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EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INCwdr-20170331ex32291670f.htm
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EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INCwdr-20170331ex312189efc.htm
EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INCwdr-20170331ex3111624d0.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 March 31, 2017

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” 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)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

 

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 April 30, 2017

Class A common stock, $.01 par value

 

83,614,514

 

 

 

 

 

 


 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2017

 

 

 

 

    

Page No.

 

 

 

 

 

Part I. 

Financial Information

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2017 and March 31, 2016

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and March 31, 2016

 

5

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity and redeemable noncontrolling interests for the three months ended March 31, 2017

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and March 31, 2016

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2. 

 

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

 

21

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

32

 

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

33

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

 

Item 6. 

 

Exhibits

 

34

 

 

 

 

 

 

 

Signatures

 

35

 

 

 

 

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

 

 

 

 

2017

 

 

December 31, 

 

 

 

(Unaudited)

 

 

2016

 

Assets:

    

 

 

    

 

 

    

Cash and cash equivalents

 

$

565,171

 

 

555,102

 

Cash and cash equivalents - restricted

 

 

45,533

 

 

31,137

 

Investment securities

 

 

309,303

 

 

328,750

 

Receivables:

 

 

 

 

 

 

 

Funds and separate accounts

 

 

23,948

 

 

27,181

 

Customers and other

 

 

111,025

 

 

128,095

 

Prepaid expenses and other current assets

 

 

28,587

 

 

21,574

 

Total current assets

 

 

1,083,567

 

 

1,091,839

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

99,070

 

 

102,449

 

Goodwill and identifiable intangible assets

 

 

147,969

 

 

148,569

 

Deferred income taxes

 

 

29,512

 

 

31,430

 

Other non-current assets

 

 

27,910

 

 

31,985

 

Total assets

 

$

1,388,028

 

 

1,406,272

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

25,281

 

 

28,023

 

Payable to investment companies for securities

 

 

69,819

 

 

53,691

 

Payable to third party brokers

 

 

27,601

 

 

31,735

 

Payable to customers

 

 

60,294

 

 

82,918

 

Short-term notes payable

 

 

94,920

 

 

 —

 

Accrued compensation

 

 

32,980

 

 

38,764

 

Other current liabilities

 

 

69,883

 

 

61,847

 

Total current liabilities

 

 

380,778

 

 

296,978

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

94,729

 

 

189,605

 

Accrued pension and postretirement costs

 

 

30,215

 

 

38,379

 

Other non-current liabilities

 

 

24,906

 

 

26,655

 

Total liabilities

 

 

530,628

 

 

551,617

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

8,516

 

 

10,653

 

 

 

 

 

 

 

 

 

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; 83,709 shares outstanding (83,118 at December 31, 2016)

 

 

997

 

 

997

 

Additional paid-in capital

 

 

274,146

 

 

291,908

 

Retained earnings

 

 

1,127,735

 

 

1,135,694

 

Cost of 15,991 common shares in treasury (16,583 at December 31, 2016)

 

 

(505,050)

 

 

(531,268)

 

Accumulated other comprehensive loss

 

 

(48,944)

 

 

(53,329)

 

Total stockholders’ equity

 

 

848,884

 

 

844,002

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

1,388,028

 

 

1,406,272

 

 

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 March 31, 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Revenues:

    

 

 

    

 

 

    

Investment management fees

 

$

130,436

 

 

144,778

 

Underwriting and distribution fees

 

 

128,831

 

 

146,658

 

Shareholder service fees

 

 

27,297

 

 

32,380

 

Total

 

 

286,564

 

 

323,816

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Underwriting and distribution

 

 

150,324

 

 

173,836

 

Compensation and related costs (including share-based compensation of $14,185 and $13,522, respectively)

 

 

49,406

 

 

52,940

 

General and administrative

 

 

25,724

 

 

19,152

 

Subadvisory fees

 

 

2,697

 

 

2,093

 

Depreciation

 

 

5,221

 

 

4,362

 

Intangible asset impairment

 

 

600

 

 

 —

 

Total

 

 

233,972

 

 

252,383

 

 

 

 

 

 

 

 

 

Operating income

 

 

52,592

 

 

71,433

 

Investment and other income (loss)

 

 

2,129

 

 

(10,218)

 

Interest expense

 

 

(2,786)

 

 

(2,768)

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

51,935

 

 

58,447

 

Provision for income taxes

 

 

18,399

 

 

20,978

 

Net income

 

 

33,536

 

 

37,469

 

Net income attributable to redeemable noncontrolling interests

 

 

480

 

 

501

 

Net income attributable to Waddell & Reed Financial, Inc.

 

$

33,056

 

 

36,968

 

 

 

 

 

 

 

 

 

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

 

$

0.39

 

 

0.45

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

 

84,077

 

 

82,104

 

 

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 March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Net income

 

$

33,536

 

 

37,469

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation of available for sale investment securities during the period, net of income tax expense (benefit) of $(1,481) and $0, respectively

 

 

3,599

 

 

76

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit, net of income tax expense of $465 and $619, respectively

 

 

786

 

 

1,077

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

37,921

 

 

38,622

 

Comprehensive income attributable to redeemable noncontrolling interests

 

 

480

 

 

501

 

Comprehensive income attributable to Waddell & Reed Financial, Inc.

 

$

37,441

 

 

38,121

 

 

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 Three Months Ended March 31, 2017

(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, 2016

 

99,701

 

 

997

 

291,908

 

1,135,694

 

(531,268)

 

(53,329)

 

844,002

 

10,653

 

Adoption of share-based compensation guidance on January 1, 2017

 

 —

 

 

 —

 

3,504

 

(2,200)

 

 —

 

 —

 

1,304

 

 —

 

Net income

 

 —

 

 

 —

 

 —

 

33,056

 

 —

 

 —

 

33,056

 

480

 

Net redemption and deconsolidation of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(2,617)

 

Recognition of equity compensation

 

 —

 

 

 —

 

12,928

 

228

 

 —

 

 —

 

13,156

 

 —

 

Issuance of restricted share and other

 

 —

 

 

 —

 

(34,194)

 

 

 

34,194

 

 

 

 —

 

 —

 

Dividends accrued, $0.46 per share

 

 —

 

 

 —

 

 —

 

(39,043)

 

 —

 

 —

 

(39,043)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(7,976)

 

 —

 

(7,976)

 

 —

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

4,385

 

4,385

 

 —

 

Balance at March 31, 2017

 

99,701

 

$

997

 

274,146

 

1,127,735

 

(505,050)

 

(48,944)

 

848,884

 

8,516

 

 

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 three months ended March 31, 

 

 

 

2017

    

2016

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

33,536

 

 

37,469

 

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

 

 

 

 

 

 

 

Depreciation and  amortization

 

 

5,221

 

 

4,367

 

Write-down of impaired assets

 

 

600

 

 

 —

 

Amortization of deferred sales commissions

 

 

1,436

 

 

7,635

 

Share-based compensation

 

 

13,156

 

 

13,522

 

Excess tax benefits from share-based payment arrangements

 

 

 —

 

 

(312)

 

Investments gain, net

 

 

(2,975)

 

 

(5,144)

 

Net purchases and sales or maturities of trading securities

 

 

 —

 

 

(25,000)

 

Deferred income taxes

 

 

4,239

 

 

2,350

 

Net change in trading securities held by consolidated sponsored funds

 

 

12,434

 

 

(43,991)

 

Other

 

 

43

 

 

118

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Cash and cash equivalents - restricted

 

 

(14,396)

 

 

27,539

 

Customer and other receivables

 

 

17,070

 

 

30,484

 

Payable to investment companies for securities and payable to customers

 

 

(6,496)

 

 

(71,613)

 

Receivables from funds and separate accounts

 

 

3,233

 

 

5,890

 

Other assets

 

 

(5,307)

 

 

(4,565)

 

Accounts payable and payable to third party brokers

 

 

(6,876)

 

 

(22,483)

 

Other liabilities

 

 

(5,749)

 

 

(3,547)

 

Net cash provided by (used in) operating activities

 

$

49,169

 

 

(47,281)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sales of available for sale and equity method securities

 

 

12,105

 

 

100

 

Additions to property and equipment

 

 

(1,885)

 

 

(5,741)

 

Net cash of sponsored funds on consolidation

 

 

 —

 

 

6,887

 

Other

 

 

 —

 

 

(298)

 

Net cash provided by investing activities

 

$

10,220

 

 

948

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(38,771)

 

 

(38,115)

 

Repurchase of common stock

 

 

(7,976)

 

 

(25,598)

 

Net redemptions, distributions and deconsolidations of redeemable noncontrolling interests in sponsored funds

 

 

(2,617)

 

 

(1,692)

 

Excess tax benefits from share-based payment arrangements

 

 

 —

 

 

312

 

Other

 

 

44

 

 

43

 

Net cash used in financing activities

 

$

(49,320)

 

 

(65,050)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

10,069

 

 

(111,383)

 

Cash and cash equivalents at beginning of period

 

 

555,102

 

 

558,495

 

Cash and cash equivalents at end of period

 

$

565,171

 

 

447,112

 

 

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. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time, we added additional mutual funds: Ivy Funds (the “Ivy Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college savings plan (“InvestEd”); Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”); and the Ivy Global Investors Fund Société d’Investissement à Capital Variable (the “SICAV”) and its Ivy Global Investors sub‑funds (the “IGI Funds”), an undertaking for the collective investment in transferable securities (“UCITS”). In 2016, we introduced the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”) (collectively, the Advisors Funds, Ivy Funds, Ivy VIP, InvestEd, IVH and Ivy NextShares are referred to as the “Funds”). As of March 31, 2017, we had $81.1 billion in assets under management.

We derive our revenues from providing investment management, investment advisory, investment product underwriting and distribution, and shareholder services administration to the Funds, the IGI Funds, and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee‑based asset allocation products and related advisory services, asset‑based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940, as amended (“Rule 12b-1”), commissions derived from sales of investment and insurance products, and distribution fees on certain variable 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, and portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts.

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, 2016 (the “2016 Form 10-K”).  Certain amounts in the prior year’s 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 2016 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017.  As required by this ASU, excess tax benefits and tax shortfalls are recognized as income tax benefit or expense in the income statement on a prospective basis.  Additionally, excess tax benefits or shortfalls recognized on share-based compensation are classified as an operating activity in the statement of cash flows.  The Company has applied this provision prospectively, and thus, the prior period presented in the statement of cash flows has not been adjusted.  This ASU allows entities to withhold shares issued during the settlement of a stock award or option, as means of meeting minimum tax withholding due by the employee, in an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification of the award (versus an equity classification). The value of the withheld shares is then remitted by the Company in cash to the taxing authorities on the employees’ behalf. The Company’s historical policy to withhold shares equivalent to the minimum individual tax rate is consistent with the thresholds meeting the classification of an equity award and, therefore, a retrospective classification

8


 

adjustment was not required. This ASU requires that all cash payments made to taxing authorities on the employees’ behalf for withheld shares be presented as financing activities on the statement of cash flows. As this requirement is consistent with the Company’s historical accounting policy, a retrospective adjustment to presentation of the statement of cash flows was not required. This standard also allows for the option to account for forfeitures as they occur when determining the amount of share-based compensation expense to be recognized, rather than estimating expected forfeitures over the course of a vesting period.  The Company elected to account for forfeitures as they occur.  The net cumulative effect to the Company from the adoption of this ASU was an increase to additional paid-in capital of $3.5 million, a reduction to retained earnings of $2.2 million and an increase to the non-current deferred tax asset of $1.3 million as of January 1, 2017.  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 March 31, 2017, and the results of operations and cash flows for the three months ended March 31, 2017 and 2016 in conformity with accounting principles generally accepted in the United States.

 

2.New Accounting Guidance

 

Accounting Guidance Adopted During The First Quarter of 2017

 

On January 1, 2017 the Company adopted ASU 2016-07, “Investments-Equity Method and Joint Ventures”.  This ASU eliminates 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.  This ASU 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.  We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

 

As disclosed in Note 1 above, on January 1, 2017, the Company adopted ASU 2016-09. This ASU requires recognition of all excess tax benefits and tax shortfalls as income tax expense or benefit in the income statement and classification of 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. The Company accounts for forfeitures when they occur. Recognition of excess tax benefits as income tax benefit and tax shortfalls as income tax expense in the income statement may result in increased volatility in our provision for income taxes and effective tax rate. See Note 1 – Description of Business and Significant Accounting Policies – Basis of Presentation for description of the financial statement impact of adopting this ASU.

 

New Accounting Guidance Not Yet Adopted

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued 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.  This ASU permits the use of either the retrospective or cumulative effect transition method. We have evaluated our population of contracts and concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

 

In February 2016, 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.  This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  Although the Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company’s consolidated balance sheet for real estate operating leases.

9


 

 

In August 2016, FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  This ASU eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. This ASU designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities.  This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures. 

 

In November 2016, FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash.” This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all periods presented. We are evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In March 2017, FASB issued ASU 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This ASU eliminates the second step from the goodwill impairment test. An entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

 

In March 2017, FASB issued ASU 2017-07, “Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”  This ASU changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in a separate line item outside of operating items. In addition, only the service cost component is eligible for capitalization as part of an asset. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

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3.Investment Securities

 

Investment securities at March 31, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

 

2016

 

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

Sponsored funds

 

$

120,756

 

122,806

 

Sponsored privately offered funds

 

 

 —

 

570

 

Total available for sale securities

 

 

120,756

 

123,376

 

Trading securities:

 

 

 

 

 

 

Mortgage-backed securities

 

 

12

 

13

 

Common stock

 

 

104

 

101

 

Consolidated sponsored funds

 

 

133,276

 

145,710

 

Sponsored funds

 

 

30,555

 

29,541

 

Sponsored privately offered funds

 

 

614

 

 —

 

Total trading securities 

 

 

164,561

 

175,365

 

Equity method securities:

 

 

 

 

 

 

Sponsored funds

 

 

20,441

 

26,775

 

Sponsored privately offered funds

 

 

3,545

 

3,234

 

Total equity method securities

 

 

23,986

 

30,009

 

Total securities

 

$

309,303

 

328,750

 

 

Mortgage-backed securities accounted for as trading and held as of March 31, 2017 mature in 2022.

 

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

  

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

124,954

 

1,258

 

(5,456)

 

120,756

 

 

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

129,427

 

828

 

(7,449)

 

122,806

 

Sponsored privately offered funds

 

 

265

 

305

 

 —

 

570

 

 

 

$

129,692

 

1,133

 

(7,449)

 

123,376

 

 

A summary of available for sale sponsored funds with fair values below carrying values at March 31, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

March 31, 2017

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

 

(in thousands)

 

Sponsored funds

 

$

56,153

 

(1,268)

 

35,291

 

(4,188)

 

91,444

 

(5,456)

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

December 31, 2016

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

 

(in thousands)

 

Sponsored funds

 

$

71,051

 

(1,834)

 

34,182

 

(5,615)

 

105,233

 

(7,449)

 

 

 

Based upon our assessment of these sponsored funds, the time frame the investments have been in a loss position and our intent to hold sponsored funds until they have recovered; we determined that a write-down was not necessary at March 31, 2017.

 

Sponsored Funds

 

The Company has classified its investments in the Advisors 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 Advisors 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 their legal structure and the powers of their 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 VIE and are considered to be VOEs.

 

Consolidated Sponsored Funds

 

The following table details the balances related to consolidated sponsored funds at March 31, 2017, and at December 31, 2016, as well as the Company’s net interest in these funds:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

2017

    

 

2016

 

    

(in thousands)

Cash

 

$

3,638

 

 

6,885

Investments

 

 

133,276

 

 

145,710

Other assets

 

 

3,346

 

 

763

Other liabilities

 

 

(2,253)

 

 

(390)

Redeemable noncontrolling interests

 

 

(8,516)

 

 

(10,653)

Net interest in consolidated sponsored funds

 

$

129,491

 

 

142,315

 

During the three months ended March 31, 2017, we consolidated certain of the Ivy Funds in which we provided initial seed capital at the time of the fund’s formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our financial statements.  During the first quarter of 2017, we closed three of the IGI Funds that were previously consolidated. Accordingly, we deconsolidated $2.6 million from Cash and cash equivalents and $2.6 million from Redeemable noncontrolling interests. There was no impact to the Consolidated Statements of Income as a result of this deconsolidation, as the IGI Funds were carried at fair value.

 

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.

 

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·

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 pricing approaches evaluated differently 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 March 31, 2017 and December 31, 2016 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Not Held at Fair Value

 

Total

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

120,756

 

 —

 

 —

 

 —

 

120,756

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

    

 

 —

    

12

    

 —

    

 —

 

12

 

Common stock

 

 

104

 

 —

 

 —

 

 —

 

104

 

Consolidated sponsored funds

 

 

94,945

 

38,331

 

 —

 

 —

 

133,276

 

Sponsored funds

 

 

30,555

 

 —

 

 —

 

 —

 

30,555

 

Sponsored privately offered funds measured at net asset value (1)

 

 

 —

 

 —

 

 —

 

614

 

614

 

Equity method securities: (2)

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

 

20,441

 

 —

 

 —

 

 —

 

20,441

 

Sponsored privately offered funds measured at net asset value (1)

 

 

 —

 

 —

 

 —

 

3,545

 

3,545

 

Total

 

$

266,801

 

38,343

 

 —

 

4,159

 

309,303

 

 

 

13


 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Not Held at Fair Value

 

Total

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

$

122,806

 

 —

 

 —

 

 —

 

122,806

 

Sponsored privately offered funds measured at net asset value (1)

 

 

 —

 

 —

 

 —

 

570

 

570

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

    

 

 —

    

13

    

 —

    

 —

 

13

 

Common stock

 

 

101

 

 —

 

 —

 

 —

 

101

 

Consolidated sponsored funds

 

 

100,847

 

44,863

 

 —

 

 —

 

145,710

 

Sponsored funds

 

 

29,541

 

 —

 

 —

 

 —

 

29,541

 

Equity method securities: (2)

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

 

26,775

 

 —

 

 —

 

 —

 

26,775

 

Sponsored privately offered funds measured at net asset value (1)

 

 

 —

 

 —

 

 —

 

3,234

 

3,234

 

Total

 

$

280,070

 

44,876

 

 —

 

3,804

 

328,750

 


 

(1)

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.

 

(2)

Substantially all of the Company’s equity method investments are investment companies that record their underlying investments at fair value.

 

4.Derivative Financial Instruments

 

In 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 March 31, 2017, we had 97% of our investments in sponsored funds, excluding our available for sale portfolio, hedged, 83% 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.

 

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 $153.1 million and $160.2 million as of March 31, 2017 and December 31, 2016, respectively. These derivative financial 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 $5.4 million and $7.1 million in cash collateral with the counterparties of the total return swap contracts as of March 31, 2017 and December 31, 2016, respectively.  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 March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

2017

 

2016

 

 

Balance sheet

 

 

 

 

 

 

    

location

    

Fair value

    

Fair value

 

 

 

 

(in thousands)

Total return swap contracts

 

Other current liabilities

 

$

476

 

475

 

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The following is a summary of net losses recognized in income for the three months ended March 31, 2017 and March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Income statement

 

Three months ended

 

Three months ended