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Table of Contents

 

 

 

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 Registrant’s principal executive offices)

 

(913) 236-2000

(Registrant’s 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 registrant’s 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

 

 

 

 



Table of Contents

 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2014

 

 

 

Page No.

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2014 and December 31, 2013

3

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2014 and September 30, 2013

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and September 30, 2013

5

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2014

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013

7

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 6.

Exhibits

37

 

 

 

 

Signatures

38

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(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.

 

3



Table of Contents

 

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.

 

4



Table of Contents

 

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.

 

5



Table of Contents

 

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.

 

6



Table of Contents

 

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.

 

7



Table of Contents

 

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 Fund’s 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 “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, 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.

 

8



Table of Contents

 

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.

 

9



Table of Contents

 

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 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.

 

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.

 

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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 MFC’s 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.

 

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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 Company’s 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 Company’s 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 Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.  As of January 1, 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 Company’s 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 Company’s 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.

 

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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
Postretirement
Benefits

 

Pension Benefits

 

Other
Postretirement
Benefits

 

 

 

Three months
ended
September 30,

 

Three months
ended
September 30,

 

Nine months
ended
September 30,

 

Nine months
ended
September 30,

 

 

 

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.

 

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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.

 

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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
on investment
securities

 

Change in
valuation
allowance for
unrealized gains
(losses) on
investment
securities

 

Pension and
postretirement
benefits

 

Total
accumulated
other
comprehensive
income (loss)

 

 

 

(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
on investment
securities

 

Change in
valuation
allowance for
unrealized gains
(losses) on
investment
securities

 

Pension and
postretirement
benefits

 

Total
accumulated
other
comprehensive
income (loss)

 

 

 

(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
on investment
securities

 

Change in
valuation
allowance for
unrealized gains
(losses) on
investment
securities

 

Pension and
postretirement
benefits

 

Total
accumulated
other
comprehensive
income (loss)

 

 

 

(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

)

 

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Nine months ended September 30, 2013

 

Unrealized gains
on investment
securities

 

Change in
valuation
allowance for
unrealized gains
(losses) on
investment
securities

 

Pension and
postretirement
benefits

 

Total
accumulated
other
comprehensive
income (loss)

 

 

 

(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
(expense)
benefit

 

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
(expense)
benefit

 

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

 

 

 

 

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For the nine months ended September 30, 2014

 

 

 

 

 

Pre-tax

 

Tax
(expense)
benefit

 

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
(expense)
benefit

 

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.  Management’s 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.

 

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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, 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.

 

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The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the “SEC”), including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 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.

 

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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 Ivy’s 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.

 

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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

 

 

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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.

 

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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

 

 

 

(in millions)