Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INC | wdr-20160630ex3223a3198.htm |
EX-32.1 - EX-32.1 - WADDELL & REED FINANCIAL INC | wdr-20160630ex32117a6e2.htm |
EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INC | wdr-20160630ex312bfffe6.htm |
EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INC | wdr-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
2
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
(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 |