,545 |
| 55,414 |
|
U.S. Treasury bills |
|
| 8,810 |
| 4,929 |
|
Mortgage-backed securities |
|
| 8 |
| 10 |
|
Consolidated sponsored funds |
|
| 35,086 |
| 62,038 |
|
Total trading securities |
|
| 104,430 |
| 124,390 |
|
Equity securities: |
|
|
|
|
|
|
Common stock |
|
| 8,088 |
| 116 |
|
Sponsored funds(1) |
|
| 160,852 |
| 137,857 |
|
Sponsored privately offered funds |
|
| 839 |
| 695 |
|
Consolidated sponsored funds |
|
| 32,548 |
| 77,048 |
|
Total equity securities |
|
| 202,327 |
| 215,716 |
|
Equity method securities: |
|
|
|
|
|
|
Sponsored funds |
|
| 62,503 |
| 95,188 |
|
Total securities |
| $ | 588,407 |
| 700,492 |
|
|
|
| | | | | | |
| | September 30, | | December 31, | | |
|
| 2019 |
| 2018 | | |
| | | (in thousands) | | ||
Available for sale securities: | | | | | | |
Certificates of deposit | | $ | — | | 5,001 | |
Commercial paper | | | 1,975 | | 7,970 | |
Corporate bonds | | | 267,064 | | 218,121 | |
U.S. Treasury bills | | | — | | 19,672 | |
Total available for sale securities | |
| 269,039 | | 250,764 | |
Trading debt securities: | | | | | | |
Commercial paper | | | 1,975 | | 1,993 | |
Corporate bonds | |
| 89,057 | | 77,250 | |
U.S. Treasury bills | | | 5,968 | | 5,884 | |
Mortgage-backed securities | |
| 5 | | 7 | |
Term loans | | | 42,272 | | — | |
Consolidated sponsored funds | |
| 41,269 | | 33,088 | |
Total trading securities | |
| 180,546 | | 118,222 | |
Equity securities: | | | | | | |
Common stock | |
| 31,744 | | 21,204 | |
Sponsored funds | | | 174,219 | | 153,548 | |
Sponsored privately offered funds | |
| 781 | | 678 | |
Consolidated sponsored funds | | | — | | 24,879 | |
Total equity securities | | | 206,744 | | 200,309 | |
Equity method securities: | | | | | | |
Sponsored funds | |
| 35,287 | | 47,840 | |
Total securities | | $ | 691,616 | | 617,135 | |
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, 20182019 mature as follows:
|
|
|
|
|
|
| Amortized |
|
|
|
| cost |
| Fair value |
|
| (in thousands) | ||
Within one year | $ | 90,565 |
| 90,143 |
After one year but within five years |
| 130,562 |
| 129,004 |
| $ | 221,127 |
| 219,147 |
| | | | |
| | Amortized | | |
| | cost |
| Fair value |
| | (in thousands) | ||
Within one year | $ | 83,965 | | 84,173 |
After one year but within five years | | 181,873 | | 184,866 |
| $ | 265,838 | | 269,039 |
Commercial paper, corporate bonds, U.S. Treasury bills, and mortgage-backed securities and term loans accounted for as trading and held as of September 30, 20182019 mature as follows:
|
|
|
|
|
|
|
|
| Fair value |
|
|
|
| (in thousands) |
Within one year |
|
| $ | 25,031 |
After one year but within five years |
|
|
| 39,654 |
After 10 years |
|
|
| 4,659 |
|
|
| $ | 69,344 |
| | | | |
| | | | Fair value |
| | | | (in thousands) |
Within one year | | | $ | 32,977 |
After one year but within five years | | | | 76,645 |
After five years but within 10 years | | | | 29,655 |
| | | $ | 139,277 |
13
10
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at September 30, 2018:2019:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| |||||||||||
|
| cost |
| gains |
| losses |
| Fair value |
| |||||||||||
| | | | | | | | | | | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| |
| |||||||||||
| | cost | | gains | | losses | | Fair value |
| |||||||||||
|
| (in thousands) |
|
| (in thousands) | | ||||||||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Certificates of deposit |
| $ | 5,000 |
| 2 |
| — |
| 5,002 |
| ||||||||||
Commercial paper |
|
| 7,902 |
| 18 |
| — |
| 7,920 |
| | $ | 1,975 | | — | | — | | 1,975 | |
Corporate bonds |
|
| 182,276 |
| 7 |
| (1,503) |
| 180,780 |
| | | 263,863 |
| 3,240 | | (39) |
| 267,064 | |
U.S. Treasury bills |
|
| 25,949 |
| — |
| (504) |
| 25,445 |
| ||||||||||
|
| $ | 221,127 |
| 27 |
| (2,007) |
| 219,147 |
| ||||||||||
| | $ | 265,838 |
| 3,240 |
| (39) |
| 269,039 | |
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2017:2018:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| |||||||||||
|
| cost |
| gains |
| losses |
| Fair value |
| |||||||||||
|
| (in thousands) |
| |||||||||||||||||
| | | | | | | | | | | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| |
| |||||||||||
| | cost | | gains | | losses | | Fair value |
| |||||||||||
| | (in thousands) | | |||||||||||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Certificates of deposit |
| $ | 13,000 |
| 1 |
| (2) |
| 12,999 |
| | $ | 5,000 | | 1 | | — | | 5,001 | |
Commercial paper |
|
| 34,836 |
| 142 |
| — |
| 34,978 |
| |
| 7,902 | | 68 | | — | | 7,970 | |
Corporate bonds |
|
| 198,404 |
| 33 |
| (995) |
| 197,442 |
| | | 219,236 |
| 254 | | (1,369) |
| 218,121 | |
U.S. Treasury bills |
|
| 20,019 |
| — |
| (240) |
| 19,779 |
| | | 19,672 | | — | | — | | 19,672 | |
|
| $ | 266,259 |
| 176 |
| (1,237) |
| 265,198 |
| ||||||||||
| | $ | 251,810 |
| 323 |
| (1,369) |
| 250,764 | |
A summary of available for sale investment securities with fair values below carrying values at September 30, 2018 and December 31, 20172019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
| 12 months or longer |
| Total | |||||||
|
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
September 30, 2018 |
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
|
| (in thousands) | |||||||||||
Corporate bonds |
| $ | 55,682 |
| (293) |
| 112,246 |
| (1,210) |
| 167,928 |
| (1,503) |
U.S. Treasury bills |
|
| 5,920 |
| (16) |
| 19,525 |
| (488) |
| 25,445 |
| (504) |
|
| $ | 61,602 |
| (309) |
| 131,771 |
| (1,698) |
| 193,373 |
| (2,007) |
| | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total | |||||||
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
September 30, 2019 |
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
| | (in thousands) | |||||||||||
Corporate bonds | | $ | 19,987 | | (19) | | 27,105 | | (20) | | 47,092 | | (39) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
| 12 months or longer |
| Total | |||||||
|
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
December 31, 2017 |
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
|
| (in thousands) | |||||||||||
Certificates of deposit |
| $ | 2,998 |
| (2) |
| — |
| — |
| 2,998 |
| (2) |
Corporate bonds |
|
| 192,409 |
| (995) |
| — |
| — |
| 192,409 |
| (995) |
U.S. Treasury bills |
|
| 19,779 |
| (240) |
| — |
| — |
| 19,779 |
| (240) |
|
| $ | 215,186 |
| (1,237) |
| — |
| — |
| 215,186 |
| (1,237) |
A summary of available for sale investment securities with fair values below carrying values at December 31, 2018 is as follows:
| | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total | |||||||
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
December 31, 2018 |
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
| | (in thousands) | |||||||||||
Corporate bonds | | $ | 36,302 | | (160) | | 119,480 | | (1,209) | | 155,782 | | (1,369) |
The Company’s investment portfolio included 46 securities, having an aggregate fair value of $193.4 million, which were in an unrealized loss position at September 30, 2018, compared to 53 securities, with an aggregate fair value of $215.2 million at December 31, 2017.
The Company evaluated all of the12 available for sale securities in an unrealized loss position at September 30, 2018 and December 31, 2017,2019.
The Company evaluated available for sale securities in an unrealized loss position at September 30, 2019 and concluded no other-than-temporary impairment existed at September 30, 2018 or December 31, 2017.existed. The unrealized losses in the Company’s investment portfolio at September 30, 2018 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.
14
Sponsored Funds
The Company has classified its equity investments in the Ivy Funds as equity method investments (when the Company owns between 20% and 50% of the fund) or equity 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 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.
11
Sponsored Privately Offered Funds
The Company holds an interest in a privately offered fund structured in the form of a limited liability company. The members of this entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote. This entity does not meet the criteria of a VIE and is considered to be a VOE.
Consolidated Sponsored Funds
The following table details the balances related to consolidated sponsored funds at September 30, 2018,2019 and at December 31, 2017,2018, as well as the Company’s net interest in these funds:
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| ||||||
|
| September 30, |
|
| December 31, | |||||||
|
| 2018 |
|
| 2017 | |||||||
|
| (in thousands) | ||||||||||
| | | | | | | ||||||
| | September 30, | | | December 31, | |||||||
| | 2019 |
| | 2018 | |||||||
|
| (in thousands) | ||||||||||
Cash |
| $ | 77,480 |
|
| 8,472 |
| $ | 5,161 | | | 4,285 |
Investments |
|
| 67,634 |
|
| 139,086 | |
| 41,269 | |
| 57,967 |
Other assets |
|
| 2,661 |
|
| 1,588 | |
| 486 | |
| 872 |
Other liabilities |
|
| (1,125) |
|
| (1,040) | |
| — | |
| (79) |
Redeemable noncontrolling interests |
|
| (16,133) |
|
| (14,509) | |
| (16,913) | |
| (11,463) |
Net interest in consolidated sponsored funds |
| $ | 130,517 |
|
| 133,597 |
| $ | 30,003 | | | 51,582 |
During the three months endedAt September 30, 2018,2019, we consolidated an Ivy Fund Ivy NextShares and Ivy Global Investors Funds in which we provided initial seed capital at the time of the funds’ formation. In May,During 2018, we started the process of liquidatingliquidated the Ivy Global Investors Société d’Investissement à Capital Variable and its Ivy Global Investors sub-funds, including converting the investments held by the sub-funds to cash.cash, and redeemed the majority of our investment. During the third quarter of 2019, the formerly consolidated Ivy Nextshares were liquidated and distributed to shareholders. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.
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. |
15
12
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 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 due to the short-time between purchase and expected maturity of the investments. Depending on the nature of the 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 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 transactions 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.
The following tables summarize our investment securities as of September 30, 20182019 and December 31, 20172018 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.
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| ||||||||||||
September 30, 2018 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value |
| Total |
| |||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
September 30, 2019 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value | | Total |
| |||||||||||||
| | (in thousands) |
| |||||||||||||||||||||
Cash equivalents: (1) |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Money market funds |
| $ | 112,289 |
| — |
| — |
| — |
| 112,289 |
| | $ | 3,090 | | — | | — | | — | | 3,090 | |
U.S. government sponsored enterprise note | | | — | | 896 | | — | | — | | 896 | | ||||||||||||
Commercial paper |
|
| — |
| 48,554 |
| — |
| — |
| 48,554 |
| | | — | | 37,104 | | — | | — | | 37,104 | |
Total cash equivalents |
| $ | 112,289 |
| 48,554 |
| — |
| — |
| 160,843 |
| | $ | 3,090 | | 38,000 | | — | | — | | 41,090 | |
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Certificates of deposit |
| $ | — |
| 5,002 |
| — |
| — |
| 5,002 |
| ||||||||||||
Commercial paper |
|
| — |
| 7,920 |
| — |
| — |
| 7,920 |
| | $ | — | | 1,975 | | — | | — | | 1,975 | |
Corporate bonds |
|
| — |
| 180,780 |
| — |
| — |
| 180,780 |
| | | — | | 267,064 | | — | | — | | 267,064 | |
U.S. Treasury bills |
|
| — |
| 25,445 |
| — |
| — |
| 25,445 |
| ||||||||||||
Trading debt securities: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Commercial paper |
|
| — |
| 1,981 |
| — |
| — |
| 1,981 |
| | | — | | 1,975 | | — | | — | | 1,975 | |
Corporate bonds |
|
| — |
| 58,545 |
| — |
|
|
| 58,545 |
| | | — | | 89,057 | | — | | | | 89,057 | |
U.S. Treasury bills |
|
| — |
| 8,810 |
| — |
| — |
| 8,810 |
| | | — | | 5,968 | | — | | — | | 5,968 | |
Mortgage-backed securities |
|
| — |
| 8 |
| — |
| — |
| 8 |
|
| | — |
| 5 |
| — |
| — | | 5 | |
Term loans | |
| — |
| 40,879 |
| 1,393 |
| — | | 42,272 | | ||||||||||||
Consolidated sponsored funds |
|
| — |
| 35,086 |
| — |
| — |
| 35,086 |
| |
| — |
| 41,269 |
| — |
| — | | 41,269 | |
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Common stock |
|
| 8,049 |
| — |
| 39 |
| — |
| 8,088 |
| | | 31,742 | | — | | 2 | | — | | 31,744 | |
Sponsored funds |
|
| 160,852 |
| — |
| — |
| — |
| 160,852 |
| | | 174,219 | | — | | — | | — | | 174,219 | |
Sponsored privately offered funds measured at net asset value (2) |
|
| — |
| — |
| — |
| 839 |
| 839 |
| | | — | | — | | — | | 781 | | 781 | |
Consolidated sponsored funds |
|
| 32,548 |
| — |
| — |
| — |
| 32,548 |
| ||||||||||||
Equity method securities: (3) |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Sponsored funds |
|
| 62,503 |
| — |
| — |
| — |
| 62,503 |
| | | 35,287 | | — | | — | | — | | 35,287 | |
Total |
| $ | 263,952 |
| 323,577 |
| 39 |
| 839 |
| 588,407 |
| ||||||||||||
Total investment securities | | $ | 241,248 | | 448,192 | | 1,395 | | 781 | | 691,616 | |
| | | | | | | | | | | | |
1613
December 31, 2018 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value | | Total |
| |
| | (in thousands) |
| |||||||||
Cash equivalents: (1) | | | | | | | | | | | | |
Money market funds | | $ | 121,759 | | — | | — | | — | | 121,759 | |
U.S. government sponsored enterprise note | | | — | | 895 | | — | | — | | 895 | |
Commercial paper | | | — | | 74,277 | | — | | — | | 74,277 | |
Total cash equivalents | | $ | 121,759 | | 75,172 | | — | | — | | 196,931 | |
Available for sale securities: | | | | | | | | | | | | |
Certificates of deposit | | $ | — | | 5,001 | | — | | — | | 5,001 | |
Commercial paper | | | — | | 7,970 | | — | | — | | 7,970 | |
Corporate bonds | | | — | | 218,121 | | — | | — | | 218,121 | |
U.S. Treasury bills | | | — | | 19,672 | | — | | — | | 19,672 | |
Trading debt securities: | | | | | | | | | | | | |
Commercial paper | | | — | | 1,993 | | — | | — | | 1,993 | |
Corporate bonds | | | — | | 77,250 | | — | | | | 77,250 | |
U.S. Treasury bills | | | — | | 5,884 | | — | | — | | 5,884 | |
Mortgage-backed securities |
| | — |
| 7 |
| — |
| — | | 7 | |
Consolidated sponsored funds | | | — | | 33,088 | | — | | — | | 33,088 | |
Equity securities: | | | | | | | | | | | | |
Common stock | |
| 21,192 |
| — |
| 12 |
| — | | 21,204 | |
Sponsored funds | |
| 153,548 |
| — |
| — |
| — | | 153,548 | |
Sponsored privately offered funds measured at net asset value (2) | | | — | | — | | — | | 678 | | 678 | |
Consolidated sponsored funds | |
| 24,879 |
| — |
| — |
| — | | 24,879 | |
Equity method securities: (3) | | | | | | | | | | | | |
Sponsored funds | | | 47,840 | | — | | — | | — | | 47,840 | |
Total investment securities | | $ | 247,459 | | 368,986 | | 12 | | 678 | | 617,135 | |
December 31, 2017 |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value |
| Total |
| |
|
| (in thousands) |
| |||||||||
Cash equivalents: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 145,785 |
| — |
| — |
| — |
| 145,785 |
|
Commercial paper |
|
| — |
| 11,064 |
| — |
| — |
| 11,064 |
|
Total cash equivalents |
| $ | 145,785 |
| 11,064 |
| — |
| — |
| 156,849 |
|
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
| $ | — |
| 12,999 |
| — |
| — |
| 12,999 |
|
Commercial paper |
|
| — |
| 34,978 |
| — |
| — |
| 34,978 |
|
Corporate bonds |
|
| — |
| 197,442 |
| — |
| — |
| 197,442 |
|
U.S. Treasury bills |
|
| — |
| 19,779 |
| — |
| — |
| 19,779 |
|
Trading debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
| — |
| 1,999 |
| — |
| — |
| 1,999 |
|
Corporate bonds |
|
| — |
| 55,414 |
| — |
|
|
| 55,414 |
|
U.S. Treasury bills |
|
| — |
| 4,929 |
| — |
| — |
| 4,929 |
|
Mortgage-backed securities |
|
| — |
| 10 |
| — |
| — |
| 10 |
|
Consolidated sponsored funds |
|
| — |
| 62,038 |
| — |
| — |
| 62,038 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
| 116 |
| — |
| — |
| — |
| 116 |
|
Sponsored funds |
|
| 137,857 |
| — |
| — |
| — |
| 137,857 |
|
Sponsored privately offered funds measured at net asset value (2) |
|
| — |
| — |
| — |
| 695 |
| 695 |
|
Consolidated sponsored funds |
|
| 77,048 |
| — |
| — |
| — |
| 77,048 |
|
Equity method securities: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds |
|
| 95,188 |
| — |
| — |
| — |
| 95,188 |
|
Total |
| $ | 310,209 |
| 389,588 |
| — |
| 695 |
| 700,492 |
|
(1) |
| Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at |
(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) |
| Substantially all of the Company’s equity method investments are investment companies that record their underlying investments at fair value. |
17
14
The following table summarizes the activity of investments categorized as Level 3 for the nine months ended September 30, 2018:
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|
|
|
|
|
|
|
|
|
|
| For the nine months ended |
|
|
|
| September 30, 2018 |
|
| |
|
| (in thousands) |
|
| |
Level 3 assets at December 31, 2017 |
| $ | — |
|
|
Additions |
|
| 419 |
|
|
Valuation change |
|
| (63) |
|
|
Redemptions |
|
| (317) |
|
|
Level 3 assets at September 30, 2018 |
| $ | 39 |
|
|
2019:
| | | |
|
| For the nine months ended | |
| | September 30, 2019 | |
| | (in thousands) | |
Level 3 assets at December 31, 2018 | | $ | 12 |
Additions | |
| 2,357 |
Transfers out of level 3 | | | (196) |
Losses in Investment and other income | |
| (23) |
Redemptions/Paydowns | | | (755) |
Level 3 assets at September 30, 2019 | | $ | 1,395 |
| | | |
Change in unrealized losses for Level 3 assets held at | | $ | (21) |
5.Derivative Financial Instruments
5. | Derivative Financial Instruments |
The Company has in place an economic hedge program that uses total return swap contracts to hedge market risk related 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, the Company was party to five14 total return swap contracts with a combined notional value of $198.4$222.1 million and six5 total return swap contracts with a combined notional value of $213.9$194.4 million as of September 30, 20182019 and December 31, 2017,2018, 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 investment and other income onin the Company’s consolidated statements of income.
The Company posted $6.4$0.6 million and $9.7$5.2 million in cash collateral with the counterparties of the total return swap contracts as of September 30, 20182019 and December 31, 2017,2018, respectively. The cash collateral is 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, 20182019 and December 31, 20172018 and is calculated based on Level 2 inputs:
The following table presents the fair value of the derivative financial instruments, excluding 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, 2018 and December 31, 2017 and is calculated based on Level 2 inputs: |
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| ||||||||
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|
|
| September 30, |
|
| December 31, | ||||||||
|
|
|
|
| 2018 |
|
| 2017 | ||||||||
|
| Balance sheet |
|
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| ||||||||
|
| location |
| Fair value |
| Fair value | ||||||||||
|
|
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| (in thousands) | ||||||||||||
| | | | | | | | | ||||||||
| | | | | September 30, | | | December 31, | ||||||||
| | Balance sheet | | | 2019 | | | 2018 | ||||||||
|
| location |
| Fair value |
| Fair value | ||||||||||
| | |
| (in thousands) | ||||||||||||
Total return swap contracts |
| Other current liabilities |
| $ | 550 |
|
| 1,093 |
| Prepaid expenses and other current assets | | $ | 153 | | | 4,968 |
Total return swap contracts | | Other current liabilities | | | 467 | | | — | ||||||||
Net total return swap (liability) asset | | |
| $ | (314) | | | 4,968 |
18
The following is a summary of net lossesgains (losses) recognized in income for the three and nine months ended September 30, 20182019 and September 30, 2017:2018:
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|
|
| Three months ended |
| Nine months ended | |||||
|
| Income statement |
| September 30, |
| September 30, | |||||
|
| location |
|
| 2018 | 2017 |
|
| 2018 |
| 2017 |
|
|
|
| (in thousands) |
| (in thousands) | |||||
Total return swap contracts |
| Investment and other income |
| $ | (6,769) | (8,855) |
| $ | (7,313) |
| (27,321) |
| | | | | | | | | | | |
| | | | Three months ended | | Nine months ended | |||||
| | Income statement | | September 30, | | September 30, | |||||
|
| location |
| | 2019 | 2018 |
| | 2019 | | 2018 |
| | |
| (in thousands) | | (in thousands) | |||||
Total return swap contracts |
| Investment and other income |
| $ | 135 | (6,769) | | $ | (25,728) | | (7,313) |
15
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. Goodwill and identifiable intangible assets (all considered indefinite lived) at September 30, 20182019 and December 31, 20172018 are as follows:
|
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|
|
|
|
| ||||||
|
| September 30, |
| December 31, |
| |||||||
|
| 2018 |
| 2017 |
| |||||||
|
| (in thousands) |
| |||||||||
| | | | | | | ||||||
| | September 30, | | December 31, |
| |||||||
| | 2019 | | 2018 | | |||||||
| | (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 |
| ||||||
Other |
|
| 200 |
| 200 |
| |
| 200 |
| 200 | |
Total identifiable intangible assets |
|
| 38,899 |
| 40,099 |
| |
| 38,899 |
| 38,899 | |
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
Total |
| $ | 145,869 |
| 147,069 |
| | $ | 145,869 |
| 145,869 | |
7.Indebtedness
7. | Indebtedness |
Debt is reported at its carrying amount in the consolidated balance sheet. The fair value, calculated based on Level 2 inputs, of the Company’s senior unsecured notenotes maturing January 13, 2021 is $98.4was $98.6 million at September 30, 20182019 compared to the carrying value net of debt issuance costs of $94.8$94.9 million, which is listed under long-term debt in the consolidated balance sheet. Fair value is calculated based on Level 2 inputs.
8.Income Tax Uncertainties
8. | Income Tax Uncertainties |
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; 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. As of September 30, 20182019 and December 31, 2017,2018, the Company’s consolidated balance sheet included unrecognized tax benefits, including penalties and interest, of $2.9$2.7 million ($2.52.3 million net of federal benefit) and $10.9$2.7 million ($8.92.4 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate. The Company finalized a voluntary disclosure agreement with a state tax jurisdiction in June 2018, which reduced unrecognized tax benefits by $9.3 million ($7.6 million net of federal benefit).
The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. The total amount of penalties and interest, net of federal impact,benefit, related to income tax uncertainties recognized in the statementstatements of income for the three and nine month periodperiods ended September 30, 20182019 was a benefit of $2.7 million.$38 thousand and $79 thousand, respectively. The total amount of accrued penalties and interest related to uncertain tax positions recognized in the consolidated balance sheet at September 30, 20182019 and December 31, 20172018 is $0.8$0.7 million ($0.70.6 million net of federal benefit) and $4.0$0.7 million ($3.50.6 million net of federal benefit), respectively.
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 Company is currently under audit in a state jurisdiction in which it operates. The Company expects to settledoes not expect the audit in this jurisdiction within the next 12-month period. The Company’s liability for unrecognized tax benefits, including
19
penalties and interest, is not expected to decrease significantly uponresolution or settlement of this audit. Additionally, such settlement is not anticipatedany open audits, Federal or State, to have a significantmaterially impact on the results of operations.consolidated financial statements.
The 2015, 2016, 2017, and 20172018 federal income tax returns are open tax years that remain subject to potential future audit. State income tax returns for all years after 20132014 and, in certain states, income tax returns for 2013,2014, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
16
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 approved an amendment to freeze the Pension Plan, effective September 30, 2017. After September 30, 2017, participants in the Pension Plan do not accrueceased accruing additional benefits for future service or compensation. Participants retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. During the third quarter of 2018, we contributed $4.0 millionThe Company intends to terminate the Pension Plan.Plan in a standard termination, as defined by the Pension Benefit Guaranty Corporation, with an expected completion date in 2020.
We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as independent financial advisors associated 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 this plan was established. During the third quarter of 2016, 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 and other postretirement costs related to these plans were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, |
| ||||||||||
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| ||
|
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | — |
| 2,958 |
| $ | — |
| — |
| $ | — |
| 8,367 |
| $ | — |
| — |
|
Interest cost |
|
| 1,497 |
| 1,522 |
|
| 14 |
| 15 |
|
| 4,490 |
| 4,780 |
|
| 41 |
| 44 |
|
Expected return on plan assets |
|
| (2,065) |
| (2,510) |
|
| — |
| — |
|
| (6,196) |
| (7,627) |
|
| — |
| — |
|
Actuarial loss |
|
| — |
| 6,552 |
|
| — |
| — |
|
| — |
| 6,552 |
|
| — |
| — |
|
Actuarial gain amortization |
|
| — |
| — |
|
| (30) |
| (45) |
|
| — |
| — |
|
| (90) |
| (135) |
|
Prior service credit amortization |
|
| — |
| — |
|
| (1) |
| (1) |
|
| — |
| — |
|
| (2) |
| (3) |
|
Curtailment gain |
|
| — |
| (31,621) |
|
| — |
| — |
|
|
|
| (31,621) |
|
| — |
| — |
|
Total |
| $ | (568) |
| (23,099) |
| $ | (17) |
| (31) |
| $ | (1,706) |
| (19,549) |
| $ | (51) |
| (94) |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, | ||||||||||
| | 2019 | | 2018 | | | 2019 | | 2018 | | 2019 | | 2018 | | | 2019 | | 2018 | ||
| | | (in thousands) | | | (in thousands) | ||||||||||||||
Components of net periodic benefit cost: |
| |
|
|
|
|
|
|
|
|
| | |
| |
| | |
| |
Interest cost | | $ | 1,537 |
| 1,497 | | $ | 9 |
| 14 | | $ | 4,610 |
| 4,490 |
| $ | 25 |
| 41 |
Expected return on plan assets | |
| (1,579) |
| (2,065) | |
| — |
| — | |
| (4,736) |
| (6,196) |
|
| — |
| — |
Actuarial gain amortization | |
| — |
| — | |
| (124) |
| (30) | |
| — |
| — |
|
| (371) |
| (90) |
Prior service credit amortization | |
| — |
| — | |
| — |
| (1) | |
| — |
| — |
|
| — |
| (2) |
Total | | $ | (42) | | (568) | | $ | (115) | | (17) | | $ | (126) | | (1,706) | | $ | (346) | | (51) |
20
10.Stockholders’ Equity
10. | 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, |
| ||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||||||
|
| (in thousands, except per share amounts) |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | |||||||||||
| | Three months ended | | Nine months ended | |||||||||||||||||
| | September 30, | | September 30, | |||||||||||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | |||||||||||||
| | (in thousands, except per share amounts) | |||||||||||||||||||
Net income attributable to Waddell & Reed Financial, Inc. |
| $ | 46,305 |
| 53,582 |
| $ | 137,120 |
| 111,515 |
|
| $ | 33,054 |
| 46,305 |
| $ | 99,056 |
| 137,120 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | |||||||||||
Weighted average shares outstanding, basic and diluted |
|
| 79,595 |
| 83,476 |
|
| 81,372 |
| 83,719 |
| |
| 72,387 | | 79,595 | |
| 74,446 | | 81,372 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | |||||||||||
Earnings per share, basic and diluted |
| $ | 0.58 |
| 0.64 |
| $ | 1.69 |
| 1.33 |
| | $ | 0.46 | | 0.58 | | $ | 1.33 | | 1.69 |
Dividends
On July 24, 2018,During the quarter, the Board of Directors approveddeclared a quarterly dividend on our Class A common stock in the amount of $0.25 per share to stockholders of record onwith a November 1, 2019 payment date and an October 11, 2018.2019 record date. The total dividend paid on November 1, 20182019 was $19.7 million and was included in other current liabilities as$17.7 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 1,424,6122,480,019 shares and 190,0561,424,612 shares repurchased in the open market or privately during the three months ended September 30, 20182019 and 2017,2018, respectively, which includes 22519 shares and 56225 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to vesting of stock awards during these two reporting periods. There were 4,519,5466,849,238 shares and 904,4104,519,546 shares repurchased in the open market or privately during the nine months ended September 30, 20182019 and 2017,2018, respectively, which includes 630,159440,002 shares and 239,410630,159 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to the vesting of stock awards during each of these two reporting periods.
21
Accumulated Other Comprehensive Income (Loss)
The following tables summarize accumulated other comprehensive income (loss) activity for the three and nine months ended September 30, 20182019 and September 30, 2017.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
| Unrealized |
| Postretirement |
| accumulated |
| |
|
| gains (losses) |
| benefits |
| other |
| |
|
| on investment |
| unrealized |
| comprehensive |
| |
Three months ended September 30, 2018 |
| securities |
| gains (losses) |
| income (loss) |
| |
|
| (in thousands) |
| |||||
Balance at June 30, 2018 |
| $ | (1,772) |
| 440 |
| (1,332) |
|
Other comprehensive income before reclassification |
|
| 218 |
| — |
| 218 |
|
Amount reclassified from accumulated other comprehensive loss |
|
| 44 |
| (24) |
| 20 |
|
Net current period other comprehensive income (loss) |
|
| 262 |
| (24) |
| 238 |
|
Balance at September 30, 2018 |
| $ | (1,510) |
| 416 |
| (1,094) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
|
|
|
| |
|
|
|
|
| valuation |
|
|
|
|
| |
|
|
|
|
| allowance for |
|
|
|
|
| |
|
|
|
|
| unrealized |
|
|
| 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) |
| 546 |
| (1,980) |
|
Other comprehensive income before reclassification |
|
| 1,968 |
|
| 800 |
| — |
| 2,768 |
|
Amount reclassified from accumulated other comprehensive loss |
|
| (438) |
|
| (260) |
| (30) |
| (728) |
|
Net current period other comprehensive income (loss) |
|
| 1,530 |
|
| 540 |
| (30) |
| 2,040 |
|
Balance at September 30, 2017 |
| $ | (456) |
|
| — |
| 516 |
| 60 |
|
| | | | | | | |
| | 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, 2019 |
| $ | 2,142 |
| 939 |
| 3,081 |
Other comprehensive income before reclassification |
|
| 379 | | — |
| 379 |
Amount reclassified from accumulated other comprehensive (loss) |
|
| (83) | | (94) |
| (177) |
Net current period other comprehensive income (loss) |
|
| 296 | | (94) |
| 202 |
Balance at September 30, 2019 | | $ | 2,438 |
| 845 |
| 3,283 |
| | | | | | | |
| | | | | | | |
Balance at June 30, 2018 |
| $ | (1,772) |
| 440 |
| (1,332) |
Other comprehensive income before reclassification |
|
| 218 |
| — |
| 218 |
Amount reclassified from accumulated other comprehensive income (loss) |
|
| 44 |
| (24) |
| 20 |
Net current period other comprehensive income (loss) |
|
| 262 | | (24) |
| 238 |
Balance at September 30, 2018 | | $ | (1,510) |
| 416 |
| (1,094) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
| Unrealized |
| Postretirement |
| accumulated |
| |
|
| gains (losses) |
| benefits |
| other |
| |
|
| on investment |
| unrealized |
| comprehensive |
| |
Nine months ended September 30, 2018 |
| securities |
| gains (losses) |
| income (loss) |
| |
|
| (in thousands) |
| |||||
Balance at December 31, 2017 |
| $ | 145 |
| 379 |
| 524 |
|
Amount reclassified to retained earnings for recently adopted ASUs |
|
| (955) |
| 107 |
| (848) |
|
Other comprehensive loss before reclassification |
|
| (744) |
| — |
| (744) |
|
Amount reclassified from accumulated other comprehensive loss |
|
| 44 |
| (70) |
| (26) |
|
Net current period other comprehensive (loss) income |
|
| (1,655) |
| 37 |
| (1,618) |
|
Balance at September 30, 2018 |
| $ | (1,510) |
| 416 |
| (1,094) |
|
22
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
|
|
|
| |
|
|
|
|
| valuation |
|
|
|
|
| |
|
|
|
|
| allowance for |
|
|
|
|
| |
|
|
|
|
| unrealized |
|
|
| 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) |
| 603 |
| (6,757) |
|
Other comprehensive income before reclassification |
|
| 4,113 |
|
| 3,743 |
| — |
| 7,856 |
|
Amount reclassified from accumulated other comprehensive loss |
|
| (597) |
|
| (355) |
| (87) |
| (1,039) |
|
Net current period other comprehensive income (loss) |
|
| 3,516 |
|
| 3,388 |
| (87) |
| 6,817 |
|
Balance at September 30, 2017 |
| $ | (456) |
| �� | — |
| 516 |
| 60 |
|
| | | | | | | |
| | 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, 2018 |
| $ | (797) |
| 1,128 |
| 331 |
Other comprehensive income before reclassification |
| | 3,413 |
| — |
| 3,413 |
Amount reclassified from accumulated other comprehensive (loss) |
| | (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 |
| | | | | | | |
| | | | | | | |
Balance at December 31, 2017 |
| $ | 145 |
| 379 |
| 524 |
Amount reclassified to retained earnings for ASUs adopted in 2018 |
| | (955) |
| 107 |
| (848) |
Other comprehensive loss before reclassification | | | (744) | | — | | (744) |
Amount reclassified from accumulated other comprehensive income (loss) |
| | 44 | | (70) |
| (26) |
Net current period other comprehensive (loss) income |
| | (1,655) | | 37 |
| (1,618) |
Balance at September 30, 2018 | | $ | (1,510) |
| 416 |
| (1,094) |
Reclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
| For the three months ended September 30, 2018 |
|
|
| |||||||||||||
|
|
|
|
| Tax |
|
|
|
|
| |||||||||
|
|
|
|
| (expense) |
|
|
| Statement of income |
| |||||||||
|
| Pre-tax |
| benefit |
| Net of tax |
| line item or retained earnings |
| ||||||||||
|
| (in thousands) |
|
|
| ||||||||||||||
| | | | | | | | | | ||||||||||
| | | | | 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: |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Losses on available for sale debt securities |
| $ | (58) |
| 14 |
| (44) |
| Investment and other income (loss) |
| |||||||||
Gains on available for sale debt securities | | $ | 109 | | (26) | | 83 |
| Investment and other income | ||||||||||
Amortization of postretirement benefits |
|
| 31 |
| (7) |
| 24 |
| Compensation and benefits and retained earnings |
| | | 124 |
| (30) |
| 94 |
| Compensation and benefits |
Total |
| $ | (27) |
| 7 |
| (20) |
|
|
| | $ | 233 |
| (56) |
| 177 | | |
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| For the three months ended September 30, 2017 |
|
|
| ||||||||||||||
|
|
|
|
| Tax |
|
|
|
|
| |||||||||
|
|
|
|
| (expense) |
|
|
|
|
| |||||||||
|
| Pre-tax |
| benefit |
| Net of tax |
| Statement of income line item |
| ||||||||||
|
| (in thousands) |
|
|
| ||||||||||||||
| | | | | | | | | | ||||||||||
| | | | | Tax | | | | | ||||||||||
| | | | | benefit | | | | | ||||||||||
For the three months ended September 30, 2018 | | Pre-tax | | (expense) | | 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 |
| |||||||||
Losses on available for sale debt securities | | $ | (58) |
| 14 | | (44) |
| Investment and other income | ||||||||||
Amortization of postretirement benefits |
|
| 46 |
| (16) |
| 30 |
| Compensation and benefits and retained earnings |
| | | 31 |
| (7) |
| 24 |
| Compensation and benefits |
Total |
| $ | 744 |
| (16) |
| 728 |
|
|
| | $ | (27) |
| 7 |
| (20) | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2018 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tax |
|
|
|
|
|
|
| Pre-tax |
| expense |
| Net of tax |
| Statement of income line item |
| |
|
| (in thousands) |
|
|
| |||||
Reclassifications included in net income or retained earnings for ASUs adopted in 2018: |
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment gains |
| $ | 1,295 |
| (340) |
| 955 |
| Investment and other income (loss) |
|
Losses on available for sale debt securities |
|
| (58) |
| 14 |
| (44) |
| Investment and other income (loss) |
|
Amortization of postretirement benefits |
|
| 92 |
| (129) |
| (37) |
| Compensation and benefits and retained earnings |
|
Total |
| $ | 1,329 |
| (455) |
| 874 |
|
|
|
| | | | | | | | | |
| | | | | 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 | | |
23
19
| | | | | | | | | |
| | | | | Tax | | | | |
| | | | | (expense) | | | | Statement of income |
For the nine months ended September 30, 2018 | | Pre-tax | | benefit | | Net of tax | | line item or retained earnings | |
| | (in thousands) | | | |||||
Reclassifications included in net income or retained earnings for ASUs adopted in 2018: |
| |
|
|
|
|
|
|
|
Sponsored funds investment gains | | $ | 1,295 |
| (340) |
| 955 |
| Retained earnings |
Losses on available for sale debt securities | |
| (58) |
| 14 |
| (44) |
| Investment and other income |
Amortization of postretirement benefits | |
| 92 |
| (129) |
| (37) |
| Compensation and benefits and retained earnings |
Total | | $ | 1,329 |
| (455) |
| 874 | | |
11. | Leases |
On January 1, 2019, the Company adopted ASU 2016-02, Leases, and related ASUs (“ASU 2016-02”), which increases transparency and comparability among organizations by establishing a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet with additional disclosures of key information about leasing arrangements. The Company applied the required modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application, and elected the effective date of the ASU as its initial date of application. The implementation of the new standard included recognition of new ROU assets and lease liabilities on our balance sheet as of January 1, 2019.
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 seven 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). Operating lease assets and liabilities are included in other non-current assets, other current liabilities, and other non-current liabilities in our consolidated balance sheet at September 30, 2019. Finance leases are included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated balance sheets.
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) 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) 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 are generally accounted for separately.
The components of lease expense were as follows:
| | | | | | |
| | For the three | | For the nine | ||
| | months ended | | months ended | ||
| | September 30, 2019 | | September 30, 2019 | ||
| | (in thousands) | ||||
Operating Lease Cost | | $ | 4,189 |
| $ | 14,472 |
| | | | | | |
Finance Lease Cost: | | | | | | |
Amortization of ROU assets | | $ | 80 |
| $ | 224 |
Interest on lease liabilities | | | 8 |
| | 23 |
Total | | $ | 88 | | $ | 247 |
| | | | | | |
20
|
|
|
|
|
|
|
|
|
|
|
|
| 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 postretirement benefits |
|
| 138 |
| (51) |
| 87 |
| Compensation and benefits and retained earnings |
|
Total |
| $ | 1,090 |
| (51) |
| 1,039 |
|
|
|
11.Contingencies
Supplemental cash flow information related to leases was as follows:
| | | |
| | For the nine | |
| | months ended | |
| | September 30, 2019 | |
| | (in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
Operating cash flows from operating leases | | $ | 13,661 |
Operating cash flows from finance leases | |
| 23 |
Financing cash flows from finance leases | | | 222 |
| | | |
ROU assets obtained in exchange for lease obligations: | | | |
Operating leases | | | 2,410 |
Finance leases | | | 40 |
Supplemental balance sheet information related to leases was as follows:
| | | |
| | September 30, 2019 | |
| | (in thousands, | |
| | except lease term | |
| | and discount rate) | |
Operating Leases: |
| |
|
Operating lease ROU assets (Other non-current assets) | | $ | 25,795 |
| | | |
Other current liabilities | | $ | 10,873 |
Other non-current liabilities | | | 16,445 |
Total operating lease liabilities | | $ | 27,318 |
| | | |
| | | |
Finance Leases: | | | |
Property and equipment, gross | | $ | 1,054 |
Accumulated depreciation | | | (734) |
Property and equipment, net | | $ | 320 |
| | | |
Other current liabilities | | $ | 241 |
Other non-current liabilities | | | 90 |
Total finance lease liabilities | | $ | 331 |
| | | |
| | | |
Weighted average remaining lease term: | | | |
Operating leases | | | 4 years |
Finance leases | | | 1 year |
| | | |
Weighted average discount rate: | | | |
Operating leases | | | 4.32% |
Finance leases | | | 6.00% |
21
Maturities of lease liabilities are as follows:
| | | | | | |
| | Operating | | | Finance | |
| | Leases | | | Leases | |
| | (in thousands) | ||||
Year ended December 31, | | | | | | |
2019 (excluding the nine months ended September 30, 2019) |
| $ | 3,361 |
| | 68 |
2020 | | | 10,580 | | | 218 |
2021 | |
| 6,468 |
| | 45 |
2022 | |
| 2,178 |
| | 6 |
2023 | | | 2,090 | | | — |
Thereafter | |
| 4,703 |
| | — |
Total lease payments | |
| 29,380 |
| | 337 |
Less imputed interest | | | (2,062) | | | (6) |
Total | | $ | 27,318 |
| | 331 |
The adoption of the lease standard using the effective date as the date of initial application requires the inclusion of the disclosures for periods prior to adoption, which are included below.
Minimum future rental commitments as of December 31, 2018 for all non-cancelable operating leases were as follows:
| | | | |
Year |
| Commitments |
| |
| | (in thousands) |
| |
2019 | | $ | 16,488 | |
2020 | |
| 9,797 | |
2021 | |
| 5,757 | |
2022 | |
| 2,913 | |
2023 | | | 2,320 | |
Thereafter | |
| 5,161 | |
| | $ | 42,436 | |
Rent expense was $5.8 million and $17.6 million for the three and nine months ended September 30, 2018, respectively.
As of December 31, 2018, we had property and equipment under capital leases with a cost of $1.6 million and accumulated depreciation of $1.1 million.
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.” These amounts are not reduced by amounts that may be recovered under insurance or claims against 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.
Shareholder Derivative Litigation
In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan v. Ivy Investment Management Company, et al. (Case No. I6CV02338 Div. 4), plaintiff filed a putative derivative action on behalf of the nominal defendant, a mutual fund trust affiliated with the Company, alleging breach of fiduciary duty and breach of contract claims relating to an investment held in the affiliated mutual fund by the Company's registered investment adviser subsidiary. On behalf of the nominal defendant trust, plaintiff filed claims against the Company’s registered investment adviser subsidiary and current and retired trustees of the trust seeking monetary damages and demanding a jury trial. While 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 trust, the parties to the litigation reached a settlement. The February 14, 2018 settlement agreement provided a full release for the benefit of defendants and for the payment of $19.9 million (less $6.1 million for attorney’s fees plus nominal costs associated with notice to shareholders), recoverable to the Company through insurance, to the affiliated mutual fund for the benefit of its shareholders. On July 30, 2018, the court entered an order granting final approval of the settlement.
401(k) Plan Class Action Litigation
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. On August 7, 2017, plaintiff filed a second amended complaint, which was 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 during a proposed class period of June 23, 2011 to present. The second amended complaint dismissed the Company’s Board of Directors as a defendant
24
22
and named as defendants the Company, the Compensation Committee of the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and the individuals who served on those committees during the proposed class period. Following the denial of their motion to dismiss, on March 8, 2018, defendants filed their answer and defenses to plaintiff’s second amended complaint. On April 23, 2018, the court entered an initial scheduling order, ordering the parties to complete mediation by August 31, 2018. While the Company and the other defendants deny any and all liability with respect to the claims, the parties have reached an agreement in principle to settle the litigation. The parties are finalizing the terms of the proposed settlement, which will be subject to preliminary and final court approval. The payment contemplated by the proposed settlement is recoverable to the Company through insurance. The Company has recorded a liability and offsetting receivable from insurance, as reflected in the Company's consolidated balance sheet.
25
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, 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 those discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which include, without limitation:
| The loss of existing distribution relationships or inability to access new distribution relationships; |
| 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 evolving fiduciary standards; |
| 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 business; |
| 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. |
26
23
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, 20172018 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2018.2019. 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.
Our products are distributed through our unaffiliated channel, or through our broker-dealerwealth management channel by Waddell and Reed, Inc. (“W&R”) independent financial advisors.Advisors. Through our institutional channel, we distribute an array of investment styles to a variety of clients.
Through our unaffiliated channel, we distribute mutual funds through broker-dealers, retirement platforms and registered investment advisers through a team of external and internal wholesalers,wholesalers.
In our wealth management channel, we had 948 Advisors and 396 licensed advisor associates as well asof September 30, 2019, for a team dedicated to home office relationship coverage.total of 1,344 licensed individuals associated with W&R who 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.
We manage assets in a variety of investment styles for a varietyin our institutional channel. Most of types of institutions. The largest percentage client type isthe clients in this channel are other asset managers that hire us to act as a subadviser for their branded products; they are typically domestic and 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.
In our broker-dealer channel, 1,074 independent financial advisors associated with W&R and 351 licensed advisor associates, who operate out of offices located throughout the United States, provide financial advice for retirement, education funding, estate planning and other financial needs for clients.
Operating Results
| Net income attributable to Waddell & Reed Financial, Inc. for the third quarter |
| Revenues of |
● | AUM ended the quarter at $68.8 billion, a decrease of 14% compared to |
|
|
|
|
|
|
● | Wealth management AUA ended the quarter at $57.1 billion, a 2% decrease compared to |
| During the third quarter of |
| Our balance sheet remains solid and we ended the third quarter of |
27
$837.5 million, excluding restricted cash and cash and investments of redeemable noncontrolling interests in consolidated sponsored funds. |
24
● | Within our wealth management channel, we are boosting our recruiting efforts nationally, targeting experienced financial advisors and hiring two veteran regional recruiting executives. During the third quarter of 2019, we also announced the addition of a platform of client engagement tools and analytics technology, which is designed to help Advisors enhance their service and align risk metrics with specific client needs and risk tolerances. |
Assets Under Management
During the third quarter of 2018, assets under management increased 1%2019, AUM decreased 4% to $79.5$68.8 billion from $78.7$71.9 billion at June 30, 20182019 due to market appreciation of $2.9 billion, partially offset by net outflows of $2.0$2.7 billion and market depreciation of $0.4 billion.Sales of $1.8 billion during the current quarter declined 30% compared to the third quarter of 2018. Redemptions improved 3% compared to the third quarter of 2018.
Change in Assets Under Management (1)
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Three months ended September 30, 2018 |
| ||||||||||||||||||||||
|
|
|
|
|
| Broker- |
|
|
| ||||||||||||||||
|
| Unaffiliated(2) |
| Institutional |
| Dealer |
| Total |
| ||||||||||||||||
|
| (in millions) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | |||||||||||||||
| | Three months ended September 30, 2019 |
| ||||||||||||||||||||||
| | | | | | Wealth | | |
| ||||||||||||||||
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | ||||||||||||||||
|
| (in millions) | | ||||||||||||||||||||||
Beginning Assets |
| $ | 30,782 |
| 5,250 |
| 42,619 |
| 78,651 |
|
| $ | 27,545 |
| 3,887 |
| 40,444 |
| 71,876 | | |||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | |||||||||||||||
Sales (3) |
|
| 1,589 |
| 83 |
| 874 |
| 2,546 |
| |
| 999 |
| 49 |
| 744 |
| 1,792 | | |||||
Redemptions |
|
| (2,425) |
| (535) |
| (1,612) |
| (4,572) |
| |
| (2,684) |
| (230) |
| (1,542) |
| (4,456) | | |||||
Net Exchanges |
|
| 360 |
| — |
| (360) |
| — |
| |
| 334 |
| — |
| (334) |
| — | | |||||
Net Flows |
|
| (476) |
| (452) |
| (1,098) |
| (2,026) |
| |
| (1,351) |
| (181) |
| (1,132) |
| (2,664) | | |||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | |||||||||||||||
Market Action |
|
| 866 |
| 389 |
| 1,662 |
| 2,917 |
| |
| (337) |
| (29) |
| (64) |
| (430) | | |||||
Ending Assets |
| $ | 31,172 |
| 5,187 |
| 43,183 |
| 79,542 |
|
| $ | 25,857 |
| 3,677 |
| 39,248 |
| 68,782 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, 2017 |
| |||||||
|
|
|
|
|
| Broker- |
|
|
| |
|
| Unaffiliated(2) |
| Institutional |
| Dealer |
| Total |
| |
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets |
| $ | 30,307 |
| 7,036 |
| 43,084 |
| 80,427 |
|
|
|
|
|
|
|
|
|
|
|
|
Sales (3) |
|
| 1,790 |
| 68 |
| 1,024 |
| 2,882 |
|
Redemptions |
|
| (2,486) |
| (1,139) |
| (2,049) |
| (5,674) |
|
Net Exchanges |
|
| 213 |
| — |
| (213) |
| — |
|
Net Flows |
|
| (483) |
| (1,071) |
| (1,238) |
| (2,792) |
|
|
|
|
|
|
|
|
|
|
|
|
Market Action |
|
| 1,238 |
| 400 |
| 1,626 |
| 3,264 |
|
Ending Assets |
| $ | 31,062 |
| 6,365 |
| 43,472 |
| 80,899 |
|
| | | | | | | | | | |
| | Three months ended September 30, 2018 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 30,782 |
| 5,250 |
| 42,619 |
| 78,651 | |
| | | | | | | | | | |
Sales (3) | |
| 1,589 | | 83 |
| 874 |
| 2,546 | |
Redemptions | |
| (2,425) |
| (535) |
| (1,612) |
| (4,572) | |
Net Exchanges | |
| 360 |
| — |
| (360) |
| — | |
Net Flows | |
| (476) |
| (452) |
| (1,098) |
| (2,026) | |
| | | | | | | | | | |
Market Action | |
| 866 |
| 389 |
| 1,662 |
| 2,917 | |
Ending Assets |
| $ | 31,172 |
| 5,187 |
| 43,183 |
| 79,542 | |
28
25
Change in Assets Under Management (continued) (1)
During the first nine months of 2018, assets under management decreased 2%2019, AUM increased 5% to $79.5$68.8 billion from $81.1$65.8 billion at December 31, 20172018 due to market appreciation of $9.8 billion, offset by net outflows of $6.6$6.8 billion. Sales of $6.4 billion partially offset by market appreciationduring the first nine months of $5.1 billion.2019 declined 31% compared to same period in 2018. Redemptions improved 17% compared to the first nine months of 2018.
| | | | | | | | | | |
| | Nine months ended September 30, 2019 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 24,977 |
| 3,655 |
| 37,177 |
| 65,809 | |
| | | | | | | | | | |
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) | |
| | | | | | | | | | |
Market Action | |
| 3,514 |
| 780 |
| 5,500 |
| 9,794 | |
Ending Assets |
| $ | 25,857 |
| 3,677 |
| 39,248 |
| 68,782 | |
| | | | | | | | | | |
| | Nine months ended September 30, 2018 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 31,133 |
| 6,289 |
| 43,660 |
| 81,082 | |
| | | | | | | | | | |
Sales (3) | |
| 5,613 |
| 788 |
| 2,877 |
| 9,278 | |
Redemptions | |
| (7,762) |
| (2,792) |
| (5,341) |
| (15,895) | |
Net Exchanges | |
| 890 |
| — |
| (890) |
| — | |
Net Flows | |
| (1,259) |
| (2,004) |
| (3,354) |
| (6,617) | |
| | | | | | | | | | |
Market Action | |
| 1,298 |
| 902 |
| 2,877 |
| 5,077 | |
Ending Assets |
| $ | 31,172 |
| 5,187 |
| 43,183 |
| 79,542 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2018 |
| |||||||
|
|
|
|
|
| Broker- |
|
|
| |
|
| Unaffiliated(2) |
| Institutional |
| Dealer |
| Total |
| |
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets |
| $ | 31,133 |
| 6,289 |
| 43,660 |
| 81,082 |
|
|
|
|
|
|
|
|
|
|
|
|
Sales (3) |
|
| 5,613 |
| 788 |
| 2,877 |
| 9,278 |
|
Redemptions |
|
| (7,762) |
| (2,792) |
| (5,341) |
| (15,895) |
|
Net Exchanges |
|
| 890 |
| — |
| (890) |
| — |
|
Net Flows |
|
| (1,259) |
| (2,004) |
| (3,354) |
| (6,617) |
|
|
|
|
|
|
|
|
|
|
|
|
Market Action |
|
| 1,298 |
| 902 |
| 2,877 |
| 5,077 |
|
Ending Assets |
| $ | 31,172 |
| 5,187 |
| 43,183 |
| 79,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2017 |
| |||||||
|
|
|
|
|
| Broker- |
|
|
| |
|
| Unaffiliated(2) |
| Institutional |
| Dealer |
| Total |
| |
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets |
| $ | 30,295 |
| 7,904 |
| 42,322 |
| 80,521 |
|
|
|
|
|
|
|
|
|
|
|
|
Sales (3) |
|
| 5,667 |
| 290 |
| 3,143 |
| 9,100 |
|
Redemptions |
|
| (9,078) |
| (2,925) |
| (5,727) |
| (17,730) |
|
Net Exchanges |
|
| 684 |
| 6 |
| (690) |
| — |
|
Net Flows |
|
| (2,727) |
| (2,629) |
| (3,274) |
| (8,630) |
|
|
|
|
|
|
|
|
|
|
|
|
Market Action |
|
| 3,494 |
| 1,090 |
| 4,424 |
| 9,008 |
|
Ending Assets |
| $ | 31,062 |
| 6,365 |
| 43,472 |
| 80,899 |
|
(1) |
| Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions. |
(2) |
| Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only, Registered Investment Advisor and Variable Annuity. |
(3) |
| Sales |
29
26
Average Assets Under Management
Average assets under management,AUM, which are generally more indicative of trends in revenue from investment management services than the change in ending assets under management,AUM, are presented below.
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Three months ended September 30, 2018 |
| |||||||||||||||||||
|
|
|
|
|
| Broker- |
|
|
|
| ||||||||||||
|
| Unaffiliated |
| Institutional |
| Dealer |
| Total |
| |||||||||||||
|
| (in millions) |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
| | Three months ended September 30, 2019 |
| |||||||||||||||||||
| | | | | | Wealth | | | |
| ||||||||||||
|
| Unaffiliated | | Institutional | | Management | | Total | | |||||||||||||
|
| (in millions) | | |||||||||||||||||||
Asset Class: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Equity |
| $ | 24,946 |
| 5,176 |
| 32,121 |
| $ | 62,243 |
|
| $ | 20,988 |
| 3,808 |
| 29,642 |
| $ | 54,438 | |
Fixed Income |
|
| 5,595 |
| 27 |
| 9,856 |
|
| 15,478 |
| |
| 5,210 |
| 3 |
| 9,256 | |
| 14,469 | |
Money Market |
|
| 89 |
| — |
| 1,652 |
|
| 1,741 |
| |
| 97 |
| — |
| 1,523 | |
| 1,620 | |
Total |
| $ | 30,630 |
| 5,203 |
| 43,629 |
| $ | 79,462 |
|
| $ | 26,295 |
| 3,811 |
| 40,421 |
| $ | 70,527 | |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Three months ended September 30, 2017 |
| |||||||||||||||||||
|
|
|
|
|
| Broker- |
|
|
|
| ||||||||||||
|
| Unaffiliated |
| Institutional |
| Dealer |
| Total |
| |||||||||||||
|
| (in millions) |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
| | Three months ended September 30, 2018 | | |||||||||||||||||||
| | | | | | Wealth | | | | | ||||||||||||
| | Unaffiliated | | Institutional | | Management | | Total | | |||||||||||||
| | (in millions) | | |||||||||||||||||||
Asset Class: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Equity |
| $ | 23,477 |
| 6,385 |
| 31,268 |
| $ | 61,130 |
|
| $ | 24,946 |
| 5,176 |
| 32,121 |
| $ | 62,243 | |
Fixed Income |
|
| 6,659 |
| 331 |
| 10,432 |
|
| 17,422 |
| |
| 5,595 |
| 27 |
| 9,856 | |
| 15,478 | |
Money Market |
|
| 102 |
| — |
| 1,834 |
|
| 1,936 |
| |
| 89 |
| — |
| 1,652 | |
| 1,741 | |
Total |
| $ | 30,238 |
| 6,716 |
| 43,534 |
| $ | 80,488 |
|
| $ | 30,630 |
| 5,203 |
| 43,629 |
| $ | 79,462 | |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Nine months ended September 30, 2018 |
| ||||||||||||||||||||
|
|
|
|
|
| Broker- |
|
|
|
| |||||||||||||
|
| Unaffiliated |
| Institutional |
| Dealer |
| Total |
| ||||||||||||||
|
| (in millions) |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | ||||||||||||
| | Nine months ended September 30, 2019 |
| ||||||||||||||||||||
| | | | | | Wealth | | | |
| |||||||||||||
|
| Unaffiliated | | Institutional | | Management | | Total | | ||||||||||||||
|
| (in millions) | | ||||||||||||||||||||
Asset Class: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Equity |
| $ | 24,970 |
| 5,740 |
| 32,319 |
| $ | 63,029 |
|
| $ | 21,237 |
| 3,851 |
| 29,396 |
| $ | 54,484 | | |
Fixed Income |
|
| 5,701 |
| 66 |
| 9,996 |
|
| 15,763 |
| |
| 5,217 |
| 14 |
| 9,281 | |
| 14,512 | | |
Money Market |
|
| 92 |
| — |
| 1,728 |
|
| 1,820 |
| |
| 100 |
| — |
| 1,571 | |
| 1,671 | | |
Total |
| $ | 30,763 |
| 5,806 |
| 44,043 |
| $ | 80,612 |
|
| $ | 26,554 |
| 3,865 |
| 40,248 |
| $ | 70,667 | |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Nine months ended September 30, 2017 |
| |||||||||||||||||||
|
|
|
|
|
| Broker- |
|
|
|
| ||||||||||||
|
| Unaffiliated |
| Institutional |
| Dealer |
|
| Total | |||||||||||||
|
| (in millions) |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
| | Nine months ended September 30, 2018 | | |||||||||||||||||||
| | | | | | Wealth | | | | | ||||||||||||
| | Unaffiliated | | Institutional | | Management | | | Total | |||||||||||||
| | (in millions) | | |||||||||||||||||||
Asset Class: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Equity |
| $ | 23,256 |
| 6,924 |
| 31,311 |
| $ | 61,491 |
|
| $ | 24,970 |
| 5,740 |
| 32,319 |
| $ | 63,029 | |
Fixed Income |
|
| 6,801 |
| 365 |
| 10,201 |
|
| 17,367 |
| |
| 5,701 |
| 66 |
| 9,996 | |
| 15,763 | |
Money Market |
|
| 107 |
| — |
| 1,887 |
|
| 1,994 |
| |
| 92 |
| — |
| 1,728 | |
| 1,820 | |
Total |
| $ | 30,164 |
| 7,289 |
| 43,399 |
| $ | 80,852 |
|
| $ | 30,763 |
| 5,806 |
| 44,043 |
| $ | 80,612 | |
30
27
Performance
We have seen improvements in trailing one-, three- and five-year performance as measured by the percentage of assets ranked in the top half of their respective Morningstar universes. As measured by percentage of funds, three- and five-year performance improved modestly, however one-year performance slightly declined.
The following table is a summary of Morningstar rankings and ratings as of September 30, 2019:
| | | | | | | |
MorningStar Fund Rankings 1 |
| 1 Year |
| 3 Years |
| 5 Years |
|
Funds ranked in top half |
| 54 | % | 42 | % | 29 | % |
Assets ranked in top half |
| 63 | % | 63 | % | 40 | % |
| | | | | | | |
MorningStar Ratings 1 |
| Overall |
| 3 Years |
| 5 Years |
|
Funds with 4/5 stars |
| 29 | % | 29 | % | 23 | % |
Assets with 4/5 stars |
| 45 | % | 42 | % | 36 | % |
(1) Based on class I share, which reflects the largest concentration of sales and assets.
28
Assets Under Administration
Assets under administration (“AUA”) include assets for which our broker-dealer provides administrative services, such asAUA includes both client assets invested in the Funds and in other companies’ products that we offer outside ofare distributed through W&R and held in brokerage accounts or within our fee-based asset allocation programs. These assets include those held in clients’ brokerage accounts. AUA are presented below.
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| ||||||||
(in millions) |
|
| September 30, 2018 |
|
| September 30, 2017 |
| ||||||||
| | | | | | | | ||||||||
| | | | | | | | ||||||||
| | | September 30, 2019 | | | | September 30, 2018 | | |||||||
| | (in millions) | | ||||||||||||
AUA |
|
|
|
|
|
|
| | | | | | | | |
Advisory assets |
| $ | 23,653 |
|
| 20,734 |
| | $ | 25,107 | | | 23,653 | | |
Non-advisory assets |
|
| 34,468 |
|
| 34,856 |
| |
| 32,006 | | | 34,468 | | |
Total assets under administration |
| $ | 58,121 |
|
| 55,590 |
| | $ | 57,113 | | | 58,121 | | |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| ||||||||
|
|
| Three months ended |
|
| Three months ended |
| ||||||||
(in millions) |
|
| September 30, 2018 |
|
| September 30, 2017 |
| ||||||||
| | | | | | | | ||||||||
| | | Three months ended | | | Three months ended | | ||||||||
| | | September 30, 2019 | | | September 30, 2018 | | ||||||||
| | (in millions, except percentage data) | | ||||||||||||
Net new advisory assets (1) |
| $ | (87) |
|
| 420 |
| | $ | 236 | | | (87) | | |
Net new non-advisory assets (1), (2) |
|
| (931) |
|
| (965) |
| |
| (769) | | | (931) | | |
Total net new assets (1), (2) |
| $ | (1,018) |
|
| (545) |
| | $ | (533) | | | (1,018) | | |
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | ||||||||
Annualized advisory AUA growth (3) |
|
| (1.5) | % |
| 8.6 | % | | | 3.8 | % | | (1.5) | % | |
Annualized AUA growth (3) |
|
| (7.1) | % |
| (4.0) | % | | | (3.7) | % | | (7.1) | % | |
|
|
|
|
|
|
|
| ||||||||
|
|
| Nine months ended |
|
| Nine months ended |
| ||||||||
(in millions) |
|
| September 30, 2018 |
|
| September 30, 2017 |
| ||||||||
| | | | | | | | ||||||||
| | | Nine months ended | | | Nine months ended | | ||||||||
| | | September 30, 2019 | | | September 30, 2018 | | ||||||||
| | (in millions, except percentage data) | | ||||||||||||
Net new advisory assets (1) |
| $ | 620 |
|
| 342 |
| | $ | 709 | | | 620 | | |
Net new non-advisory assets (1), (2) |
|
| (2,831) |
|
| (2,526) |
| |
| (2,474) | | | (2,831) | | |
Total net new assets (1), (2) |
| $ | (2,210) |
|
| (2,184) |
| | $ | (1,765) | | | (2,211) | | |
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | ||||||||
Annualized advisory AUA growth (3) |
|
| 3.8 | % |
| 2.5 | % | | | 4.5 | % | | 3.8 | % | |
Annualized AUA growth (3) |
|
| (5.2) | % |
| (5.6) | % | | | (4.6) | % | | (5.2) | % | |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| ||||||||
|
|
| September 30, 2018 |
|
| September 30, 2017 |
| ||||||||
Advisor count |
|
| 1,074 |
|
| 1,481 |
| ||||||||
Average trailing 12-month production per advisor (4) (in thousands) |
| $ | 350 |
|
| 240 |
| ||||||||
Advisor associate count |
|
| 351 |
|
| 262 |
| ||||||||
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | ||||||||
| | | September 30, 2019 | | | September 30, 2018 | | ||||||||
Advisors and advisor associates | |
| 1,344 | | | 1,425 | | ||||||||
Average trailing 12-month production per Advisor (4) (in thousands) | | $ | 422 | | | 350 | | ||||||||
| | | | | | | |
(1) | Net new assets |
(2) | Excludes activity related to products held outside of our |
(3) | Annualized growth is calculated as annualized total net new assets divided by beginning |
(4) | Production per |
31
29
Results of Operations — Three and Nine Months Ended September 30, 20182019 as Compared with Three and Nine Months Ended September 30, 20172018
Total Revenues
Total revenues increased 2%decreased 8% to $295.1$270.7 million for the three months ended September 30, 20182019 compared to the three months ended September 30, 2017.2018. For the nine months ended September 30, 2018,2019, total revenues increased $25.4decreased $87.8 million, or 3%10%, compared to the same period in the prior year.
|
|
|
|
|
|
|
|
|
|
| Three months ended |
|
|
| |||
|
| September 30, |
|
|
| |||
|
| 2018 |
| 2017 |
| Variance |
| |
|
| (in thousands, except percentage data) |
| |||||
Investment management fees |
| $ | 129,302 |
| 134,149 |
| (4) | % |
Underwriting and distribution fees |
|
| 140,308 |
| 128,892 |
| 9 | % |
Shareholder service fees |
|
| 25,508 |
| 26,406 |
| (3) | % |
Total revenues |
| $ | 295,118 |
| 289,447 |
| 2 | % |
|
|
|
|
|
|
|
|
| ||||||||
|
| Nine months ended |
|
|
| |||||||||||
|
| September 30, |
|
|
| |||||||||||
|
| 2018 |
| 2017 |
| Variance |
| |||||||||
|
| (in thousands, except percentage data) |
| |||||||||||||
| | | | | | | | | ||||||||
| | Three months ended | | | | |||||||||||
| | September 30, | | | | |||||||||||
|
| 2019 |
| 2018 |
| Variance |
| |||||||||
| | (in thousands, except percentage data) | | |||||||||||||
Investment management fees |
| $ | 393,385 |
| 395,463 |
| (1) | % | | $ | 111,806 |
| 129,302 |
| (14) | % |
Underwriting and distribution fees |
|
| 416,222 |
| 386,499 |
| 8 | % | |
| 135,787 |
| 140,308 |
| (3) | % |
Shareholder service fees |
|
| 78,464 |
| 80,706 |
| (3) | % | |
| 23,087 |
| 25,508 |
| (9) | % |
Total revenues |
| $ | 888,071 |
| 862,668 |
| 3 | % | | $ | 270,680 |
| 295,118 |
| (8) | % |
| | | | | | | | |
| | Nine months ended | | | | |||
| | September 30, | | | | |||
|
| 2019 |
| 2018 |
| Variance |
| |
| | (in thousands, except percentage data) | | |||||
Investment management fees | | $ | 334,438 |
| 393,385 |
| (15) | % |
Underwriting and distribution fees | |
| 395,527 |
| 416,222 |
| (5) | % |
Shareholder service fees | |
| 70,279 |
| 78,464 |
| (10) | % |
Total revenues | | $ | 800,244 |
| 888,071 |
| (10) | % |
Investment Management Fee Revenues
Investment management fee revenues for the third quarter of 20182019 decreased $4.8$17.5 million, or 4%14%, from the third quarter of 2017.2018. For the nine month period endedending September 30, 2018,2019, investment management fee revenues decreased $2.1$58.9 million, or 1%15%, compared to the same period in 2017. Decreases in investment management fees for2018. For both comparative periods, werethe decrease was due to an increase in fees waivers related to fee reductions in selected mutual funds implemented as of July 31, 2018, as well as the impact of fund mergers in previous periods. In the fourth quarter of 2017, nine Advisors Funds were merged into Ivy Funds with substantially similar objectiveslower average AUM and strategies. The remaining 11 Advisor Funds were merged into Ivy Funds on February 26, 2018.
The following table summarizes investmenta lower effective management fee revenues, related average assets underrate. The effective management fee waivers and investment management fee rates for the three and nine months ended September 30, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
|
|
|
| ||||
|
| 2018 |
| 2017 |
|
| Variance |
| ||
|
| (in thousands, except for management fee rate and average assets) |
|
|
|
| ||||
Funds investment management fees (net) |
| $ | 123,764 |
|
| 128,078 |
|
| (3) | % |
Funds average assets (in millions) |
|
| 74,259 |
|
| 73,772 |
|
| 1 | % |
Funds management fee rate (net) |
|
| 0.6612 | % |
| 0.6888 | % |
|
|
|
Total fee waivers |
| $ | 5,641 |
|
| 1,826 |
|
| 209 | % |
Institutional investment management fees (net) |
| $ | 5,538 |
|
| 6,071 |
|
| (9) | % |
Institutional average assets (in millions) |
|
| 5,203 |
|
| 6,716 |
|
| (23) | % |
Institutional management fee rate (net) |
|
| 0.4071 | % |
| 0.3871 | % |
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
|
|
|
| ||||
|
| 2018 |
| 2017 |
|
| Variance |
| ||
|
| (in thousands, except for management fee rate and average assets) |
|
|
|
| ||||
Funds investment management fees (net) |
| $ | 376,193 |
|
| 376,563 |
|
| — |
|
Funds average assets (in millions) |
|
| 74,806 |
|
| 73,563 |
|
| 2 | % |
Funds management fee rate (net) |
|
| 0.6724 | % |
| 0.6844 | % |
|
|
|
Total fee waivers |
| $ | 11,087 |
|
| 6,015 |
|
| 84 | % |
Institutional investment management fees (net) |
| $ | 17,192 |
|
| 18,900 |
|
| (9) | % |
Institutional average assets (in millions) |
|
| 5,806 |
|
| 7,289 |
|
| (20) | % |
Institutional management fee rate (net) |
|
| 0.4055 | % |
| 0.3722 | % |
|
|
|
Revenues from investment management services provided to our affiliated mutual funds, which are distributed through the unaffiliated and broker-dealer channels, decreased 3% in the third quarter of 2018 compared to the third quarter of 2017 primarilyrate decrease is due to an increase in fee waivers related to fee reductions in selected mutual funds that were implemented as of July 31, 2018. Fee waivers are recorded as an offset to investment management fees up to the amount of fees earned. Fee
The following table summarizes investment management fee revenues, related average AUM, fee waivers increased duringand investment management fee rates for the three and nine months ended September 30, 2019 and 2018.
| | | | | | | | | | |
| | Three months ended September 30, | | | | | ||||
|
| 2019 |
| 2018 |
| | Variance |
| ||
| | (in thousands, except for management fee rate and average assets) | | | | | ||||
Investment management fees (net) | | $ | 107,926 | | | 123,764 | | | (13) | % |
Average assets (in millions) | | $ | 66,716 | | | 74,259 | | | (10) | % |
Management fee rate (net) | |
| 0.6418 | % | | 0.6612 | % | | | |
Total fee waivers | | $ | 8,154 | | | 5,641 | | | 45 | % |
Institutional investment management fees (net) | | $ | 3,880 | | | 5,538 | | | (30) | % |
Institutional average assets (in millions) | | $ | 3,811 | |
| 5,203 | |
| (27) | % |
Institutional management fee rate (net) | |
| 0.4040 | % |
| 0.4071 | % |
| | |
| | | | | | | | | | |
30
| | Nine months ended September 30, | | | | | ||||
|
| 2019 |
| 2018 |
| | Variance |
| ||
| | (in thousands, except for management fee rate and average assets) | | | | | ||||
Investment management fees (net) | | $ | 322,678 | | | 376,193 | | | (14) | % |
Average assets (in millions) | |
| 66,802 | | | 74,806 | | | (11) | % |
Management fee rate (net) | |
| 0.6458 | % | | 0.6724 | % | | | |
Total fee waivers | | $ | 22,127 | | | 11,087 | | | 100 | % |
Institutional investment management fees (net) | | $ | 11,760 | | | 17,192 | | | (32) | % |
Institutional average assets (in millions) | |
| 3,865 | |
| 5,806 | |
| (33) | % |
Institutional management fee rate (net) | |
| 0.4068 | % |
| 0.4055 | % |
| | |
Revenues from investment management services provided to our retail mutual funds, which are distributed through the unaffiliated and wealth management channels, decreased 13% in the third quarter of 2019 and 14% for the nine months ended September 30, 20182019, compared to the same periodperiods in 20172018. These decreases were due to the Advisors Funds mergers, the inclusion of common fund expenses that were previously not reimburseda decrease in average AUM and a lower effective management fee rate due to fee waivers related to fee reductions in selected mutual funds. The change in fee waivers was partially offset by increased investment management fees due to slightly higher average assets.funds that were implemented as of July 31, 2018.
Institutional account revenues in the third quarter of 20182019 decreased $0.5$1.7 million compared to the third quarter of 2017 due to a 23% decrease in average assets under management, partially offset by an increase in the average management fee rate.2018. For the nine month periodmonths ended September 30, 2018,2019, institutional account revenues decreased $1.7$5.4 million compared to the same period in 2017 primarily2018. The decreases for both comparative periods were due to a 20% decreasedecreases in average assets under management, partially offset by an increase in the average management fee rate.AUM due to elevated event-driven redemptions.
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Annualized long-term redemption rates |
| |||||||||||||||||
|
| (excludes money market redemptions) |
| |||||||||||||||||
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| ||||||||||
| | | | | | | | | | | ||||||||||
| | | | Annualized long-term redemption rates | | | | |||||||||||||
| | | | (excludes money market redemptions) | | | | |||||||||||||
| | Three months ended | | | Nine months ended | | ||||||||||||||
| | September 30, | | | September 30, | | ||||||||||||||
|
| 2019 |
| 2018 |
| | 2019 |
| 2018 |
| ||||||||||
Unaffiliated channel |
| 31.8 | % | 33.0 | % |
| 34.1 | % | 40.8 | % |
| 40.9 | % | 31.8 | % | | 37.8 | % | 34.1 | % |
Institutional channel |
| 40.8 | % | 67.3 | % |
| 64.3 | % | 53.7 | % |
| 23.9 | % | 40.8 | % | | 35.5 | % | 64.3 | % |
Broker-Dealer channel |
| 12.9 | % | 16.4 | % |
| 14.1 | % | 15.4 | % | ||||||||||
Wealth Management channel |
| 13.4 | % | 12.9 | % | | 13.9 | % | 14.1 | % | ||||||||||
Total |
| 22.1 | % | 27.1 | % |
| 25.5 | % | 28.5 | % |
| 24.3 | % | 22.1 | % | | 24.2 | % | 25.5 | % |
The decreased long-term redemption rate for the three and nine months ended September 30, 20182019 increased in the unaffiliated channel was driven primarily by improved redemption rates inas compared to the Ivy Asset Strategy Fundthree and the Ivy VIP Asset Strategy Fund (the “Asset Strategy funds”). Redemptions in the Asset Strategy funds represented approximately 9% of the unaffiliated channel’s redemptions for the nine months ended September 30, 2018, reduced from 21%2018. For both comparative periods, increased volatility in the nine months ended September 30, 2017.equity markets in recent quarters led to continued redemptions, particularly in our International Core Equity fund. The decreased long-term redemption rate for the third quarter of 2018 as compared to the same period in 2017has decreased in the institutional channel, wasprimarily due to larger client redemptions in the third quarter of 2017, primarily in our Core Equity strategy. The increased long-term redemption rate for the nine months ended September 30, 2018 in the institutional channel was due to larger client redemptions than the comparative period primarily$1.3 billion from our Core Equity and Large Cap Growth strategies. Additionally, we havestrategies during the second quarter of 2018. We had been previously notified of approximately $1.0$0.5 billion of redemptions in ourthe institutional channel forof which $0.3 billion was redeemed during the fourthsecond quarter of 2018, of which $0.6 billion has been2019 and the remainder was redeemed in October 2018. The redemptions are a result of a variety of factors including performance, a move to passive and personnel turnover. The decreased redemption rate in the broker-dealer channel for the three months ended September 30, 2018 reflects a reduction in redemption rates in this channel after the 2017 launch of the MAP Navigator product.2019. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods.
Our overall current year-to-date annualized redemption rate of 25.5% is slightly higher than theThe current year-to-date industry average of approximately 23.0%,redemption rate, based on data fromprovided by the Investment Company Institute.Institute, was 22.1%, versus our rate of 24.2%.
31
33
Underwriting and Distribution Fee Revenues
The following tables summarize the significant components of underwriting and distribution fee revenues by distribution channel:
| | | | | | | |
| | For the three months ended September 30, 2019 | |||||
|
| |
| Wealth | | | |
|
| Unaffiliated |
| Management | | Total | |
|
| (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Fee-based asset allocation product revenues | | $ | — |
| 73,356 |
| 73,356 |
Rule 12b-1 service and distribution fees |
| | 16,003 |
| 16,426 |
| 32,429 |
Sales commissions on front-end load mutual fund and variable annuity products | |
| 361 | | 12,523 |
| 12,884 |
Sales commissions on other products | |
| — |
| 8,024 |
| 8,024 |
Other revenues | |
| 67 |
| 9,027 |
| 9,094 |
Total |
| $ | 16,431 |
| 119,356 |
| 135,787 |
| | | | | | | |
| | For the three months ended September 30, 2018 | |||||
| | |
| Wealth | | | |
| | Unaffiliated |
| Management | | Total | |
| | (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Fee-based asset allocation product revenues |
| $ | — |
| 69,468 |
| 69,468 |
Rule 12b-1 service and distribution fees | |
| 19,707 |
| 18,106 |
| 37,813 |
Sales commissions on front-end load mutual fund and variable annuity products | |
| 441 |
| 13,651 |
| 14,092 |
Sales commissions on other products | |
| — |
| 9,111 |
| 9,111 |
Other revenues | |
| 126 |
| 9,698 |
| 9,824 |
Total |
| $ | 20,274 |
| 120,034 |
| 140,308 |
| | | | | | | |
| | For the nine months ended September 30, 2019 | |||||
|
| |
| Wealth | | | |
|
| Unaffiliated |
| Management | | Total | |
|
| (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Fee-based asset allocation product revenues |
| $ | — |
| 208,806 |
| 208,806 |
Rule 12b-1 service and distribution fees | |
| 48,514 |
| 48,441 |
| 96,955 |
Sales commissions on front-end load mutual fund and variable annuity products | |
| 1,287 |
| 36,845 |
| 38,132 |
Sales commissions on other products | |
| — |
| 24,127 |
| 24,127 |
Other revenues | |
| 242 |
| 27,265 |
| 27,507 |
Total |
| $ | 50,043 |
| 345,484 |
| 395,527 |
| | | | | | | |
| | For the nine months ended September 30, 2018 | |||||
| | |
| Wealth | | | |
| | Unaffiliated |
| Management | | Total | |
| | (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Fee-based asset allocation product revenues |
| $ | — |
| 201,565 |
| 201,565 |
Rule 12b-1 service and distribution fees | |
| 60,734 |
| 54,591 |
| 115,325 |
Sales commissions on front-end load mutual fund and variable annuity products | |
| 1,418 |
| 41,900 |
| 43,318 |
Sales commissions on other products | |
| — |
| 26,632 |
| 26,632 |
Other revenues | |
| 459 |
| 28,923 |
| 29,382 |
Total |
| $ | 62,611 |
| 353,611 |
| 416,222 |
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2018 | |||||
|
|
|
| Broker- |
|
| |
|
| Unaffiliated |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Fee-based asset allocation product revenues |
| $ | — |
| 69,468 |
| 69,468 |
Rule 12b-1 service and distribution fees |
|
| 19,707 |
| 18,106 |
| 37,813 |
Sales commissions on front-end load mutual fund and variable annuity products |
|
| 441 |
| 13,651 |
| 14,092 |
Sales commissions on other products |
|
| — |
| 9,111 |
| 9,111 |
Other revenues |
|
| 126 |
| 9,698 |
| 9,824 |
Total |
| $ | 20,274 |
| 120,034 |
| 140,308 |
32
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2017 | |||||
|
|
|
| Broker- |
|
| |
|
| Unaffiliated |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Fee-based asset allocation product revenues |
| $ | — |
| 61,115 |
| 61,115 |
Rule 12b-1 service and distribution fees |
|
| 22,322 |
| 19,026 |
| 41,348 |
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 nine months ended September 30, 2018 | |||||
|
|
|
| Broker- |
|
| |
|
| Unaffiliated |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Fee-based asset allocation product revenues |
| $ | — |
| 201,565 |
| 201,565 |
Rule 12b-1 service and distribution fees |
|
| 60,734 |
| 54,591 |
| 115,325 |
Sales commissions on front-end load mutual fund and variable annuity products |
|
| 1,418 |
| 41,900 |
| 43,318 |
Sales commissions on other products |
|
| — |
| 26,632 |
| 26,632 |
Other revenues |
|
| 459 |
| 28,923 |
| 29,382 |
Total |
| $ | 62,611 |
| 353,611 |
| 416,222 |
34
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 | |||||
|
|
|
| Broker- |
|
| |
|
| Unaffiliated |
| Dealer |
| Total | |
|
| (in thousands) | |||||
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues |
|
|
|
|
|
|
|
Fee-based asset allocation product revenues |
| $ | — |
| 176,184 |
| 176,184 |
Rule 12b-1 service and distribution fees |
|
| 69,191 |
| 56,544 |
| 125,735 |
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 |
| | | | | | | |
Underwriting and distribution revenues earned in the third quarter of 2018 increased2019 decreased by $11.4$4.5 million, or 9%3%, compared to the third quarter of 2017,2018. For the nine months ended September 30, 2019, underwriting and distribution revenues decreased by $20.7 million, or 5%, compared to the nine months ended September 30, 2018. For both comparative periods, the decreases were primarily driven by an increase in fee-based asset allocation product revenues of $8.4 million in the broker-dealer channel, partially offset by a decrease in Rule 12b-1 asset-based service and distribution fees and commissionable sales across both channels. Fee-based asset allocation product revenues increased primarily due to an increasechannels, partially offset by increases in fee-based asset allocation assets of $3.2 billion, or 16%, whilerevenues. Rule 12b-1 asset-based service and distribution fees decreased due to a decrease in average mutual fund assets under managementAUM for which we earn Rule 12b-1 revenues. Additionally, other revenues increased $4.7 million in the third quarter of 2018 compared to the third quarter of 2017sales commissions decreased primarily due to an increase in payments received from independent financial advisors for services.
For the nine months ended September 30, 2018, underwriting and distribution revenues increased by $29.7 million, or 8%, compared to the nine months ended September 30, 2017, primarily driven by an increase in fee-based asset allocation product revenues of $25.4 million in the broker-dealer channel, partially offset by a decrease in Rule 12b-1 asset-based servicemutual fund and distribution fees across both channels.variable annuity product commissionable sales. Fee-based asset allocation product revenues increased primarily due to an increase in fee-based asset allocation assetsassets.
Shareholder Service Fee Revenue
During the third quarter of $3.2 billion,2019, shareholder service fee revenue decreased $2.4 million, or 17%9%, while Rule 12b-1 asset-based service and distribution fees decreased duecompared to a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues. Additionally, other revenues increased $11.4 million inthe third quarter of 2018. For the nine months ended September 30, 20182019, shareholder service fee revenue decreased $8.2 million, or 10%, as compared to the same period in 2017 primarily due to an increase in payments received from independent financial advisors for services.
Shareholder Service Fee Revenue
During the third quarter of 2018, shareholder service fee revenue decreased slightly compared to the third quarter of 20172018. Decreases for both comparative periods were primarily due to a decrease in the number of accounts and decreased Fund administrative and accounting serviceassets on which these fees are based, in part due to the fund mergers in October 2017 and February 2018. These decreases were partially offset by increases in asset based services fees,
Total Operating Expenses
Operating expenses for the third quarter of 2019 decreased $5.0 million, or 2%, compared to the third quarter of 2018, primarily due to an increase in assets,decreased occupancy and custodian fees due to a change in fees that now includes broker-dealer advisory accounts.
Duringdepreciation expenses. For the nine months ended September 30, 2018, shareholder service fee revenue2019, operating expenses decreased $2.2$27.0 million, or 3%4%, compared to the nine months ended September 30, 2017. Fund service fees decreased $3.7 million, or 14%,2018, primarily due to a decreasedecreased compensation and benefits, general and administrative costs and depreciation expenses. We have been able to successfully reduce expenses during the year as we execute our corporate strategy while investing in the numbertargeted growth areas.
| | | | | | | | |
| | Three months ended | | | | |||
| | September 30, | | | | |||
|
| 2019 |
| 2018 |
| Variance |
| |
| | (in thousands) | | | | |||
Distribution | | $ | 117,425 |
| 116,591 |
| 1 | % |
Compensation and benefits | |
| 64,999 |
| 64,561 |
| 1 | % |
General and administrative | |
| 16,680 |
| 17,559 |
| (5) | % |
Technology | |
| 15,019 |
| 15,414 |
| (3) | % |
Occupancy | |
| 5,684 |
| 7,148 |
| (20) | % |
Marketing and advertising | |
| 2,134 |
| 2,461 |
| (13) | % |
Depreciation | | | 4,833 | | 8,141 | | (41) | % |
Subadvisory fees | | | 3,882 | | 3,767 | | 3 | % |
Total operating expenses | | $ | 230,656 |
| 235,642 |
| (2) | % |
| | | | | | | | |
| | Nine months ended | | | | |||
|
| September 30, | | | | |||
|
| 2019 |
| 2018 |
| Variance |
| |
| | (in thousands) | | | | |||
Distribution | | $ | 343,696 |
| 345,376 |
| (0) | % |
Compensation and benefits | |
| 191,718 |
| 199,174 |
| (4) | % |
General and administrative | |
| 47,421 |
| 56,240 |
| (16) | % |
Technology | |
| 47,769 |
| 49,293 |
| (3) | % |
Occupancy | |
| 19,100 |
| 21,081 |
| (9) | % |
Marketing and advertising | | | 6,497 | | 7,638 | | (15) | % |
Depreciation | | | 16,062 | | 19,262 | | (17) | % |
Subadvisory fees | | | 11,154 | | 11,158 | | (0) | % |
Intangible asset impairment | | | — | | 1,200 | | (100) | % |
Total operating expenses | | $ | 683,417 |
| 710,422 |
| (4) | % |
33
OperatingDistribution expenses for the third quarter of 2018 were relatively unchanged2019 increased by $0.8 million, or 1%, compared to the third quarter of 2017.2018. For the nine months ended September 30, 2018, operating2019, distribution expenses increased $5.7 million, or 1%,decreased slightly compared to the first nine months of 2017, primarily due to increased distribution and depreciation expenses, partially offset by decreases in compensation and benefits and general and administrative costs. In August 2017, we announced a cost reduction plan which we plan to complete by 2019.
35
|
|
|
|
|
|
|
|
|
|
| Three months ended |
|
|
| |||
|
| September 30, |
|
|
| |||
|
| 2018 |
| 2017 |
| Variance |
| |
|
| (in thousands) |
|
|
| |||
|
|
|
|
|
|
|
|
|
Distribution |
| $ | 116,591 |
| 106,878 |
| 9 | % |
Compensation and benefits |
|
| 64,561 |
| 69,636 |
| (7) | % |
General and administrative |
|
| 17,559 |
| 23,400 |
| (25) | % |
Technology |
|
| 15,414 |
| 16,039 |
| (4) | % |
Occupancy |
|
| 7,148 |
| 7,645 |
| (7) | % |
Marketing and advertising |
|
| 2,461 |
| 3,197 |
| (23) | % |
Depreciation |
|
| 8,141 |
| 5,230 |
| 56 | % |
Subadvisory fees |
|
| 3,767 |
| 3,566 |
| 6 | % |
Intangible asset impairment |
|
| — |
| — |
| — |
|
Total operating expenses |
| $ | 235,642 |
| 235,591 |
| 0 | % |
|
|
|
|
|
|
|
|
|
|
| Nine months ended |
|
|
| |||
|
| September 30, |
|
|
| |||
|
| 2018 |
| 2017 |
| Variance |
| |
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
| |||
|
|
|
|
|
|
|
|
|
Distribution |
| $ | 345,376 |
| 324,375 |
| 6 | % |
Compensation and benefits |
|
| 199,174 |
| 202,003 |
| (1) | % |
General and administrative |
|
| 56,240 |
| 68,882 |
| (18) | % |
Technology |
|
| 49,293 |
| 50,796 |
| (3) | % |
Occupancy |
|
| 21,081 |
| 22,978 |
| (8) | % |
Marketing and advertising |
|
| 7,638 |
| 9,072 |
| (16) | % |
Depreciation |
|
| 19,262 |
| 15,626 |
| 23 | % |
Subadvisory fees |
|
| 11,158 |
| 9,457 |
| 18 | % |
Intangible asset impairment |
|
| 1,200 |
| 1,500 |
| (20) | % |
Total operating expenses |
| $ | 710,422 |
| 704,689 |
| 1 | % |
Distribution expensessame period for the third quarter of 2018 increased by $9.7 million, or 9%, compared to the third quarter of 2017. Expenses in the broker-dealer channel increased $13.4 million, or 18%, primarily due to higher2018. For both comparative periods, Rule 12b-1 commissions paid to independent financial advisors under the new commission structure that became effective on January 1, 2018 and higher commissions on our asset-based advisory productsthird parties decreased due to advisory asset growth. Distribution expenses in the unaffiliated channel decreased by $3.7 million due to a decrease inlower average mutual fund assets under management for which we pay Rule 12b-1 commissions to third party distributors.
For the nine months ended September 30, 3018, distribution expenses increasedAUM in our unaffiliated channel. This decrease in expense was more than offset by $21.0 million, or 6%, comparedenhancements to the first nine months of 2017. ExpensesAdvisor compensation grid in the broker-dealerour wealth management channel increased $32.5 million, or 14%, primarily due to higher commissions paid to independent financial advisors under the new commission structure that became effective on January 1, 2018 and higher commissions on our asset-based advisory products due to advisory asset growth. Distribution expensesstarting in the unaffiliated channel decreased by $11.5 million due to a decrease in average mutual fund assets under management for which we pay Rule 12b-1 commissions to third party distributors.2019.
Compensation and benefits during the third quarter of 2018 decreased $5.12019 increased $0.4 million, or 7%1%, compared to the same period of 2018, due to severance expense, primarily related to the outsourcing of our transfer agency transactional processing operations. The increase was partially offset by lower costs from reduced headcount as well as a $1.3 million decrease in share-based compensation due to previously issued awards vesting fully as well as forfeitures. For the nine months ended September 30, 2019, compensation and benefits expenses decreased $7.5 million, or 4%, compared to the same period in 2018, primarily due to a decrease in share-based compensation from previously issued awards vesting fully, forfeitures and prior year accelerated vestings as well as lower costs from reduced headcount. These decreases were partially offset by increased severance expense, primarily related to the aforementioned outsourcing. The Company expects to record the remaining amount of the previously disclosed $4.0 million - $6.0 million pre-tax restructuring charge for severance benefits due to the outsourcing of the transactional processing operations of its internal transfer agency during the fourth quarter of 2019.
General and administrative expenses for the third quarter of 2019 decreased $0.9 million, or 5%, compared to the third quarter of 2017.2018. The decrease iswas primarily due to a a $3.0 million decreasedecreases in pension expense as a result of the Pension Plan freeze as of September 30, 2017, a $2.1 million decreasecontractor, legal and consulting costs due to a discretionary 401(k) contributionthe completion of significant projects in 2017 and a $1.3 million decrease related to share-based compensation primarily driven by changes in the Company’s share price. Partially offsetting these decreases was a $1.3 million increase in base compensation from merit increases.
2018. For the nine months ended September 30, 2018, compensation2019, general and benefitsadministrative expenses decreased $2.8$8.8 million, or 1%16%, compared to the nine months ended September 30, 2017.2018. The decrease iswas primarily due to a $8.4 million decreasedecreases in pension expense as a result of the Pension Plan freeze and a $2.1 million decrease due to a discretionary 401(k) contribution in 2017. Partially offsetting these decreases was a combined $8.3 million increase in base compensation from merit increases and the 2017 change in field leader compensation structure, resulting in that compensation being recorded in the compensation
36
and benefits line as opposed to distribution expense.
General and administrative expenses in the third quarter of 2018 decreased $5.8 million, compared to the third quarter of 2017. The decrease was mainly due to a decrease incontractor, legal and consulting costs due to the completion of significant projects in 2018. Fund expenses also decreased for the comparative period primarily due to decreased fee waivers in excess of revenue on certain projects,products.
Technology, occupancy and marketing and advertising expenses for the third quarter of 2019 decreased a decreasecombined $2.2 million, or 9%, and for the nine months ended September 30, 2019, decreased $4.6 million, or 6%, compared to the same periods in temporary staff2018. Technology costs decreased due to lower shareholder servicing expense resulting from fewer accounts and a decrease innon-recurring benefit from the outsourcing of our transfer agency transactional processing. These decreases were partially offset by costs from the centralized advisor desktop platform which was rolled out during the second quarter of 2019. Occupancy costs decreased as we realized cost savings from the closure of our field offices. Marketing and advertising expenses decreased as prior period fund expenses relatedmergers have reduced fund-related marketing expenses.
Depreciation expense for third quarter of 2019 decreased $3.3 million, or 41%, compared to prior year fund launches and fund mergers.the third quarter of 2018. For the nine months ended September 30, 2018, general and administrative expenses2019, depreciation expense decreased $12.6$3.2 million, or 17%, compared to the same period in 2017. The2018. For both comparative periods, the decrease was mainlyprimarily due to a decrease in legal and consulting costs due tocertain fixed assets reaching the completionend of certain projects, a decrease in temporary staff expense and a decrease in fund expenses due to fund launches and fund mergers in the prior year.their useful lives.
Occupancy and Marketing and advertising costs decreased a combined $1.2 million in the third quarter of 2018 compared to the third quarter of 2017 and decreased a combined $3.3 million in theThe nine months ended September 30, 2018 compared to the same period in 2017. For both comparative periods, costs decreased primarily due to lower office space rent as a resultincluded an intangible impairment charge of fewer field office leased locations and less advertising spend as we continue to evolve our broker-dealer market structure.
Depreciation increased for both comparative periods primarily due$1.2 million related to a charge of $2.4 million interminated subadvisory agreement.
Investment and Other Income
Investment and other income for the third quarter of 2018 to adjust the useful life on certain internally developed software assets.
Subadvisory fees are paid to other asset managers for providing advisory services for certain mutual fund portfolios,three and subadvised products generally have a lower operating margin.
Subadvisory expenses increased $0.2 million in the third quarter of 2018 compared to the third quarter of 2017 due to an increase in subadvised average assets of 8%. Quarterly subadvised average assets under management at September 30, 2018were $5.8 billion compared to $5.3 billion at September 30, 2017. Subadvisory expenses increased $1.7 million for the nine months ended September 30, 20182019 increased $3.5 million and $18.3 million, respectively, compared to the same periodperiods in 2017,2018 primarily due to market appreciation, net of hedging activity, and an increase in subadvised average assets of 12%. Year-to-date subadvised average assets under management at September 30, 2018 were $5.8 billion compared to $5.1 billion at September 30, 2017. The increase in subadvised average assets for both comparative periods is primarily due to the launch of Ivy Proshares in April of 2017 and the introduction of the Wilshire Global Allocation Fund in May of 2017.
Investment and Other Income
Investment and other income was $1.7 million for the three months ended September 30, 2018 compared to $33.3 million for the same period in 2017. In the third quarter of 2018, we recognized $3.8 million in dividend, capital gain distributions and interest income. The third quarter of 2018 also included $3.1 million of net losses related to our seed capital investments and associated hedges, $0.6 million in mark-to-market pension gains and $0.4 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. During the third quarter of 2017, we recognized $3.3 million in dividend and interest income and gains on the sales of sponsored funds held as available for sale, $1.9 million of net gains related toin our seed capital investments and associated hedges and $2.0 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. The third quarter of 2017 also included net gains of $25.1 million related to the freeze of our Pension Plan on September 30, 2017.corporate investment portfolio.
Investment and other income was $5.4 million for the nine months ended September 30, 2018 compared to $39.3 million for the same period in 2017. For the nine months ended September 30, 2018, we recognized $11.3 million in dividend, capital gain distributions and interest income. The first nine months of 2018 also included $8.6 million of net losses related to our seed capital investments and associated hedges, $1.7 million in mark-to-market pension gains and $0.7 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. During the nine months ended September 30, 2017, we recognized $6.1 million in dividend and interest income and gains on the sales of sponsored funds held as available for sale, $0.6 million of net gains related to our seed capital investments and associated hedges and $4.2 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. The first nine months of 2017 also included net gains of $25.1 million related to the freeze of our Pension Plan on September 30, 2017.
As a result of the change of accounting method for the Pension Plan enacted in the fourth quarter of 2017, the Company’s pension liability will be marked-to-market in the fourth quarter of 2018.
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Taxes
Interest Expense
Interest expense was $1.6 million and $2.8 million in the third quarter of 2018 and 2017, respectively. Interest expense was $4.9 million and $8.4 million for the nine months ended September 30, 2018, and September 30, 2017, respectively. The majority of our interest expense is fixed based on our Series A and Series B senior unsecured notes. The $95.0 million Series A senior unsecured notes were repaid upon maturity in January 2018. As a result, interest expense declined in both comparative periods, and we anticipate $4.8 million in annualized interest expense savings.
Taxes
The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the three and nine months ended September 30, 20182019 and 2017.2018:
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| September 30, |
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| 2018 |
| 2017 |
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| 2017 |
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| Three months ended | | | Nine months ended | | |||||||||||||||
| | September 30, | | | September 30, | | |||||||||||||||
| | 2019 |
| 2018 | | | 2019 |
| 2018 | | |||||||||||
Statutory federal income tax rate |
| 21.0 | % | 35.0 | % |
| 21.0 | % | 35.0 | % |
|
| 21.0 | % | 21.0 | % | | 21.0 | % | 21.0 | % |
State income taxes, net of federal tax benefit |
| 2.7 |
| 2.4 |
| 2.8 |
| 2.3 |
|
| 2.7 | | 2.7 | | | 2.8 | | 2.8 | | ||
Effects of U.S. tax rate decrease |
| (1.7) |
| — |
| (0.6) |
| — |
| | — | | (1.7) | | | — | | (0.6) | | ||
Share-based compensation |
| (0.4) |
| (1.0) |
| 2.3 |
| 3.9 |
| | (0.5) | | (0.4) | | | 1.6 | | 2.3 | | ||
Uncertain tax positions |
| 0.4 |
| (1.0) |
| (2.9) |
| (0.2) |
|
| 0.1 | | 0.4 | | | 0.2 | | (2.9) | | ||
Other items |
| — |
| (0.4) |
| 0.6 |
| (1.3) |
|
| — | | — | | | 0.2 | | 0.6 | | ||
Effective income tax rate |
| 22.0 | % | 35.0 | % |
| 23.2 | % | 39.7 | % |
|
| 23.3 | % | 22.0 | % | | 25.8 | % | 23.2 | % |
Our effective income tax rate was 22.0%23.3% and 23.2%25.8% for the three and nine months ended September 30, 2018,2019, as compared to 35.0%22.0% and 39.7%23.2% for the same periods in 2017. The effective2018. During the third quarter of 2018, we adjusted our net deferred tax rate in 2018 was lower primarily dueasset for provision-to-return adjustments related to the 2017 tax year. Accordingly, we recognized a discrete tax benefit of $1.0 million as a result of this provision-to-return revaluation and the related impact of the statutory federal statutory tax rate decrease from 35% to 21% effective January 1, 2018.
The enactment of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017 significantly revised the U.S. Corporate income tax system. As a result of the Tax Reform Act, the Company recorded a one-time charge of $5.4 million in the fourth quarter of 2017 to measure our net deferred tax assets at the reduced federal statutory rate. According to guidance from Staff Accounting Bulletin 118, the Company recognized a provisional tax impact related to the revaluation of deferred tax assets and liabilities and included those amounts in its consolidated financial statements for the year ended December 31, 2017. In the third quarter of 2018, we finalized our 2017 U.S. corporate income tax return and revised provisional adjustments made to our net deferred tax asset. Accordingly, we recorded a discrete tax benefit of $1.0 million in the three months ended September 30, 2018,, which decreasedincreased the three and nine month effective tax raterates by 1.7% and 0.6%, respectively. The Company now considers its accounting for the income tax effects of the Tax Reform Act to be complete.
Other factors affecting the rate for the nine month comparison periodmonths ended September 30, 2018 included the reversal of previously recorded uncertain tax expense upon the completion of a voluntary disclosure agreement with a state tax jurisdiction, during 2018, which decreased the rate by 3.6%. The tax impact of share-based compensation created a tax shortfall in both years, but the impact was greater in 2017 mostly due to a larger differential between grant date and vest date prices on restricted stock awards at vesting, which decreased the rate 2.7% and was partially offset by a lesser benefit on unvested restricted stock dividend payments in 2018.for that period.
The Company expects continued future volatility in its effective tax rate in 2019 as the tax effects of share-based compensation will be impacted by market fluctuations in our stock price. Based on current estimates, the Company expects a tax shortfall from share-based payments of $1.5 to $2.0 million in 2019, primarily in the second quarter. The Company expects its future effective tax rate exclusive of the effects of share-based payments,could also experience volatility from federal and state tax incentives, unanticipated federal and state tax legislative changes, and unanticipated fluctuations in earnings to range from 23% to 25%.earnings.
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Liquidity and Capital Resources
Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund the Company’s short-term operating and capital requirements. Expected short-term uses of cash include dividend payments, repurchases of our Class A common stock, interest on indebtedness, income tax payments, seed money for new products, ongoing technology enhancements, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.
Expected long-term capital requirements include interest on indebtedness and maturities of outstanding debt, operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchases of our Class A common stock.
Our operations provide much of the cash necessary to fund our priorities, as follows:
| Repurchase our stock |
| Pay dividends |
| Finance |
As part of our regular assessment of the return of capital to stockholders, we implemented a revisedOur existing capital return policy in the fourth quarter of 2017 that is designed to provide greater financial flexibility to invest in our business, support ongoing operations and maintain a strong balance sheet, while continuing to provide a very competitive return to stockholders. The components of the capital return policy are described below.
35
Repurchase Our Stock
We repurchased 4,519,5466,849,238 shares and 904,4104,519,546 shares of our Class A common stock in the open market or privately during the nine months ended September 30, 20182019 and 2017,2018, respectively, resulting in share repurchases of $89.0$116.7 million and $15.6$89.0 million, respectively.
In connection with our existing capital return policy, during the third quarter of 2019, we intendcompleted the two-year initiative to complete the repurchase of $250 million of our Class A common stock throughby late 2019, which iswas inclusive of buybacks to offset dilution of our equity grants.awards. We continue to engage in an opportunisticactive share repurchase plan to fulfill the targeted buybacks. We have repurchased $109.1 millionas part of our Class A common stock since the announcement of this program in the fourth quarter of 2017 at a weighted average share price of $20.00.ongoing capital management plan.
Pay Dividends
We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of $61.5$56.6 million and $115.7$61.5 million for the first nine months of 20182019 and 2017,2018, respectively.
The Board of Directors approved a dividend on our Class A common stock of $0.25 per share that was paid onwith a November 1, 2018 to stockholders of record on2019 payment date and an October 11, 2018.2019 record date.
Finance Internal Growth Objectives
We use cash to fund growth in our distribution channels. We continue to invest in our broker-dealerwealth management channel by offering home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our brokerage and product platform. We use cash to fund growth in our distribution channels.wealth management platforms. Our unaffiliated channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred loaddeferred-load product sales. We also provide seed money for new products to further enhance our product offerings and distribution efforts. As we continue to advance our investment in improved technology, we expect increased costs in this area in the near term.
Operating Cash Flows
Cash from operations increased $275.9is our primary source of funds. Cash from operations decreased $179.5 million for the nine months ended September 30, 20182019 compared to the nine months ended September 30, 2017.2018. The increasedecrease is primarily due to an increase in cash generated from investment activity of $239.3 million and an increasea decrease in net income, net purchases, maturities and sales of $22.8 million.trading and equity securities, net change in equity and trading debt securities held by consolidated sponsored funds and fluctuations in assets and liabilities, as described below.
The payable to investment companies for securities, payable to customers and other receivables accounts can fluctuate significantly based on trading activity at the end of a reporting period. Changes in these accounts resulted in variances within cash from operations on the statement of cash flows; however, there is no impact to the Company’s liquidity and operations fordue to the variances in these accounts.
Investing Cash Flows
Cash from investing activities increased $241.6During the year, cash provided by operations was $84.2 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarilyand was reduced due to a decrease in restricted cash balances of $234.7$36.2 million related to customer trading activity.
Investing activities consist primarily of the seeding and sale of sponsored investment securities, purchases and maturities of investments held in our corporate investment portfolio and capital expenditures.
Financing activities include payment of dividends and repurchases of our Class A common stock. Additionally, in the purchasesfirst quarter of available for sale and equity method securities.
39
Financing Cash Flows
The2018, financing activities included repayment of our $95.0 million Series A senior unsecured notes in January of 2018, stock repurchases of $88.2 million and dividends of $61.5 million accounted for the majority of our financing cash outflows in the first nine months of 2018. Dividends of $115.7 million and stock repurchases of $15.6 million accounted for the majority of our financing cash outflows in the first nine months of 2017.at maturity. Future financing cash outflows will be affected by the newexisting capital return policy.
Future Capital Requirements
Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements during 2018. Expected short term uses of cash include dividend payments, repurchases of our Class A common stock, interest on indebtedness, income tax payments, seed money for new products, ongoing technology enhancements, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.
Expected long term capital requirements include interest on indebtedness and maturities of outstanding debt, operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchases of our Class A common stock.
Critical Accounting Policies and Estimates
There have been no material changes in the critical accounting policies and estimates disclosed in the “Critical Accounting Policies and Estimates” section of our 20172018 Form 10-K, except for the removal10-K.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices. The Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, 2017. As further described2018 other than the changes to the investment and derivative portfolios disclosed in Note 4 and Note 5 to the unaudited consolidated financial statements,statements. As further described in Note 5, the Company has an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in sponsored funds.
Item 4. | Controls and Procedures |
Item 4.Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2018,2019, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.2019.
The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 20182019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
40
reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Part II. | Other Information |
See Part I, Item 1, Notes to the Unaudited Consolidated Financial Statements, Note 11 – Contingencies, of this Quarterly Report on Form 10-Q.
Item 1A. | Risk Factors |
Except as noted below, there have been no material changes to the Company’s Risk Factors from those previously reported in the Company’s 20172018 Form 10-K.
Regulatory Risk Is Substantial In Our Business And Regulatory Reforms Could Have A Material Adverse Effect On Our Business, Reputation And Prospects.
In March 2018,June 2019, the U.S. CourtSEC adopted a package of Appeals forrulemakings and interpretations, including Regulation Best Interest and the Fifth Circuit vacatednew Form CRS Relationship Summary (“Form CRS”), which are intended to enhance the DOL Fiduciary Rule. Althoughquality and transparency of retail investors’ relationships with broker-dealers and investment advisers. Regulation Best Interest enhances the DOL Fiduciary Rule has been vacated, other regulators have enacted or proposed other fiduciary standards that could require modificationsbroker-dealer standard of conduct beyond existing suitability obligations and requires compliance with disclosure, care, conflict of interest and compliance obligations. Form CRS requires broker-dealers and registered investment advisers to our distribution activities and may impact our abilityprovide a brief relationship summary to service clients or engage in certainretail investors, including (i) the types of distribution or other business activities.
In April 2018,client and customer relationships and services the SEC proposed its own fiduciary rule that would impose a newfirm offers, (ii) the fees, costs, conflicts of interest and required standard of careconduct associated with those relationships and services, (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm. The compliance date for Regulation Best Interest and Form CRS is June 30, 2020. These regulations may have a material impact on broker-dealers when making recommendationsthe provision of investment services to both retirementretail investors, including imposing additional compliance, reporting and non-retirement accounts. In addition, various states have also implemented or proposed new fiduciary requirements. operational requirements, which could negatively affect our business.
Specific references in the Risk Factors reported in the Company’s 20172018 Form 10-K regarding the impact the DOL Fiduciary Rulethat new fiduciary standards may have on the Company should be read to refer generallyinclude best interest standards, including the SEC’s Regulation Best Interest.
37
We remain subject to “new fiduciary standards”,various state and federal laws and regulations related to data privacy and protection of data we maintain concerning certain individuals, including Fund shareholders, our clients, Advisors’ clients and our employees. For example, the State of California recently enacted the California Consumer Privacy Act of 2018, which would include any fiduciary standards imposed bywill be effective January 1, 2020 and, among other things, creates detailed notice, opt-out/opt-in, access and erasure rights for consumers vis-à-vis business that collect their personal information, and provides a new private cause of action for data breaches. Other states have enacted or proposed, or in the DOL,future may enact, similar data privacy and protection legislation. Privacy and data protection laws and regulations could impose significant limitations, require changes to our business, restrict our use or storage of personal information and subject us to legal liability or regulatory action, which may result in increased compliance expenses, fines or penalties, the SEC or any states.termination of client contracts, costly mitigation activities and harm to our reputation.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth certain information about the shares of Class A common stock we repurchased during the third quarter of 2018.2019.
| | | | | | | | | |
|
| |
| | |
| Total Number of |
| Maximum Number (or |
| | | | | | | Shares | | Approximate Dollar |
| | | | | | | Purchased as | | Value) of Shares That |
| | Total Number | | Average | | Part of Publicly | | May Yet Be | |
| | of Shares | | Price Paid | | Announced | | Purchased Under The | |
Period | | Purchased | | per Share | | Program (1) | | Program (1) | |
July 1 - July 31 |
| 715,000 | | $ | 16.94 |
| 715,000 |
| n/a |
August 1 - August 31 |
| 1,270,019 | |
| 15.91 |
| 1,270,000 |
| n/a |
September 1 - September 30 |
| 495,000 | |
| 16.97 |
| 495,000 |
| n/a |
Total |
| 2,480,019 | | $ | 16.42 |
| 2,480,000 | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Number of |
| Maximum Number (or |
|
|
|
|
|
|
|
| Shares |
| Approximate Dollar |
|
|
|
|
|
|
|
| Purchased as |
| Value) of Shares That |
|
|
| Total Number |
| Average |
| Part of Publicly |
| May Yet Be |
| |
|
| of Shares |
| Price Paid |
| Announced |
| Purchased Under The |
| |
Period |
| Purchased (1) |
| per Share |
| Program |
| Program |
| |
July 1 - July 31 |
| 597,487 |
| $ | 18.97 |
| 597,487 |
| n/a | (1) |
Aug 1 - Aug 31 |
| 360,225 |
|
| 20.51 |
| 360,000 |
| n/a | (1) |
Sep 1 - Sep 30 |
| 466,900 |
|
| 20.66 |
| 466,900 |
| n/a | (1) |
Total |
| 1,424,612 |
| $ | 19.91 |
| 1,424,387 |
|
|
|
(1) |
|
|
During the third quarter of 2019, 19 shares were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.
In connection with our existing capital return policy, in the third quarter of 2019 we intendcompleted the two-year initiative to complete the repurchase of $250 million of our Class A common stock throughby late 2019, which iswas inclusive of buybacks to offset dilution of our equity grants.awards. We continue to engage in an opportunisticactive share repurchase plan to fulfill the targeted buybacks. plan.
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|
Exhibits | |
|
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
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39
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 2nd1st day of November 2018.2019.
| 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 Financial Officer (Principal Financial Officer) |
| |
|
|
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