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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 June 30, 2015

 

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 ¨.

 

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 ¨.

 

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 ¨ No x.

 

Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:

 

Class

 

Outstanding as of July 23, 2015

Class A common stock, $.01 par value

 

83,739,728

 

 

 



Table of Contents

 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2015

 

 

 

Page No.

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2015 and December 31, 2014

3

 

 

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2015 and June 30, 2014

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and June 30, 2014

5

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2015

6

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014

7

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

8

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

Part II.

Other Information

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 6.

Exhibits

36

 

 

 

 

Signatures

37

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

June 30,

 

 

 

 

 

2015

 

December 31,

 

 

 

(unaudited)

 

2014

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

614,865

 

566,621

 

Cash and cash equivalents - restricted

 

59,935

 

76,595

 

Investment securities

 

238,985

 

243,283

 

Receivables:

 

 

 

 

 

Funds and separate accounts

 

33,822

 

39,110

 

Customers and other

 

151,550

 

216,843

 

Deferred income taxes

 

6,941

 

7,454

 

Income taxes receivable

 

3,712

 

7,747

 

Prepaid expenses and other current assets

 

20,750

 

14,980

 

 

 

 

 

 

 

Total current assets

 

1,130,560

 

1,172,633

 

 

 

 

 

 

 

Property and equipment, net

 

98,200

 

92,304

 

Deferred sales commissions, net

 

38,954

 

56,472

 

Goodwill and identifiable intangible assets

 

158,118

 

158,123

 

Deferred income taxes

 

21,723

 

20,036

 

Other non-current assets

 

14,415

 

12,298

 

Total assets

 

$

1,461,970

 

1,511,866

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable

 

$

24,893

 

32,263

 

Payable to investment companies for securities

 

88,664

 

129,633

 

Payable to third party brokers

 

59,510

 

67,954

 

Payable to customers

 

67,533

 

110,399

 

Accrued compensation

 

75,213

 

67,574

 

Other current liabilities

 

55,176

 

55,143

 

 

 

 

 

 

 

Total current liabilities

 

370,989

 

462,966

 

 

 

 

 

 

 

Long-term debt

 

190,000

 

190,000

 

Accrued pension and postretirement costs

 

29,595

 

45,936

 

Other non-current liabilities

 

25,747

 

26,880

 

 

 

 

 

 

 

Total liabilities

 

616,331

 

725,782

 

 

 

 

 

 

 

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; 83,916 shares outstanding (83,654 at December 31, 2014)

 

997

 

997

 

Additional paid-in capital

 

317,513

 

318,636

 

Retained earnings

 

1,104,136

 

1,041,909

 

Cost of 15,785 common shares in treasury (16,047 at December 31, 2014)

 

(525,276

)

(525,015

)

Accumulated other comprehensive loss

 

(51,731

)

(50,443

)

Total stockholders’ equity

 

845,639

 

786,084

 

Total liabilities and stockholders’ equity

 

$

1,461,970

 

1,511,866

 

 

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 six months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

185,914

 

193,624

 

368,019

 

381,661

 

Underwriting and distribution fees

 

171,508

 

169,001

 

338,486

 

334,268

 

Shareholder service fees

 

36,568

 

38,009

 

72,943

 

75,121

 

 

 

 

 

 

 

 

 

 

 

Total

 

393,990

 

400,634

 

779,448

 

791,050

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

195,762

 

195,608

 

391,182

 

390,559

 

Compensation and related costs (including share-based compensation of $11,333, $14,593, $23,806 and $27,679, respectively)

 

52,829

 

48,589

 

106,324

 

98,598

 

General and administrative

 

27,897

 

27,183

 

53,575

 

50,939

 

Subadvisory fees

 

2,394

 

2,069

 

4,781

 

3,946

 

Depreciation

 

4,064

 

3,541

 

8,098

 

6,790

 

 

 

 

 

 

 

 

 

 

 

Total

 

282,946

 

276,990

 

563,960

 

550,832

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

111,044

 

123,644

 

215,488

 

240,218

 

Investment and other income

 

9

 

6,100

 

3,981

 

10,000

 

Interest expense

 

(2,765

)

(2,755

)

(5,531

)

(5,510

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

108,288

 

126,989

 

213,938

 

244,708

 

Provision for income taxes

 

40,843

 

44,001

 

79,380

 

86,856

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

67,445

 

82,988

 

134,558

 

157,852

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic and diluted:

 

$

0.80

 

0.98

 

1.61

 

1.86

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

84,079

 

85,073

 

83,831

 

85,046

 

 

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 six months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

67,445

 

82,988

 

134,558

 

157,852

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $(8), $4, $5 and $2, respectively

 

(4,974

)

2,170

 

(3,164

)

1,471

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits, net of income tax expense of $397, $167, $951 and $372, respectively

 

933

 

285

 

1,876

 

632

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

63,404

 

85,443

 

133,270

 

159,955

 

 

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 Six Months Ended June 30, 2015

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Stock

 

Loss

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

99,701

 

$

997

 

318,636

 

1,041,909

 

(525,015

)

(50,443

)

786,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

134,558

 

 

 

134,558

 

Recognition of equity compensation

 

 

 

23,806

 

 

 

 

23,806

 

Net issuance/forfeiture of nonvested shares

 

 

 

(29,743

)

 

29,743

 

 

 

Dividends accrued, $0.86 per share

 

 

 

 

(72,331

)

 

 

(72,331

)

Excess tax benefits from share-based payment arrangements

 

 

 

4,814

 

 

 

 

4,814

 

Repurchase of common stock

 

 

 

 

 

(30,004

)

 

(30,004

)

Other comprehensive income

 

 

 

 

 

 

(1,288

)

(1,288

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

99,701

 

$

997

 

317,513

 

1,104,136

 

(525,276

)

(51,731

)

845,639

 

 

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 six months

 

 

 

ended June 30,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

134,558

 

157,852

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

8,100

 

6,906

 

Amortization of deferred sales commissions

 

24,270

 

32,967

 

Share-based compensation

 

23,806

 

27,679

 

Excess tax benefits from share-based payment arrangements

 

(4,814

)

(16,861

)

Gain on sale of available for sale investment securities

 

(2,804

)

(2,586

)

Net purchases and sales or maturities of trading securities

 

56

 

(18,269

)

Gain on trading securities

 

(3

)

(5,508

)

Loss on sale and retirement of property and equipment

 

84

 

1,058

 

Capital gains and dividends reinvested

 

 

(9

)

Deferred income taxes

 

(2,130

)

1,357

 

Changes in assets and liabilities:

 

 

 

 

 

Cash and cash equivalents - restricted

 

16,660

 

32,457

 

Other receivables

 

65,293

 

(63,441

)

Payable to investment companies for securities and payable to customers

 

(83,835

)

18,048

 

Receivables from funds and separate accounts

 

5,288

 

(2,215

)

Other assets

 

(7,887

)

(9,743

)

Deferred sales commissions

 

(6,752

)

(33,322

)

Accounts payable and payable to third party brokers

 

(15,814

)

3,637

 

Other liabilities

 

1,768

 

(899

)

 

 

 

 

 

 

Net cash provided by operating activities

 

$

155,844

 

129,108

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of available for sale investment securities

 

(25,891

)

(52,941

)

Proceeds from sales and maturities of available for sale investment securities

 

29,778

 

64,666

 

Additions to property and equipment

 

(14,078

)

(18,161

)

 

 

 

 

 

 

Net cash used in investing activities

 

$

(10,191

)

(6,436

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Dividends paid

 

(72,219

)

(57,963

)

Repurchase of common stock

 

(30,004

)

(61,722

)

Excess tax benefits from share-based payment arrangements

 

4,814

 

16,861

 

 

 

 

 

 

 

Net cash used in financing activities

 

$

(97,409

)

(102,824

)

Net increase in cash and cash equivalents

 

48,244

 

19,848

 

Cash and cash equivalents at beginning of period

 

566,621

 

487,845

 

Cash and cash equivalents at end of period

 

$

614,865

 

507,693

 

 

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 and advisory services, investment product underwriting and distribution, and/or 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”), the Selector Management Fund SICAV, renamed Ivy Global Investors SICAV effective July 1, 2015, and its Ivy Global Investors sub-funds (the “IGI 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”).  The IGI Funds are regulated by Luxembourg’s Commission de Surveillance du Secteur Financier as an undertaking for collective investment in transferable securities (“UCITS”). 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.  Services to the IGI Funds are provided under investment management and underwriting agreements.  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 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, 2014 (the “2014 Form 10-K”).

 

The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 2 to the consolidated financial statements included in our 2014 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 funds (mutual funds and UCITS sub-funds), property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, leases, 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 June 30, 2015, the results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014 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.  This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer.  This ASU will supersede much of the existing revenue recognition guidance in accounting principles generally accepted in the United States and is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; early application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016.  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 this ASU will have on our consolidated financial statements and related disclosures.

 

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.”  The amendments in this ASU will affect all companies that are required to evaluate whether they should consolidate another entity. Additionally, the amendments in this ASU rescind the indefinite deferral of FASB Statement 167, “Amendments to FASB Interpretation No. 46(r)” included in FASB ASU 2010-10, “ConsolidationAmendments for Certain Investment Funds.”  ASU 2015-02 will be effective for annual reporting periods after December 15, 2015, including interim periods within that reporting period; early adoption is permitted.  This standard permits the use of either a full retrospective or a modified retrospective approach. The Company is evaluating which approach to apply and the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.”  The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.  ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period; early adoption is permitted.  The Company believes that the adoption of this ASU in 2016 will result in an immaterial impact to our consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”  ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license.  If a cloud computing arrangement includes a software license, then the customer would account for the software license element of the arrangement consistent with its accounting for the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract.  The proposed guidance would not change GAAP for a customer’s accounting of software license or service contracts.  This standard will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015; early adoption is permitted.  The Company believes that the adoption of this ASU in 2016 will result in an immaterial impact to our consolidated financial statements.

 

9



Table of Contents

 

4.              Investment Securities

 

Investment securities at June 30, 2015 and December 31, 2014 are as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

June 30, 2015

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Affiliated funds

 

$

210,839

 

4,925

 

(9,239

)

206,525

 

 

 

$

210,839

 

4,925

 

(9,239

)

206,525

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

24

 

Common stock

 

 

 

 

 

 

 

73

 

Affiliated funds

 

 

 

 

 

 

 

32,363

 

 

 

 

 

 

 

 

 

32,460

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

$

238,985

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

December 31, 2014

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Affiliated funds

 

$

162,425

 

4,237

 

(5,392

)

161,270

 

 

 

$

162,425

 

4,237

 

(5,392

)

161,270

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

28

 

Common stock

 

 

 

 

 

 

 

72

 

Affiliated funds

 

 

 

 

 

 

 

81,913

 

 

 

 

 

 

 

 

 

82,013

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

$

243,283

 

 

Purchases of trading securities during the six months ended June 30, 2015 were $0.3 million.  Sales of trading securities were $0.3 million for the same period.

 

A summary of available for sale affiliated funds with fair values below carrying values at June 30, 2015 and December 31, 2014 is as follows:

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

June 30, 2015

 

Fair value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in thousands)

 

Affiliated funds

 

$

147,131

 

(9,204

)

305

 

(35

)

147,436

 

(9,239

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

December 31, 2014

 

Fair value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in thousands)

 

Affiliated funds

 

$

66,858

 

(5,362

)

1,187

 

(30

)

68,045

 

(5,392

)

 

Based upon our assessment of these affiliated funds, the time frame the investments have been in a loss

 

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position and our intent to hold affiliated funds until they have recovered, we determined that a write-down was not necessary at June 30, 2015.

 

Mortgage-backed securities accounted for as trading and held as of June 30, 2015 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 equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.

 

Securities’ values classified as Level 3 are 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 June 30, 2015 and December 31, 2014 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

 

June 30, 2015

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

 

24

 

 

24

 

Common stock

 

73

 

 

 

73

 

Affiliated funds

 

238,888

 

 

 

238,888

 

Total

 

$

238,961

 

24

 

 

238,985

 

 

December 31, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

 

28

 

 

28

 

Common stock

 

72

 

 

 

72

 

Affiliated funds

 

243,183

 

 

 

243,183

 

Total

 

$

243,255

 

28

 

 

243,283

 

 

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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.  As of June 30, 2015, the Company’s annual impairment test indicated that goodwill and identifiable intangible assets were not impaired.  Goodwill and identifiable intangible assets (all considered indefinite lived) at June 30, 2015 and December 31, 2014 are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Goodwill

 

$

106,970

 

106,970

 

 

 

 

 

 

 

Mutual fund management advisory contracts

 

42,748

 

42,753

 

Mutual fund management subadvisory contracts

 

8,400

 

8,400

 

Total identifiable intangible assets

 

51,148

 

51,153

 

 

 

 

 

 

 

Total

 

$

158,118

 

158,123

 

 

6.              Indebtedness

 

Debt is reported at its carrying amount in the consolidated balance sheet.  The fair value of the Company’s outstanding indebtedness is approximately $205.0 million at June 30, 2015 compared to the carrying value of $190.0 million.  Fair value is calculated based on Level 2 inputs.

 

7.              Income Tax Uncertainties

 

As of January 1, 2015 and June 30, 2015, the Company had unrecognized tax benefits, including penalties and interest, of $11.6 million ($8.3 million net of federal benefit) and $12.4 million ($8.9 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.  In the accompanying consolidated balance sheet, unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable; unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to either current or noncurrent deferred income taxes, as applicable.

 

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, 2015, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.5 million ($2.9 million net of federal benefit).  The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the six month period ended June 30, 2015 was $0.5 million.  The total amount of accrued penalties and interest related to uncertain tax positions at June 30, 2015 of $4.1 million ($3.4 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, 2013 and 2014 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 for 2010, 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.  The Company’s liability for unrecognized tax benefits, including penalties and interest, is not expected to decrease significantly upon settlement of these audits.  Additionally, such settlements are not anticipated to have a significant impact on the results of operations.

 

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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 our advisors, who are independent contractors.  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
June 30,

 

Three months

ended
June 30,

 

Six months
ended
June 30,

 

Six months
ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands)

 

(in thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

2,994

 

2,317

 

228

 

180

 

6,041

 

5,042

 

456

 

360

 

Interest cost

 

2,056

 

2,045

 

99

 

99

 

4,210

 

4,198

 

198

 

198

 

Expected return on plan assets

 

(3,565

)

(3,595

)

 

 

(7,256

)

(7,008

)

 

 

Actuarial (gain) loss amortization

 

1,209

 

337

 

 

(4

)

2,585

 

748

 

 

(8

)

Prior service cost amortization

 

115

 

104

 

5

 

14

 

230

 

234

 

10

 

28

 

Transition obligation amortization

 

1

 

1

 

 

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total(1)

 

$

2,810

 

1,209

 

332

 

289

 

5,812

 

3,216

 

664

 

578

 

 


(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 quarter of 2015, 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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands, except per share
amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

67,445

 

82,988

 

134,558

 

157,852

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted

 

84,079

 

85,073

 

83,831

 

85,046

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted

 

0.80

 

0.98

 

1.61

 

1.86

 

 

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Dividends

 

On April 15, 2015, the Board of Directors approved a dividend on our common stock in the amount of $0.43 per share to stockholders of record on July 13, 2015 to be paid on August 3, 2015.  The total dividend to be paid is approximately $36.1 million and is included in other current liabilities as of June 30, 2015.

 

Common Stock Repurchases

 

The Board of Directors has authorized the repurchase of our 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 516,533 shares and 628,022 shares repurchased in the open market or privately during the three months ended June 30, 2015 and 2014, respectively, which includes 306,533 shares and 423,452 shares, respectively, repurchased from employees who tendered shares to cover their minimum income tax withholdings with respect to vesting of stock awards during these same reporting periods. There were 622,591 shares and 908,208 shares repurchased in the open market or privately during the six months ended June 30, 2015 and 2014, respectively, which includes 312,091 shares and 426,119 shares, respectively, repurchased from employees who tendered shares to cover their minimum income tax withholdings with respect to vesting of stock awards during each of these two periods.

 

Accumulated Other Comprehensive Income (Loss)

 

The following tables summarize other comprehensive income (loss) activity for the three and six months ended June 30, 2015 and June 30, 2014.

 

Three months ended June 30, 2015

 

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 March 31, 2015

 

$

421

 

(809

)

(47,302

)

(47,690

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassification

 

(2,845

)

(1,671

)

 

(4,516

)

Amount reclassified from accumulated other comprehensive income

 

(289

)

(169

)

933

 

475

 

Net current period other comprehensive income (loss)

 

(3,134

)

(1,840

)

933

 

(4,041

)

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

$

(2,713

)

(2,649

)

(46,369

)

(51,731

)

 

Three months ended June 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 March 31, 2014

 

$

2,709

 

552

 

(19,472

)

(16,211

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassification

 

2,253

 

1,317

 

 

3,570

 

Amount reclassified from accumulated other comprehensive income

 

(884

)

(516

)

285

 

(1,115

)

Net current period other comprehensive income

 

1,369

 

801

 

285

 

2,455

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2014

 

$

4,078

 

1,353

 

(19,187

)

(13,756

)

 

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Six months ended June 30, 2015

 

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, 2014

 

$

(727

)

(1,471

)

(48,245

)

(50,443

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassification

 

(222

)

(158

)

 

(380

)

Amount reclassified from accumulated other comprehensive income

 

(1,764

)

(1,020

)

1,876

 

(908

)

Net current period other comprehensive income (loss)

 

(1,986

)

(1,178

)

1,876

 

(1,288

)

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

$

(2,713

)

(2,649

)

(46,369

)

(51,731

)

 

Six months ended June 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

 

2,557

 

1,494

 

 

4,051

 

Amount reclassified from accumulated other comprehensive income

 

(1,629

)

(951

)

632

 

(1,948

)

Net current period other comprehensive income

 

928

 

543

 

632

 

2,103

 

 

 

 

 

 

 

 

 

 

 

Balance at June, 2014

 

$

4,078

 

1,353

 

(19,187

)

(13,756

)

 

Reclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.

 

 

 

For the three months ended June 30, 2015

 

 

 

 

 

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

 

$

459

 

(170

)

289

 

Investment and other income

 

Valuation allowance

 

 

169

 

169

 

Provision for income taxes

 

Amortization of pension and postretirement benefits

 

(1,330

)

397

 

(933

)

Underwriting and distribution expense and Compensation and related costs

 

Total

 

$

(871

)

396

 

(475

)

 

 

 

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Table of Contents

 

 

 

For the three months ended June 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

 

$

1,404

 

(520

)

884

 

Investment and other income

 

Valuation allowance

 

 

516

 

516

 

Provision for income taxes

 

Amortization of pension and postretirement benefits

 

(452

)

167

 

(285

)

Underwriting and distribution expense and Compensation and related costs

 

Total

 

$

952

 

163

 

1,115

 

 

 

 

 

 

For the six months ended June 30, 2015

 

 

 

 

 

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

 

$

2,804

 

(1,040

)

1,764

 

Investment and other income

 

Valuation allowance

 

 

1,020

 

1,020

 

Provision for income taxes

 

Amortization of pension and postretirement benefits

 

(2,827

)

951

 

(1,876

)

Underwriting and distribution expense and Compensation and related costs

 

Total

 

$

(23

)

931

 

908

 

 

 

 

 

 

For the six months ended June 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

 

$

2,586

 

(957

)

1,629

 

Investment and other income

 

Valuation allowance

 

 

951

 

951

 

Provision for income taxes

 

Amortization of pension and postretirement benefits

 

(1,004

)

372

 

(632

)

Underwriting and distribution expense and Compensation and related costs

 

Total

 

$

1,582

 

366

 

1,948

 

 

 

 

10.       Share-Based Compensation

 

On April 2, 2015, we granted 1,028,523 shares of restricted stock with a fair value of $50.18 per share under the Company’s 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”).  The value of those shares at the grant date, aggregating to $51.6 million, will generally be amortized to expense over a four-year vesting period.

 

11.       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.

 

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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.

 

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, 2014, 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;

 

·                                          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;

 

·                                          The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;

 

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·                                          Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

 

·                                          Our inability to attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment management advisory business;

 

·                                          A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and

 

·                                          Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.

 

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, 2014 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2015.  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 and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments.  Our earnings and cash flows are heavily dependent on financial market conditions.  Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.

 

We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the 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”), the Selector Management Fund SICAV, renamed Ivy Global Investors SICAV effective July 1, 2015, and its Ivy Global Investors sub-funds (the “IGI Funds”) and institutional and separately managed accounts. Investment management and/or advisory fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of 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 sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold.  Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts.  Our major expenses are for commissions, employee compensation, field 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, or through our Advisors channel sales force of independent financial advisors.  Through our Institutional channel, we distribute a variety of investment styles for a variety of types of institutions.

 

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Company Developments

 

·                  Ivy Investment Management Company entered into a preliminary agreement with Navigate Fund Solutions, a subsidiary of Eaton Vance Corporation, to support the launch by Ivy Funds of a family of NextShares exchange-traded managed funds.  The Ivy Funds launch of NextShares is subject to securing exemptive order relief from the SEC to allow it to manage exchange-traded managed funds, as well as the development of implementation technology by broker/dealers and other market participants.

 

·                  In October 2015, Ivy Funds will launch two new Apollo Funds offering income solutions for investors.  The Ivy Apollo Strategic Income Fund will invest among three investment strategies: Apollo’s total return and Ivy’s global bond and high income.  The Ivy Apollo Multi-Asset Income Fund will invest among four investment strategies: Apollo’s total return and Ivy’s global high income, equity income and real estate.

 

·                  Operating revenues of $394.0 million in the second quarter of 2015 decreased $6.6 million, or 2%, compared to the second quarter of 2014.

 

·                  Operating income of $111.0 million in the second quarter of 2015 decreased $12.6 million, or 10%, compared to the second quarter of 2014.  Our operating margin of 28.2% for the quarter ended June 30, 2015 declined from 30.9% for the quarter ended June 30, 2014. Net income of $67.4 million for the second quarter of 2015 decreased $15.5 million, or 19%, compared to this same period a year ago.

 

·                  Our assets under management decreased 11% from $135.6 billion at June 30, 2014 to $120.7 billion at June 30, 2015 and our average assets under management decreased 6% from $131.8 billion for the quarter ended June 30, 2014 to $123.5 billion for the quarter ended June 30, 2015.

 

·                  Company-wide sales in the second quarter of 2015 decreased 23% compared to sales in the second quarter of 2014. Diversification remains our focus as sales exceeded $100.0 million for 10 investment strategies during the second quarter of 2015; of these investment strategies, sales for four strategies exceeded $500.0 million.

 

·                  The long-term redemption rate in the Wholesale channel decreased to 31.0% during the second quarter of 2015, compared to 42.9% during the first quarter of 2015, primarily driven by a moderation of outflows in the Ivy Asset Strategy Fund.

 

·                  Our balance sheet remains solid, and we ended the second quarter of 2015 with cash and investments of $853.9 million.

 

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Assets Under Management

 

Assets under management at June 30, 2015 decreased 2% to $120.7 billion from $122.9 billion at March 31, 2015, and decreased 11% compared to $135.6 billion at June 30, 2014.

 

Change in Assets Under Management(1)

 

 

 

Second Quarter 2015

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

59,412

 

46,385

 

17,097

 

122,894

 

 

 

 

 

 

 

 

 

 

 

Sales(2)

 

3,239

 

1,347

 

1,203

 

5,789

 

Redemptions

 

(4,558

)

(1,279

)

(1,003

)

(6,840

)

Net Exchanges

 

144

 

(144

)

 

 

Net Flows

 

(1,175

)

(76

)

200

 

(1,051

)

 

 

 

 

 

 

 

 

 

 

Market Depreciation/Other

 

(692

)

(362

)

(83

)

(1,137

)

Ending Assets

 

$

57,545

 

45,947

 

17,214

 

120,706

 

 

 

 

Second Quarter 2014

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

70,467

 

44,224

 

16,692

 

131,383

 

 

 

 

 

 

 

 

 

 

 

Sales(2)

 

4,864

 

1,457

 

1,193

 

7,514

 

Redemptions

 

(4,363

)

(1,098

)

(851

)

(6,312

)

Net Exchanges

 

(397

)

(88

)

485

 

 

Net Flows

 

104

 

271

 

827

 

1,202

 

 

 

 

 

 

 

 

 

 

 

Market Appreciation/Other

 

1,100

 

1,302

 

646

 

3,048

 

Ending Assets

 

$

71,671

 

45,797

 

18,165

 

135,633

 

 


(1)         Includes all activity of the Funds, the IGI 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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Assets under management decreased to $120.7 billion at June 30, 2015 compared to $123.7 billion at December 31, 2014 due to outflows of $4.6 billion offset by market appreciation of $1.7 billion.

 

 

 

Year to Date 2015

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

60,335

 

45,517

 

17,798

 

123,650

 

 

 

 

 

 

 

 

 

 

 

Sales(2)

 

7,110

 

2,616

 

1,504

 

11,230

 

Redemptions

 

(10,816

)

(2,558

)

(2,464

)

(15,838

)

Net Exchanges

 

367

 

(367

)

 

 

Net Flows

 

(3,339

)

(309

)

(960

)

(4,608

)

 

 

 

 

 

 

 

 

 

 

Market Appreciation/Other

 

549

 

739

 

376

 

1,664

 

Ending Assets

 

$

57,545

 

45,947

 

17,214

 

120,706

 

 

 

 

Year to Date 2014

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

67,055

 

43,667

 

15,821

 

126,543

 

 

 

 

 

 

 

 

 

 

 

Sales(2)

 

11,881

 

2,892

 

2,747

 

17,520

 

Redemptions

 

(7,925

)

(2,204

)

(1,530

)

(11,659

)

Net Exchanges

 

(285

)

(200

)

485

 

 

Net Flows

 

3,671

 

488

 

1,702

 

5,861

 

 

 

 

 

 

 

 

 

 

 

Market Appreciation/Other

 

945

 

1,642

 

642

 

3,229

 

Ending Assets

 

$

71,671

 

45,797

 

18,165

 

135,633

 

 


(2)         Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and investment income.

 

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Table of Contents

 

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

 

 

 

Second Quarter 2015

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

48,580

 

35,106

 

16,216

 

$

99,902

 

Fixed Income

 

10,448

 

10,093

 

1,110

 

21,651

 

Money Market

 

137

 

1,822

 

 

1,959

 

Total

 

$

59,165

 

47,021

 

17,326

 

$

123,512

 

 

 

 

Second Quarter 2014

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

55,679

 

32,547

 

16,410

 

$

104,636

 

Fixed Income

 

14,254

 

9,903

 

785

 

24,942

 

Money Market

 

167

 

2,066

 

 

2,233

 

Total

 

$

70,100

 

44,516

 

17,195

 

$

131,811

 

 

 

 

Year to Date 2015

 

 

 

Wholesale

 

Advisors

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

48,605

 

34,649

 

16,382