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EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INCwdr-20160630ex3223a3198.htm
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EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INCwdr-20160630ex312bfffe6.htm
EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INCwdr-20160630ex3118c0f91.htm


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

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  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  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 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(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 .

 

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

 

 

 

 

Class

 

Outstanding as of July 15, 2016

Class A common stock, $.01 par value

 

82,840,733

 

 

 

 

 

 


 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2016

 

 

 

 

    

Page No.

 

 

 

 

 

Part I. 

Financial Information

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2016 and December 31, 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2016 and June 30, 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and June 30, 2015

 

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2016

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and June 30, 2015

 

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

 

 

 

 

 

Item 2. 

 

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

 

21 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

37 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

37 

 

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

38 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

38 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39 

 

 

 

 

 

Item 6. 

 

Exhibits

 

40 

 

 

 

 

 

 

 

Signatures

 

41 

 

 

 

 

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

2016

 

 

December 31, 

 

 

 

(Unaudited)

 

 

2015

 

Assets:

    

 

 

    

 

 

    

Cash and cash equivalents

 

$

467,458

 

 

558,495

 

Cash and cash equivalents - restricted

 

 

33,200

 

 

66,880

 

Investment securities

 

 

361,615

 

 

291,743

 

Receivables:

 

 

 

 

 

 

 

Funds and separate accounts

 

 

26,090

 

 

34,399

 

Customers and other

 

 

166,656

 

 

220,660

 

Income taxes receivable

 

 

4,701

 

 

10,594

 

Prepaid expenses and other current assets

 

 

24,042

 

 

34,800

 

Total current assets

 

 

1,083,762

 

 

1,217,571

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

105,871

 

 

105,434

 

Deferred sales commissions, net

 

 

6,783

 

 

24,262

 

Goodwill and identifiable intangible assets

 

 

158,318

 

 

158,118

 

Deferred income taxes

 

 

31,319

 

 

32,692

 

Other non-current assets

 

 

20,185

 

 

17,074

 

Total assets

 

$

1,406,238

 

 

1,555,151

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

25,397

 

 

32,858

 

Payable to investment companies for securities

 

 

48,838

 

 

113,648

 

Payable to third party brokers

 

 

34,458

 

 

49,848

 

Payable to customers

 

 

84,635

 

 

120,420

 

Accrued compensation

 

 

75,861

 

 

69,335

 

Other current liabilities

 

 

63,093

 

 

57,104

 

Total current liabilities

 

 

332,282

 

 

443,213

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

189,519

 

 

189,432

 

Accrued pension and postretirement costs

 

 

29,408

 

 

48,810

 

Other non-current liabilities

 

 

26,605

 

 

27,241

 

Total liabilities

 

 

577,814

 

 

708,696

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

10,865

 

 

 —

 

 

 

 

 

 

 

 

 

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; 82,870 shares outstanding (82,850 at December 31, 2015)

 

 

997

 

 

997

 

Additional paid-in capital

 

 

279,206

 

 

331,611

 

Retained earnings

 

 

1,135,646

 

 

1,141,608

 

Cost of 16,831 common shares in treasury (16,851 at December 31, 2015)

 

 

(540,782)

 

 

(566,256)

 

Accumulated other comprehensive loss

 

 

(57,508)

 

 

(61,505)

 

Total stockholders’ equity

 

 

817,559

 

 

846,455

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

1,406,238

 

 

1,555,151

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

3


 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited, in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 

 

For the six months ended June 30, 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

    

 

    

    

 

    

    

 

 

    

 

 

    

Investment management fees

 

$

140,880

 

 

185,914

 

 

285,658

 

 

368,019

 

Underwriting and distribution fees

 

 

146,312

 

 

171,508

 

 

292,970

 

 

338,486

 

Shareholder service fees

 

 

32,016

 

 

36,568

 

 

64,396

 

 

72,943

 

Total

 

 

319,208

 

 

393,990

 

 

643,024

 

 

779,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

 

181,245

 

 

195,762

 

 

355,081

 

 

391,182

 

Compensation and related costs (including share-based compensation of $12,625, $11,333, $26,147 and $23,806, respectively)

 

 

58,341

 

 

52,829

 

 

111,281

 

 

106,324

 

General and administrative

 

 

19,276

 

 

27,897

 

 

38,428

 

 

53,575

 

Subadvisory fees

 

 

2,325

 

 

2,394

 

 

4,418

 

 

4,781

 

Depreciation

 

 

4,260

 

 

4,064

 

 

8,622

 

 

8,098

 

Total

 

 

265,447

 

 

282,946

 

 

517,830

 

 

563,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

53,761

 

 

111,044

 

 

125,194

 

 

215,488

 

Investment and other income (loss)

 

 

687

 

 

9

 

 

(9,531)

 

 

3,981

 

Interest expense

 

 

(2,776)

 

 

(2,765)

 

 

(5,544)

 

 

(5,531)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

51,672

 

 

108,288

 

 

110,119

 

 

213,938

 

Provision for income taxes

 

 

18,101

 

 

40,843

 

 

39,079

 

 

79,380

 

Net income

 

 

33,571

 

 

67,445

 

 

71,040

 

 

134,558

 

Net income (loss) attributable to redeemable noncontrolling interests

 

 

(124)

 

 

 —

 

 

377

 

 

 —

 

Net income attributable to Waddell & Reed Financial, Inc

 

$

33,695

 

 

67,445

 

 

70,663

 

 

134,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:

 

$

0.41

 

 

0.80

 

 

0.86

 

 

1.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

 

82,947

 

 

84,079

 

 

82,526

 

 

83,831

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4


 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the three months ended June 30, 

 

For the six months ended June 30, 

 

 

 

2016

    

2015

    

2016

    

2015

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

33,571

 

 

67,445

 

 

71,040

 

 

134,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $0, $(8), $0, and $5, respectively

 

 

1,884

 

 

(4,974)

 

 

1,960

 

 

(3,164)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits, net of income tax expense of $566, $397, $1,185 and $951, respectively

 

 

960

 

 

933

 

 

2,037

 

 

1,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

36,415

 

 

63,404

 

 

75,037

 

 

133,270

 

Comprehensive income (loss) attributable to redeemable noncontrolling interests

 

 

(124)

 

 

 —

 

 

377

 

 

 —

 

Comprehensive income attributable to Waddell & Reed Financial, Inc.

 

$

36,539

 

 

63,404

 

 

74,660

 

 

133,270

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity and redeemable noncontrolling interests

For the Six Months Ended June 30, 2016

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

Total 

 

Non

 

 

 

Common Stock

 

Additional

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

Controlling

 

 

    

Shares

    

Amount

    

Paid-in Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

interest

 

Balance at December 31, 2015

 

99,701

 

 

997

 

331,611

 

1,141,608

 

(566,256)

 

(61,505)

 

846,455

 

 —

 

Adoption of consolidation guidance on January 1, 2016 - redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

14,330

 

Net income

 

 —

 

 

 —

 

 —

 

70,663

 

 —

 

 —

 

70,663

 

377

 

Net redemption of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(3,842)

 

Recognition of equity compensation

 

 —

 

 

 —

 

26,147

 

 —

 

 —

 

 —

 

26,147

 

 —

 

Net issuance/forfeiture of nonvested shares

 

 —

 

 

 —

 

(72,935)

 

 —

 

72,935

 

 —

 

 —

 

 —

 

Dividends accrued, $0.92 per share

 

 —

 

 

 —

 

 —

 

(76,625)

 

 —

 

 —

 

(76,625)

 

 —

 

Tax impact of share-based payment arrangements

 

 —

 

 

 —

 

(5,617)

 

 —

 

 —

 

 —

 

(5,617)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(47,461)

 

 —

 

(47,461)

 

 —

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

3,997

 

3,997

 

 —

 

Balance at June 30, 2016

 

99,701

 

$

997

 

279,206

 

1,135,646

 

(540,782)

 

(57,508)

 

817,559

 

10,865

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

    

For the six months ended June 30, 

 

 

 

2016

    

2015

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

71,040

 

 

134,558

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,627

 

 

8,100

 

Amortization of deferred sales commissions

 

 

19,661

 

 

24,270

 

Share-based compensation

 

 

26,147

 

 

23,806

 

Excess tax benefits from share-based payment arrangements

 

 

(1,423)

 

 

(4,814)

 

Investments gain, net

 

 

(8,560)

 

 

(2,804)

 

Net purchases and sales or maturities of trading securities

 

 

(24,996)

 

 

56

 

Deferred income taxes

 

 

187

 

 

(2,130)

 

Net change in trading securities held by consolidated sponsored funds

 

 

(45,455)

 

 

 —

 

Other

 

 

328

 

 

81

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Cash and cash equivalents - restricted

 

 

33,680

 

 

16,660

 

Customer and other receivables

 

 

54,004

 

 

65,293

 

Payable to investment companies for securities and payable to customers

 

 

(100,595)

 

 

(83,835)

 

Receivables from funds and separate accounts

 

 

8,309

 

 

5,288

 

Other assets

 

 

6,560

 

 

(7,887)

 

Deferred sales commissions

 

 

(2,182)

 

 

(6,752)

 

Accounts payable and payable to third party brokers

 

 

(22,852)

 

 

(15,814)

 

Other liabilities

 

 

(4,034)

 

 

1,768

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

18,446

 

 

155,844

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available for sale and equity method securities

 

 

(104)

 

 

(25,891)

 

Proceeds from sales and maturities of available for sale and equity method securities

 

 

17,986

 

 

29,778

 

Additions to property and equipment

 

 

(9,265)

 

 

(14,078)

 

Net cash of sponsored funds on consolidation

 

 

6,887

 

 

 —

 

Other

 

 

(196)

 

 

 —

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

$

15,308

 

 

(10,191)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(76,616)

 

 

(72,219)

 

Repurchase of common stock

 

 

(47,461)

 

 

(30,004)

 

Net subscriptions from (redemptions and distributions to) redeemable noncontrolling interests in sponsored funds

 

 

(2,224)

 

 

 —

 

Excess tax benefits from share-based payment arrangements

 

 

1,423

 

 

4,814

 

Other

 

 

87

 

 

 —

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

$

(124,791)

 

 

(97,409)

 

Net increase (decrease) in cash and cash equivalents

 

 

(91,037)

 

 

48,244

 

Cash and cash equivalents at beginning of period

 

 

558,495

 

 

566,621

 

Cash and cash equivalents at end of period

 

$

467,458

 

 

614,865

 

 

See accompanying notes to the unaudited consolidated financial statements.

7


 

 

WADDELL & REED FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.Description of Business and Significant Accounting Policies

 

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 Ivy Global Investors Fund SICAV (the “SICAV”) and its 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 distribution 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, 2015 (the “2015 Form 10-K”).  Certain amounts in the prior years’ financial statements have been reclassified for consistent presentation.

 

The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 1 to the consolidated financial statements included in our 2015 Form 10-K except as noted below.  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, 2016, the results of operations and cash flows for the six months ended June 30, 2016 and 2015 in conformity with accounting principles generally accepted in the United States.

 

Investments Securities and Investments in Sponsored Funds

 

Sponsored funds, which include the Funds, the IGI Funds and privately offered funds structured in the form of limited liability companies, are investments we have made for general corporate investment purposes and to provide seed capital for new investment products. The Company’s initial investment in a new investment product typically represents 100% ownership in that product.  Sponsored funds are initially consolidated and are accounted for as trading securities.  The Company has classified its investments in certain sponsored funds as either equity method investments (when the Company owns between 20% and 50% of the fund) or as available for sale investments (when the Company owns less than 20% of the fund) as described in Note 4.  Investments held by our broker-dealer entities or certain investments that are anticipated to be purchased and sold on a more frequent basis are classified as trading.

 

8


 

2.Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and short-term investments.  We consider all highly liquid investments with maturities upon acquisition of 90 days or less to be cash equivalents.  Cash and cash equivalents - restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations.

 

3.New Accounting Guidance

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which 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 January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which provides updated guidance on the recognition, measurement, presentation and disclosure of certain financial assets and financial liabilities.  This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  This ASU will be presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted.  The Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-07,“Simplifying the Transition to the Equity Method of Accounting.”  The amendments in this ASU eliminate the requirement that when an investment qualifies for the use of equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in effect during all previous periods that the investment had been held.  ASU 2016-07 also requires that an entity that has an available for sale equity security that becomes qualified for the equity method recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.  ASU 2016-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  The Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, with classifying excess tax benefits along with other income tax cash flows as an operating activity; allows an entity to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; and permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted.  The Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The ASU changes the impairment model for most financial assets, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting

9


 

in a net presentation of the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

4.Investment Securities

 

Investment securities at June 30, 2016 and December 31, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2016

 

2015

 

(in thousands)

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

Sponsored funds

 

$

84,947

 

40,552

 

Sponsored privately offered funds

 

 

868

 

825

 

Total available for sale securities

 

 

85,815

 

41,377

 

Trading securities:

 

 

 

 

 

 

Mortgage-backed securities

 

 

16

 

20

 

Corporate bond

 

 

3

 

5

 

Common stock

 

 

97

 

87

 

Consolidated sponsored funds

 

 

111,803

 

 —

 

Sponsored funds

 

 

29,924

 

29,701

 

Total trading securities 

 

 

141,843

 

29,813

 

Equity method securities:

 

 

 

 

 

 

Sponsored funds

 

 

130,898

 

217,380

 

Sponsored privately offered funds

 

 

3,059

 

3,173

 

Total equity method securities

 

 

133,957

 

220,553

 

Total securities

 

$

361,615

 

291,743

 

 

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

  

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

89,278

 

1,928

 

(6,259)

 

84,947

 

Sponsored privately offered funds

 

 

500

 

368

 

 —

 

868

 

  

 

$

89,778

 

2,296

 

(6,259)

 

85,815

 

 

 

 

 

 

 

 

 

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

46,800

 

434

 

(6,682)

 

40,552

 

Sponsored privately offered funds

 

 

500

 

325

 

 —

 

825

 

 

 

$

47,300

 

759

 

(6,682)

 

41,377

 

 

10


 

A summary of available for sale sponsored funds with fair values below carrying values at June 30, 2016 and December 31, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

June 30, 2016

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

 

(in thousands)

 

Sponsored funds

 

$

2,258

 

(44)

 

33,859

 

(6,037)

 

36,117

 

(6,081)

 

Sponsored privately offered funds

 

 

7,001

 

(178)

 

 —

 

 —

 

7,001

 

(178)

 

 

 

$

9,259

 

(222)

 

33,859

 

(6,037)

 

43,118

 

(6,259)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

December 31, 2015

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

 

(in thousands)

 

Sponsored funds

 

$

3,476

 

(166)

 

33,619

 

(6,516)

 

37,095

 

(6,682)

 

 

 

Based upon our assessment of these sponsored funds, we wrote-off $0.1 million at June 30, 2016.

 

The corporate bond accounted for as trading matures in 2018. Mortgage-backed securities accounted for as trading and held as of June 30, 2016 mature in 2022.

 

Sponsored funds

 

The Company has classified its investments in the Advisor Funds, Ivy Funds and IGI Funds as either trading, equity method investments (when the Company owns between 20% and 50% of the fund) or as available for sale investments (when the Company owns less than 20% of the fund).  These entities do not meet the criteria of a variable interest entity (“VIE”) and are considered to be voting interest entities (“VOE”). The Company has determined the Advisor and Ivy Funds are VOEs because the structure of the investment products is such that the voting rights held by the equity holders provide for equality among equity investors.  The Company has determined that the IGI Funds are VOEs as its legal structure and the powers of its equity investors prevent the IGI Funds from meeting characteristics of being a VIE.

 

Sponsored privately offered funds

 

The Company holds interests in privately offered funds structured in the form of limited liability companies.  The members of these entities have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote.  These entities do not meet the criteria of a variable interest entity and are considered to be voting interest entities.

 

Consolidated sponsored funds

 

The following table details the balances related to consolidated sponsored funds at June 30, 2016, as well as the Company’s net interest in these funds:

 

 

 

 

 

 

 

 

June 30, 2016

 

 

    

(in thousands)

 

 

 

 

 

 

Cash

 

$

7,801

 

Investments

 

 

111,803

 

Other assets

 

 

2,014

 

Other liabilities

 

 

(955)

 

Redeemable noncontrolling interests

 

 

(10,865)

 

Net interest in consolidated sponsored funds

 

$

109,798

 

 

During the six months ended June 30, 2016, we consolidated Ivy Funds and IGI Funds in which we provided initial seed capital at the time of the funds formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our financial statements.  We deconsolidated $44.2 million of these investments from our consolidated balance sheet during the first quarter of 2016.  There was no impact to the consolidated statement of income as a result of this deconsolidation.

11


 

 

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 trades in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. 

 

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, 2016 and December 31, 2015 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

84,947

 

 —

 

 —

 

84,947

 

Sponsored privately offered funds measured at net asset value (2)

 

 

 —

 

 —

 

 —

 

868

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

    

 

 —

    

16

    

 —

    

16

 

Corporate bonds

 

 

 —

 

3

 

 —

 

3

 

Common stock

 

 

97

 

 —

 

 —

 

97

 

Consolidated sponsored funds (2)

 

 

 —

 

 —

 

 —

 

111,803

 

Sponsored funds

 

 

29,924

 

 —

 

 —

 

29,924

 

Equity method securities: (1)

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

 

130,898

 

 —

 

 —

 

130,898

 

Sponsored privately offered funds measured at net asset value (2)

 

 

 —

 

 —

 

 —

 

3,059

 

Total

 

$

245,866

 

19

 

 —

 

361,615

 

 

 

12


 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

40,552

 

 —

 

 —

 

40,552

 

Sponsored privately offered funds measured at net asset value (2)

 

 

 —

 

 —

 

 —

 

825

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

    

 

 —

    

20

    

 —

    

20

 

Corporate bonds

 

 

 —

 

5

 

 —

 

5

 

Common stock

 

 

87

 

 —

 

 —

 

87

 

Sponsored funds

 

 

29,701

 

 —

 

 —

 

29,701

 

Equity method securities: (1)

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

 

217,380

 

 —

 

 —

 

217,380

 

Sponsored privately offered funds measured at net asset value (2)

 

 

 —

 

 —

 

 —

 

3,173

 

Total

 

$

287,720

 

25

 

 —

 

291,743

 


(1)

Substantially all of the Company’s equity method investments are investment companies that record their underlying investments at fair value.  Fair value is measured using the Company’s share of the investee’s underlying net income or loss, which is predominantly representative of fair value adjustments in the investments held by the investee.

 

(2)

Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.  The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

 

5.Derivative Financial Instruments

 

In January 2016, the Company implemented an economic hedge program that uses total return swap contracts to hedge market risk with its investments in certain sponsored funds.  As of June 30, 2016, we had 91% of our investments in sponsored funds, excluding our available for sale portfolio, hedged, 82% of which were hedged with total return swap contracts.  Certain of the consolidated sponsored funds may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives.  We do not hedge for speculative purposes.

 

As of June 30, 2016, excluding derivative financial instruments held in certain consolidated sponsored funds, the Company was party to three total return swap contracts with a combined notional value of $200.7 million. These derivative instruments are not designated as hedges for accounting purposes.  Changes in fair value of the total return swap contracts are recognized in investment and other income (loss), net on the Company’s consolidated statement of income. 

 

The Company posted $8.2 million in cash collateral with the counterparties of the total return swap contracts as of June 30, 2016.  The cash collateral is included in customers and other receivables on the Company’s consolidated balance sheet.  The company does not record its fair value in derivative transactions against the posted collateral.

 

The following table presents the fair value of the derivative financial instruments, excluding derivative financial instruments held in certain consolidated sponsored funds as of June 30, 2016:

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

Balance sheet

 

 

 

 

 

    

location

    

Fair value

 

 

 

 

 

(in thousands)

 

Total return swap contracts

 

Other current liabilities

 

$

793

 

 

13