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EXCEL - IDEA: XBRL DOCUMENT - WADDELL & REED FINANCIAL INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - WADDELL & REED FINANCIAL INC | a14-19663_1ex32d1.htm |
EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INC | a14-19663_1ex32d2.htm |
EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INC | a14-19663_1ex31d1.htm |
EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INC | a14-19663_1ex31d2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
o |
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, Kansas 66202
(Address, including zip code, of Registrants principal executive offices)
(913) 236-2000
(Registrants telephone number, including area code)
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 x No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x.
Shares outstanding of each of the registrants classes of common stock as of the latest practicable date:
Class |
|
Outstanding as of October 24, 2014 |
|
Class A common stock, $.01 par value |
|
83,614,054 |
|
WADDELL & REED FINANCIAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Quarter Ended September 30, 2014
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
(in thousands)
|
|
September 30, |
|
|
| |
|
|
2014 |
|
December 31, |
| |
|
|
(unaudited) |
|
2013 |
| |
Assets: |
|
|
|
|
| |
Cash and cash equivalents |
|
$ |
528,967 |
|
487,845 |
|
Cash and cash equivalents - restricted |
|
61,219 |
|
121,419 |
| |
Investment securities |
|
243,921 |
|
201,348 |
| |
Receivables: |
|
|
|
|
| |
Funds and separate accounts |
|
35,760 |
|
36,467 |
| |
Customers and other |
|
165,678 |
|
141,763 |
| |
Deferred income taxes |
|
7,595 |
|
7,654 |
| |
Income taxes receivable |
|
|
|
419 |
| |
Prepaid expenses and other current assets |
|
12,887 |
|
9,410 |
| |
Total current assets |
|
1,056,027 |
|
1,006,325 |
| |
|
|
|
|
|
| |
Property and equipment, net |
|
86,610 |
|
72,638 |
| |
Deferred sales commissions, net |
|
68,074 |
|
79,894 |
| |
Goodwill and identifiable intangible assets |
|
158,123 |
|
161,969 |
| |
Deferred income taxes |
|
5,620 |
|
3,839 |
| |
Other non-current assets |
|
24,575 |
|
12,300 |
| |
Total assets |
|
$ |
1,399,029 |
|
1,336,965 |
|
|
|
|
|
|
| |
Liabilities: |
|
|
|
|
| |
Accounts payable |
|
$ |
19,585 |
|
18,821 |
|
Payable to investment companies for securities |
|
106,695 |
|
214,085 |
| |
Payable to third party brokers |
|
61,347 |
|
59,756 |
| |
Payable to customers |
|
63,205 |
|
8,664 |
| |
Accrued compensation |
|
74,007 |
|
58,677 |
| |
Other current liabilities |
|
48,602 |
|
59,726 |
| |
Current income taxes |
|
3,441 |
|
|
| |
Total current liabilities |
|
376,882 |
|
419,729 |
| |
|
|
|
|
|
| |
Long-term debt |
|
190,000 |
|
190,000 |
| |
Accrued pension and postretirement costs |
|
12,516 |
|
13,333 |
| |
Other non-current liabilities |
|
27,810 |
|
26,561 |
| |
Total liabilities |
|
607,208 |
|
649,623 |
| |
|
|
|
|
|
| |
Commitments and contingencies |
|
|
|
|
| |
|
|
|
|
|
| |
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; 84,064 shares outstanding (85,236 at December 31, 2013) |
|
997 |
|
997 |
| |
Additional paid-in capital |
|
313,086 |
|
267,406 |
| |
Retained earnings |
|
996,683 |
|
850,600 |
| |
Cost of 15,637 common shares in treasury (14,465 at December 31, 2013) |
|
(500,542 |
) |
(415,802 |
) | |
Accumulated other comprehensive loss |
|
(18,403 |
) |
(15,859 |
) | |
Total stockholders equity |
|
791,821 |
|
687,342 |
| |
Total liabilities and stockholders equity |
|
$ |
1,399,029 |
|
1,336,965 |
|
See accompanying notes to the unaudited consolidated financial statements.
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited, in thousands, except for per share data)
|
|
For the three months |
|
For the nine months |
| |||||
|
|
ended September 30, |
|
ended September 30, |
| |||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| |
|
|
|
|
|
|
|
|
|
| |
Revenues: |
|
|
|
|
|
|
|
|
| |
Investment management fees |
|
$ |
197,783 |
|
165,559 |
|
579,444 |
|
470,223 |
|
Underwriting and distribution fees |
|
173,047 |
|
146,863 |
|
507,315 |
|
423,879 |
| |
Shareholder service fees |
|
38,728 |
|
34,667 |
|
113,849 |
|
101,248 |
| |
Total |
|
409,558 |
|
347,089 |
|
1,200,608 |
|
995,350 |
| |
|
|
|
|
|
|
|
|
|
| |
Operating expenses: |
|
|
|
|
|
|
|
|
| |
Underwriting and distribution |
|
197,246 |
|
169,046 |
|
587,805 |
|
495,461 |
| |
Compensation and related costs (including share-based compensation of $12,941, $14,186, $40,620 and $39,192, respectively) |
|
48,375 |
|
49,472 |
|
146,973 |
|
145,003 |
| |
General and administrative |
|
24,924 |
|
20,462 |
|
75,863 |
|
63,608 |
| |
Subadvisory fees |
|
2,203 |
|
1,667 |
|
6,149 |
|
10,442 |
| |
Depreciation |
|
3,786 |
|
3,172 |
|
10,576 |
|
9,621 |
| |
Intangible asset impairment |
|
7,900 |
|
|
|
7,900 |
|
|
| |
Total |
|
284,434 |
|
243,819 |
|
835,266 |
|
724,135 |
| |
|
|
|
|
|
|
|
|
|
| |
Operating income |
|
125,124 |
|
103,270 |
|
365,342 |
|
271,215 |
| |
Investment and other income (loss) |
|
(1,205 |
) |
5,212 |
|
8,795 |
|
10,591 |
| |
Interest expense |
|
(2,769 |
) |
(2,832 |
) |
(8,279 |
) |
(8,544 |
) | |
|
|
|
|
|
|
|
|
|
| |
Income before provision for income taxes |
|
121,150 |
|
105,650 |
|
365,858 |
|
273,262 |
| |
Provision for income taxes |
|
46,564 |
|
37,231 |
|
133,420 |
|
99,023 |
| |
|
|
|
|
|
|
|
|
|
| |
Net income |
|
$ |
74,586 |
|
68,419 |
|
232,438 |
|
174,239 |
|
|
|
|
|
|
|
|
|
|
| |
Net income per share, basic and diluted: |
|
$ |
0.89 |
|
0.80 |
|
2.74 |
|
2.03 |
|
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
| |
Basic |
|
84,242 |
|
85,603 |
|
84,775 |
|
85,688 |
| |
Diluted |
|
84,242 |
|
85,603 |
|
84,775 |
|
85,689 |
|
See accompanying notes to the unaudited consolidated financial statements.
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
|
|
For the three months |
|
For the nine months |
| |||||
|
|
ended September 30, |
|
ended September 30, |
| |||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| |
|
|
|
|
|
|
|
|
|
| |
Net income |
|
$ |
74,586 |
|
68,419 |
|
232,438 |
|
174,239 |
|
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $(11), $12, $(9) and $3, respectively |
|
(4,962 |
) |
4,633 |
|
(3,491 |
) |
4,008 |
| |
|
|
|
|
|
|
|
|
|
| |
Pension and postretirement benefits, net of income tax expense of $186, $480, $558 and $1,633, respectively |
|
315 |
|
816 |
|
947 |
|
2,254 |
| |
|
|
|
|
|
|
|
|
|
| |
Comprehensive income |
|
$ |
69,939 |
|
73,868 |
|
229,894 |
|
180,501 |
|
See accompanying notes to the unaudited consolidated financial statements.
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
For the Nine Months Ended September 30, 2014
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
| |
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
Total |
| |
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Stockholders |
| |||
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Stock |
|
Income (Loss) |
|
Equity |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2013 |
|
99,701 |
|
$ |
997 |
|
267,406 |
|
850,600 |
|
(415,802 |
) |
(15,859 |
) |
687,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income |
|
|
|
|
|
|
|
232,438 |
|
|
|
|
|
232,438 |
| |
Recognition of equity compensation |
|
|
|
|
|
40,620 |
|
|
|
|
|
|
|
40,620 |
| |
Net issuance/forfeiture of nonvested shares |
|
|
|
|
|
(11,405 |
) |
|
|
11,405 |
|
|
|
|
| |
Dividends accrued, $1.02 per share |
|
|
|
|
|
|
|
(86,355 |
) |
|
|
|
|
(86,355 |
) | |
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
16,465 |
|
|
|
|
|
|
|
16,465 |
| |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
(96,145 |
) |
|
|
(96,145 |
) | |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
(2,544 |
) |
(2,544 |
) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at September 30, 2014 |
|
99,701 |
|
$ |
997 |
|
313,086 |
|
996,683 |
|
(500,542 |
) |
(18,403 |
) |
791,821 |
|
See accompanying notes to the unaudited consolidated financial statements.
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|
|
For the nine months |
| |||
|
|
ended September 30, |
| |||
|
|
2014 |
|
2013 |
| |
Cash flows from operating activities: |
|
|
|
|
| |
Net income |
|
$ |
232,438 |
|
174,239 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |
Intangible asset impairment |
|
7,900 |
|
|
| |
Depreciation and amortization |
|
10,695 |
|
10,351 |
| |
Amortization of deferred sales commissions |
|
49,373 |
|
41,569 |
| |
Share-based compensation |
|
40,620 |
|
39,192 |
| |
Excess tax benefits from share-based payment arrangements |
|
(16,465 |
) |
(6,860 |
) | |
Gain on sale of available for sale investment securities |
|
(3,875 |
) |
(7,887 |
) | |
Net purchases and sales or maturities of trading securities |
|
(14,298 |
) |
(27,394 |
) | |
Gain on trading securities |
|
(1,985 |
) |
(2,862 |
) | |
Loss on sale and retirement of property and equipment |
|
1,131 |
|
302 |
| |
Capital gains and dividends reinvested |
|
(14 |
) |
(50 |
) | |
Deferred income taxes |
|
(2,273 |
) |
(7,335 |
) | |
Changes in assets and liabilities: |
|
|
|
|
| |
Cash and cash equivalents - restricted |
|
60,200 |
|
(8,939 |
) | |
Other receivables |
|
(24,263 |
) |
25,501 |
| |
Payable to investment companies for securities and payable to customers |
|
(52,849 |
) |
(28,096 |
) | |
Receivables from funds and separate accounts |
|
707 |
|
53 |
| |
Other assets |
|
(7,934 |
) |
(2,429 |
) | |
Deferred sales commissions |
|
(37,553 |
) |
(48,464 |
) | |
Accounts payable and payable to third party brokers |
|
2,355 |
|
3,734 |
| |
Other liabilities |
|
16,322 |
|
26,769 |
| |
|
|
|
|
|
| |
Net cash provided by operating activities |
|
$ |
260,232 |
|
181,394 |
|
|
|
|
|
|
| |
Cash flows from investing activities: |
|
|
|
|
| |
Purchases of available for sale investment securities |
|
(131,844 |
) |
(137,828 |
) | |
Proceeds from sales and maturities of available for sale investment securities |
|
105,826 |
|
159,343 |
| |
Additions to property and equipment |
|
(25,211 |
) |
(10,944 |
) | |
Fund adoption transaction |
|
(1,447 |
) |
|
| |
Disposition of companies |
|
|
|
22,000 |
| |
|
|
|
|
|
| |
Net cash provided by (used in) investing activities |
|
$ |
(52,676 |
) |
32,571 |
|
|
|
|
|
|
| |
Cash flows from financing activities: |
|
|
|
|
| |
Dividends paid |
|
(86,754 |
) |
(72,101 |
) | |
Repurchase of common stock |
|
(96,145 |
) |
(52,546 |
) | |
Exercise of stock options |
|
|
|
135 |
| |
Excess tax benefits from share-based payment arrangements |
|
16,465 |
|
6,860 |
| |
|
|
|
|
|
| |
Net cash used in financing activities |
|
$ |
(166,434 |
) |
(117,652 |
) |
Net increase in cash and cash equivalents |
|
41,122 |
|
96,313 |
| |
Cash and cash equivalents at beginning of period |
|
487,845 |
|
330,330 |
| |
Cash and cash equivalents at end of period |
|
$ |
528,967 |
|
426,643 |
|
See accompanying notes to the unaudited consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Waddell & Reed Financial, Inc. and Subsidiaries
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the Company, we, our and us) derive revenues from investment management services, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the Advisors Funds), Ivy Funds (the Ivy Funds), Ivy Funds Variable Insurance Portfolios (the Ivy Funds VIP) and InvestEd Portfolios (InvestEd) (collectively, the Advisors Funds, Ivy Funds, Ivy Funds VIP and InvestEd are referred to as the Funds), and institutional and separately managed accounts. The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the United States Securities and Exchange Commission (the SEC). Services to the Funds are provided under investment management agreements, underwriting agreements and shareholder servicing and accounting service agreements that set forth the fees to be charged for these services. The majority of these agreements are subject to annual review and approval by each Funds board of trustees. Our revenues are largely dependent on the total value and composition of assets under management. Accordingly, fluctuations in financial markets and composition of assets under management can significantly impact our revenues and results of operations.
Basis of Presentation
We have prepared the accompanying unaudited consolidated financial statements included herein 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 Managements 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, 2013 (the 2013 Form 10-K).
The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2013 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in affiliated mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation and accounting for income taxes.
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, 2014, the results of operations for the three and nine months ended September 30, 2014 and 2013, and cash flows for the nine months ended September 30, 2014 and 2013 in conformity with accounting principles generally accepted in the United States.
2. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments. We consider all highly liquid investments with maturities upon acquisition of 90 days or less to be cash equivalents. Cash and cash equivalents restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations.
3. Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will supersede much of the existing revenue recognition guidance in accounting principles generally accepted in the United States. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating which transition method to apply and the estimated impact the adoption of ASU 2014-09 will have on our consolidated financial statements.
4. Investment Securities
Investment securities at September 30, 2014 and December 31, 2013 were as follows:
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||
September 30, 2014 |
|
cost |
|
gains |
|
losses |
|
Fair value |
| ||
|
|
(in thousands) |
| ||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
| ||
Affiliated mutual funds |
|
$ |
158,779 |
|
3,547 |
|
(2,043 |
) |
160,283 |
| |
|
|
$ |
158,779 |
|
3,547 |
|
(2,043 |
) |
160,283 |
| |
|
|
|
|
|
|
|
|
|
| ||
Trading securities: |
|
|
|
|
|
|
|
|
| ||
Mortgage-backed securities |
|
|
|
|
|
|
|
33 |
| ||
Common stock |
|
|
|
|
|
|
|
64 |
| ||
Affiliated mutual funds |
|
|
|
|
|
|
|
83,541 |
| ||
|
|
|
|
|
|
|
|
83,638 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total investment securities |
|
|
|
|
|
|
|
$ |
243,921 |
| |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||
December 31, 2013 |
|
cost |
|
gains |
|
losses |
|
Fair value |
| ||
|
|
(in thousands) |
| ||||||||
Available for sale securities: |
|
|
|
|
|
|
|
|
| ||
Mortgage-backed securities |
|
$ |
8 |
|
1 |
|
|
|
9 |
| |
Corporate bonds |
|
14,568 |
|
61 |
|
|
|
14,629 |
| ||
Affiliated mutual funds |
|
87,710 |
|
5,899 |
|
(957 |
) |
92,652 |
| ||
|
|
$ |
102,286 |
|
5,961 |
|
(957 |
) |
107,290 |
| |
|
|
|
|
|
|
|
|
|
| ||
Trading securities: |
|
|
|
|
|
|
|
|
| ||
Mortgage-backed securities |
|
|
|
|
|
|
|
37 |
| ||
Municipal bonds |
|
|
|
|
|
|
|
501 |
| ||
Corporate bonds |
|
|
|
|
|
|
|
9,412 |
| ||
Common stock |
|
|
|
|
|
|
|
60 |
| ||
Affiliated mutual funds |
|
|
|
|
|
|
|
84,048 |
| ||
|
|
|
|
|
|
|
|
94,058 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total investment securities |
|
|
|
|
|
|
|
$ |
201,348 |
| |
Purchases of trading securities during the nine months ended September 30, 2014 were $129.5 million. Sales and maturities of trading securities were $115.2 million for the same period.
A summary of available for sale affiliated mutual funds with fair values below carrying values at September 30, 2014 and December 31, 2013 was as follows:
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
| |||||||
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| |
September 30, 2014 |
|
Fair value |
|
losses |
|
value |
|
losses |
|
value |
|
losses |
| |
|
|
(in thousands) |
| |||||||||||
Affiliated mutual funds |
|
$ |
97,124 |
|
(2,016 |
) |
1,189 |
|
(27 |
) |
98,313 |
|
(2,043 |
) |
Total temporarily impaired securities |
|
$ |
97,124 |
|
(2,016 |
) |
1,189 |
|
(27 |
) |
98,313 |
|
(2,043 |
) |
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
| |||||||
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| |
December 31, 2013 |
|
Fair value |
|
losses |
|
value |
|
losses |
|
value |
|
losses |
| |
|
|
(in thousands) |
| |||||||||||
Affiliated mutual funds |
|
$ |
29,598 |
|
(939 |
) |
213 |
|
(18 |
) |
29,811 |
|
(957 |
) |
Total temporarily impaired securities |
|
$ |
29,598 |
|
(939 |
) |
213 |
|
(18 |
) |
29,811 |
|
(957 |
) |
Based upon our assessment of these affiliated mutual funds, the time frame the funds have been in a loss position, and our intent to hold affiliated mutual funds until they have recovered, we determined that a write-down was not necessary at September 30, 2014.
Mortgage-backed securities accounted for as trading and held as of September 30, 2014 mature in 2022.
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 investments 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 Companys own assumptions in determining the fair value of investments.
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 fair value of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers and broker/dealers, current trades, bid-wants lists, offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. 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.
The value of securities classified as Level 3 is primarily determined through the use of a single quote (or multiple quotes) from dealers in the securities using proprietary valuation models. These quotes involve significant unobservable inputs, and thus, the related securities are classified as Level 3 securities.
The following tables summarize our investment securities as of September 30, 2014 and December 31, 2013 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.
September 30, 2014 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |
|
|
(in thousands) |
| |||||||
Mortgage-backed securities |
|
$ |
|
|
33 |
|
|
|
33 |
|
Common stock |
|
64 |
|
|
|
|
|
64 |
| |
Affiliated mutual funds |
|
243,824 |
|
|
|
|
|
243,824 |
| |
Total |
|
$ |
243,888 |
|
33 |
|
|
|
243,921 |
|
December 31, 2013 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |
|
|
(in thousands) |
| |||||||
Mortgage-backed securities |
|
$ |
|
|
46 |
|
|
|
46 |
|
Municipal bonds |
|
|
|
501 |
|
|
|
501 |
| |
Corporate bonds |
|
|
|
24,041 |
|
|
|
24,041 |
| |
Common stock |
|
60 |
|
|
|
|
|
60 |
| |
Affiliated mutual funds |
|
176,700 |
|
|
|
|
|
176,700 |
| |
Total |
|
$ |
176,760 |
|
24,588 |
|
|
|
201,348 |
|
5. 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) were as follows:
|
|
September 30, |
|
December 31, |
| |
|
|
2014 |
|
2013 |
| |
|
|
(in thousands) |
| |||
|
|
|
|
|
| |
Goodwill |
|
$ |
106,970 |
|
106,970 |
|
|
|
|
|
|
| |
Mutual fund management advisory contracts |
|
42,753 |
|
38,699 |
| |
Mutual fund management subadvisory contracts |
|
8,400 |
|
16,300 |
| |
Total identifiable intangible assets |
|
51,153 |
|
54,999 |
| |
|
|
|
|
|
| |
Total |
|
$ |
158,123 |
|
161,969 |
|
The mutual fund management subadvisory contracts in the table above represents our indefinite life intangible asset balance related to our subadvisory agreement to manage certain mutual fund products for Mackenzie Financial Corporation (MFC). This intangible asset was recorded in connection with our purchase of Mackenzie Investment Management, Inc. in 2002. As part of purchase accounting, a deferred tax liability was established related to this intangible asset, and prior to a third quarter 2014 adjustment, the associated deferred tax liability was $6.0 million.
We performed a review of the intangible asset associated with the MFC subadvisory agreement during the third quarter of 2014 due to a recent decline in the related assets under management. The decline can be attributed to a realignment of MFCs fund offerings and additional asset reductions. We recorded an impairment charge of $7.9 million in the third quarter of 2014 to this intangible asset as a result of the reduction in assets and associated cash flows, and reduced the associated deferred tax liability by $2.9 million.
During the third quarter of 2014, we recorded a $4.1 million intangible asset related to the fund adoption transaction agreement with Emerging Managers Group, L.P., which became effective in August 2014, through which Ivy Investment Management Company assumed responsibility as investment adviser and Ivy Funds Distributor, Inc. serves as distributor of the Selector Management Fund SICAV.
6. Indebtedness
Debt is reported at its carrying amount in the consolidated balance sheets. The fair value (calculated based on Level 2 inputs) of the Companys outstanding indebtedness is approximately $208.8 million at September 30, 2014 compared to the carrying value of $190.0 million.
7. Income Tax Uncertainties
As of January 1, 2014 and September 30, 2014, the Company had unrecognized tax benefits, including penalties and interest, of $12.0 million ($8.4 million net of federal benefit) and $13.7 million ($9.7 million net of federal benefit), respectively, that if recognized, would impact the Companys effective tax rate. The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets. Unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.
The Companys accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. As of January 1, 2014, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.0 million ($2.5 million net of federal benefit). The total amount of interest and penalties, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the nine month period ended September 30, 2014 was $0.5 million. The total amount of accrued interest and penalties related to uncertain tax positions at September 30, 2014 of $3.6 million ($3.0 million net of federal benefit) is included in the total unrecognized tax benefits described above.
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 2011, 2012 and 2013 federal income tax returns are open tax years that remain subject to potential future audit. State income tax returns for all years after 2010 and, in certain states, income tax returns prior to 2011, are subject to potential future audit by tax authorities in the Companys major state tax jurisdictions.
The Company is currently being audited in various state jurisdictions. It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period. It is estimated that the Companys liability for unrecognized tax benefits, including penalties and interest, could decrease by up to $0.3 million (up to $0.2 million net of federal benefit) upon settlement of these audits. Such settlements are not anticipated to have a significant impact on our results of operations.
8. Pension Plan and Postretirement Benefits Other Than Pension
We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the Pension Plan). Benefits payable under the Pension Plan are based on employees years of service and compensation during the final 10 years of employment. We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, as well as Waddell & Reed advisors who are independent contractors, through the age of 65. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.
The components of net periodic pension and other postretirement costs related to these plans were as follows:
|
|
Pension Benefits |
|
Other |
|
Pension Benefits |
|
Other |
| |||||||||
|
|
Three months |
|
Three months |
|
Nine months |
|
Nine months |
| |||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| |
|
|
(in thousands) |
|
(in thousands) |
| |||||||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Service cost |
|
$ |
2,521 |
|
2,753 |
|
180 |
|
197 |
|
7,563 |
|
8,259 |
|
540 |
|
591 |
|
Interest cost |
|
2,099 |
|
1,928 |
|
99 |
|
90 |
|
6,297 |
|
5,783 |
|
297 |
|
270 |
| |
Expected return on plan assets |
|
(3,504 |
) |
(2,796 |
) |
|
|
|
|
(10,512 |
) |
(8,389 |
) |
|
|
|
| |
Actuarial (gain) loss amortization |
|
373 |
|
1,142 |
|
(4 |
) |
|
|
1,121 |
|
3,426 |
|
(12 |
) |
|
| |
Prior service cost amortization |
|
117 |
|
138 |
|
14 |
|
14 |
|
351 |
|
416 |
|
42 |
|
42 |
| |
Transition obligation amortization |
|
1 |
|
1 |
|
|
|
|
|
3 |
|
3 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total(1) |
|
$ |
1,607 |
|
3,166 |
|
289 |
|
301 |
|
4,823 |
|
9,498 |
|
867 |
|
903 |
|
(1) Approximately 60% of net periodic pension and other postretirement benefit costs are included in compensation and related costs on the consolidated statements of income, while the remainder is included in underwriting and distribution expense.
During the first nine months of 2014, we contributed $20.0 million to the Pension Plan.
9. Stockholders Equity
Earnings per Share
The components of basic and diluted earnings per share were as follows:
|
|
Three months ended |
|
Nine months ended |
| |||||
|
|
September 30, |
|
September 30, |
| |||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| |
|
|
(in thousands, except per share amounts) |
| |||||||
Net income |
|
$ |
74,586 |
|
68,419 |
|
232,438 |
|
174,239 |
|
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding - basic |
|
84,242 |
|
85,603 |
|
84,775 |
|
85,688 |
| |
Dilutive potential shares from stock options |
|
|
|
|
|
|
|
1 |
| |
Weighted average shares outstanding - diluted |
|
84,242 |
|
85,603 |
|
84,775 |
|
85,689 |
| |
|
|
|
|
|
|
|
|
|
| |
Earnings per share basic and diluted |
|
$ |
0.89 |
|
0.80 |
|
2.74 |
|
2.03 |
|
Dividends
On July 16, 2014, the Board of Directors (the Board) approved a dividend on our Class A common stock in the amount of $0.34 per share to stockholders of record as of October 13, 2014 to be paid on November 3, 2014. The total dividend to be paid is approximately $28.6 million and is included in other current liabilities in the consolidated balance sheet at September 30, 2014.
Common Stock Repurchases
The Board 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 shares issued to employees in our stock-based compensation programs.
There were 614,062 shares and 316,961 shares repurchased in the open market or privately during the three months ended September 30, 2014 and 2013, respectively, which included 1,962 shares and 1,961 shares, respectively, repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during these same reporting periods. There were 1,522,270 shares and 1,187,839 shares repurchased in the open market or privately during the nine months ended September 30, 2014 and 2013, respectively, which included 428,081 shares and 468,739 shares, respectively, repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during each of these reporting periods.
Accumulated Other Comprehensive Income (Loss)
The following tables summarize other comprehensive income (loss) activity for the three and nine months ended September 30, 2014 and September 30, 2013.
Three months ended September 30, 2014 |
|
Unrealized gains |
|
Change in |
|
Pension and |
|
Total |
| |
|
|
(in thousands) |
| |||||||
Balance at June 30, 2014 |
|
$ |
4,078 |
|
1,353 |
|
(19,187 |
) |
(13,756 |
) |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income before reclassification |
|
(2,317 |
) |
(1,357 |
) |
|
|
(3,674 |
) | |
Amount reclassified from accumulated other comprehensive income |
|
(813 |
) |
(475 |
) |
315 |
|
(973 |
) | |
Net current period other comprehensive income (loss) |
|
(3,130 |
) |
(1,832 |
) |
315 |
|
(4,647 |
) | |
|
|
|
|
|
|
|
|
|
| |
Balance at September 30, 2014 |
|
$ |
948 |
|
(479 |
) |
(18,872 |
) |
(18,403 |
) |
Three months ended September 30, 2013 |
|
Unrealized gains |
|
Change in |
|
Pension and |
|
Total |
| |
|
|
(in thousands) |
| |||||||
Balance at June 30, 2013 |
|
$ |
1,431 |
|
(201 |
) |
(47,214 |
) |
(45,984 |
) |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income before reclassification |
|
4,330 |
|
2,530 |
|
|
|
6,860 |
| |
Amount reclassified from accumulated other comprehensive income |
|
(1,408 |
) |
(819 |
) |
816 |
|
(1,411 |
) | |
Net current period other comprehensive income |
|
2,922 |
|
1,711 |
|
816 |
|
5,449 |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at September 30, 2013 |
|
$ |
4,353 |
|
1,510 |
|
(46,398 |
) |
(40,535 |
) |
Nine months ended September 30, 2014 |
|
Unrealized gains |
|
Change in |
|
Pension and |
|
Total |
| |
|
|
(in thousands) |
| |||||||
Balance at December 31, 2013 |
|
$ |
3,150 |
|
810 |
|
(19,819 |
) |
(15,859 |
) |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income before reclassification |
|
239 |
|
138 |
|
|
|
377 |
| |
Amount reclassified from accumulated other comprehensive income |
|
(2,441 |
) |
(1,427 |
) |
947 |
|
(2,921 |
) | |
Net current period other comprehensive income (loss) |
|
(2,202 |
) |
(1,289 |
) |
947 |
|
(2,544 |
) | |
|
|
|
|
|
|
|
|
|
| |
Balance at September 30, 2014 |
|
$ |
948 |
|
(479 |
) |
(18,872 |
) |
(18,403 |
) |
Nine months ended September 30, 2013 |
|
Unrealized gains |
|
Change in |
|
Pension and |
|
Total |
| |
|
|
(in thousands) |
| |||||||
Balance at December 31, 2012 |
|
$ |
1,823 |
|
32 |
|
(48,652 |
) |
(46,797 |
) |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income before reclassification |
|
7,519 |
|
4,396 |
|
|
|
11,915 |
| |
Amount reclassified from accumulated other comprehensive income |
|
(4,989 |
) |
(2,918 |
) |
2,254 |
|
(5,653 |
) | |
Net current period other comprehensive income |
|
2,530 |
|
1,478 |
|
2,254 |
|
6,262 |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at September 30, 2013 |
|
$ |
4,353 |
|
1,510 |
|
(46,398 |
) |
(40,535 |
) |
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, 2014 |
|
|
| |||||
|
|
Pre-tax |
|
Tax |
|
Net of tax |
|
Statement of income line item |
| |
|
|
(in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
| |
Realized gain on sale of available for sale investment securities |
|
$ |
1,290 |
|
(477 |
) |
813 |
|
Investment and other income |
|
Valuation allowance |
|
|
|
475 |
|
475 |
|
Provision for income taxes |
| |
Amortization of pension and postretirement benefits |
|
(501 |
) |
186 |
|
(315 |
) |
Underwriting and distribution expense and Compensation and related costs |
| |
Total |
|
$ |
789 |
|
184 |
|
973 |
|
|
|
|
|
For the three months ended September 30, 2013 |
|
|
| |||||
|
|
Pre-tax |
|
Tax |
|
Net of tax |
|
Statement of income line item |
| |
|
|
(in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
| |
Realized gain on sale of available for sale investment securities |
|
$ |
2,225 |
|
(817 |
) |
1,408 |
|
Investment and other income |
|
Valuation allowance |
|
|
|
819 |
|
819 |
|
Provision for income taxes |
| |
Amortization of pension and postretirement benefits |
|
(1,296 |
) |
480 |
|
(816 |
) |
Underwriting and distribution expense and Compensation and related costs |
| |
Total |
|
$ |
929 |
|
482 |
|
1,411 |
|
|
|
|
|
For the nine months ended September 30, 2014 |
|
|
| |||||
|
|
Pre-tax |
|
Tax |
|
Net of tax |
|
Statement of income line item |
| |
|
|
(in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
| |
Realized gain on sale of available for sale investment securities |
|
$ |
3,875 |
|
(1,434 |
) |
2,441 |
|
Investment and other income |
|
Valuation allowance |
|
|
|
1,427 |
|
1,427 |
|
Provision for income taxes |
| |
Amortization of pension and postretirement benefits |
|
(1,505 |
) |
558 |
|
(947 |
) |
Underwriting and distribution expense and Compensation and related costs |
| |
Total |
|
$ |
2,370 |
|
551 |
|
2,921 |
|
|
|
|
|
For the nine months ended September 30, 2013 |
|
|
| |||||
|
|
Pre-tax |
|
Tax |
|
Net of tax |
|
Statement of income line item |
| |
|
|
(in thousands) |
|
|
| |||||
Reclassifications included in net income: |
|
|
|
|
|
|
|
|
| |
Realized gain on sale of available for sale investment securities |
|
$ |
7,887 |
|
(2,898 |
) |
4,989 |
|
Investment and other income |
|
Valuation allowance |
|
|
|
2,918 |
|
2,918 |
|
Provision for income taxes |
| |
Amortization of pension and postretirement benefits |
|
(3,887 |
) |
1,633 |
|
(2,254 |
) |
Underwriting and distribution expense and Compensation and related costs |
| |
Total |
|
$ |
4,000 |
|
1,653 |
|
5,653 |
|
|
|
10. 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 results of operations in a particular quarter or year.
The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. 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. For contingencies where an unfavorable outcome is reasonably possible and that are significant, the Company discloses the nature of the contingency 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. Managements judgment is required related to contingent liabilities because the outcomes are difficult to predict. In our opinion, the likelihood that any pending legal proceeding, regulatory investigation, claim, or other contingency will have a material adverse effect on our business, financial condition or results of operations is remote.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements 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, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of such words as may, could, should, would, believe, anticipate, forecast, estimate, expect, intend, plan, project, outlook, will, potential and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by 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, 2013, which include, without limitation:
· The loss of existing distribution channels or inability to access new distribution channels;
· A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;
· The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;
· The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;
· Our inability to provide sufficient capital to support new investment products;
· The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
· Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner;
· Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;
· A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds; and
· Our inability to attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment management advisory business.
The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the SEC), including the information in Item 1 Business and Item 1A Risk Factors of Part I and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations of Part II to our Annual Report on Form 10-K for the year ended December 31, 2013 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2014. All forward-looking statements 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
Founded in 1937, we are one of the oldest mutual fund complexes in the United States, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.
We derive our revenues by providing investment management services, investment product underwriting and distribution, and shareholder services administration to the Waddell & Reed Advisors Group of Mutual Funds (the Advisors Funds), Ivy Funds (the Ivy Funds), Ivy Funds Variable Insurance Portfolios (the Ivy Funds VIP) and InvestEd Portfolios (InvestEd) (collectively, the Advisors Funds, Ivy Funds, Ivy Funds VIP and InvestEd are referred to as the Funds), and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of Rule 12b-1 asset-based service and distribution fees, fees earned on fee-based asset allocation products and related advisory services, distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products we sell have various commission structures and the revenues received from those sales vary based on the type of product and dollar amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts. Our major expenses are for commissions, employee compensation, field support, dealer services and information technology.
One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our retail products are distributed through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors and various retirement platforms, and through our Advisors channel sales force of independent financial advisors. Through the Institutional channel, we serve as sub-advisor for domestic and foreign distributors of investment products and manage investments for pension funds, Taft-Hartley plans and endowments.
Company Highlights
· In August 2014, we completed a fund adoption transaction agreement with Emerging Managers Group, L.P. through which Ivy Investment Management Company assumed responsibility as investment adviser and Ivy Funds Distributor, Inc. serves as distributor of the Selector Management Fund SICAV, an umbrella UCITS fund range domiciled in Luxembourg, (collectively, Ivy Investment Management Company and Ivy Funds Distributor, Inc. are referred to as Ivy). This agreement allows Ivy to serve the non U.S. resident customer market through national broker-dealer firms in the United States and establish greater international distribution of Ivys investment management capabilities.
· In October 2014, we launched the Ivy Mid Cap Income Opportunities Fund, an equity portfolio focusing primarily on income-producing mid-capitalization companies.
· Operating revenues of $409.6 million in the third quarter of 2014 increased $62.5 million, or 18%, compared to the third quarter of 2013.
· We recorded an intangible asset impairment charge of $7.9 million ($5.0 million net of taxes) related to our subadvisory agreement to manage certain mutual funds products for Mackenzie Financial Corporation.
· Operating income of $125.1 million in the third quarter of 2014 increased $21.9 million, or 21%, compared to the third quarter of 2013, and net income of $74.6 million increased $6.2 million, or 9%, over this same period.
· Our operating margin was 30.6% for the third quarter of 2014, an improvement from 29.8% for the same period a year ago.
· Our assets under management increased 13% from $113.7 billion at September 30, 2013 to $128.9 billion at September 30, 2014.
· Company-wide sales exceeded $100.0 million for nine investment strategies during the third quarter of 2014; of these investment strategies, sales for one strategy exceeded $500.0 million and sales for two strategies exceeded $1.0 billion.
· The long-term redemption rate in the Wholesale channel increased to 40.3% during the third quarter of 2014, compared to 25.7% during the same period in 2013, primarily driven by redemptions in the Ivy Asset Strategy Fund and the Ivy High Income Fund.
· Our balance sheet remains solid, and we ended the third quarter of 2014 with cash and investments of $772.9 million.
Assets Under Management
Assets under management at September 30, 2014 decreased 5% from $135.6 billion at June 30, 2014, and increased 13% compared to $113.7 billion at September 30, 2013.
Change in Assets Under Management(1)
|
|
Third Quarter 2014 |
| |||||||
|
|
Wholesale |
|
Advisors |
|
Institutional |
|
Total |
| |
|
|
(in millions) |
| |||||||
Beginning Assets |
|
$ |
71,671 |
|
45,797 |
|
18,165 |
|
135,633 |
|
|
|
|
|
|
|
|
|
|
| |
Sales(2) |
|
4,269 |
|
1,322 |
|
328 |
|
5,919 |
| |
Redemptions |
|
(7,008 |
) |
(1,146 |
) |
(727 |
) |
(8,881 |
) | |
Net Exchanges |
|
112 |
|
(112 |
) |
|
|
|
| |
Net Flows |
|
(2,627 |
) |
64 |
|
(399 |
) |
(2,962 |
) | |
|
|
|
|
|
|
|
|
|
| |
Market Depreciation |
|
(2,669 |
) |
(953 |
) |
(163 |
) |
(3,785 |
) | |
Ending Assets |
|
$ |
66,375 |
|
44,908 |
|
17,603 |
|
128,886 |
|
|
|
Third Quarter 2013 |
| |||||||
|
|
Wholesale |
|
Advisors |
|
Institutional |
|
Total |
| |
|
|
(in millions) |
| |||||||
Beginning Assets |
|
$ |
53,860 |
|
38,172 |
|
12,312 |
|
104,344 |
|
|
|
|
|
|
|
|
|
|
| |
Sales(2) |
|
5,191 |
|
1,242 |
|
386 |
|
6,819 |
| |
Redemptions |
|
(3,723 |
) |
(1,071 |
) |
(550 |
) |
(5,344 |
) | |
Net Exchanges |
|
83 |
|
(83 |
) |
|
|
|
| |
Net Flows |
|
1,551 |
|
88 |
|
(164 |
) |
1,475 |
| |
|
|
|
|
|
|
|
|
|
| |
Market Appreciation |
|
4,250 |
|
2,507 |
|
1,168 |
|
7,925 |
| |
Ending Assets |
|
$ |
59,661 |
|
40,767 |
|
13,316 |
|
113,744 |
|
Assets under management increased to $128.9 billion at September 30, 2014 compared to $126.5 billion on December 31, 2013 due to inflows of $2.9 billion offset by market depreciation of $0.6 billion.
|
|
Year to Date 2014 |
| |||||||
|
|
Wholesale |
|
Advisors |
|
Institutional |
|
Total |
| |
|
|
(in millions) |
| |||||||
Beginning Assets |
|
$ |
67,055 |
|
43,667 |
|
15,821 |
|
126,543 |
|
|
|
|
|
|
|
|
|
|
| |
Sales(2) |
|
16,150 |
|
4,214 |
|
3,075 |
|
23,439 |
| |
Redemptions |
|
(14,933 |
) |
(3,350 |
) |
(2,257 |
) |
(20,540 |
) | |
Net Exchanges |
|
(173 |
) |
(312 |
) |
485 |
|
|
| |
Net Flows |
|
1,044 |
|
552 |
|
1,303 |
|
2,899 |
| |
|
|
|
|
|
|
|
|
|
| |
Market Appreciation (Depreciation) |
|
(1,724 |
) |
689 |
|
479 |
|
(556 |
) | |
Ending Assets |
|
$ |
66,375 |
|
44,908 |
|
17,603 |
|
128,886 |
|
|
|
Year to Date 2013 |
| |||||||
|
|
Wholesale |
|
Advisors |
|
Institutional |
|
Total |
| |
|
|
(in millions) |
| |||||||
Beginning Assets |
|
$ |
48,930 |
|
35,660 |
|
11,775 |
|
96,365 |
|
|
|
|
|
|
|
|
|
|
| |
Sales(2) |
|
15,262 |
|
3,949 |
|
1,195 |
|
20,406 |
| |
Redemptions |
|
(10,863 |
) |
(3,201 |
) |
(1,830 |
) |
(15,894 |
) | |
Net Exchanges |
|
211 |
|
(211 |
) |
|
|
|
| |
Net Flows |
|
4,610 |
|
537 |
|
(635 |
) |
4,512 |
| |
|
|
|
|
|
|
|
|
|
| |
Market Appreciation |
|
6,121 |
|
4,570 |
|
2,176 |
|
12,867 |
| |
Ending Assets |
|
$ |
59,661 |
|
40,767 |
|
13,316 |
|
113,744 |
|
(1) Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value for which we receive no commissions.
(2) Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and investment income.
Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.
Average Assets Under Management
|
|
Third Quarter 2014 |
| ||||||||
|
|
Wholesale |
|
Advisors |
|
Institutional |
|
Total |
| ||
|
|
(in millions) |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||
Asset Class: |
|
|
|
|
|
|
|
|
| ||
Equity |
|
$ |
55,866 |
|
33,630 |
|
17,046 |
|
$ |
106,542 |
|
Fixed Income |
|
13,375 |
|
10,105 |
|
893 |
|
24,373 |
| ||
Money Market |
|
158 |
|
2,030 |
|
|
|
2,188 |
| ||
Total |
|
$ |
69,399 |
|
45,765 |
|
17,939 |
|
$ |
133,103 |
|
|
|
Third Quarter 2013 |
| ||||||||
|
|
Wholesale |
|
Advisors |
|
Institutional |
|
Total |
< |