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EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INCwdr-20170630ex311cb932a.htm
EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INCwdr-20170630ex32277af12.htm
EX-32.1 - EX-32.1 - WADDELL & REED FINANCIAL INCwdr-20170630ex32195ed41.htm
EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INCwdr-20170630ex312804aa7.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, 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 July 28, 2017

Class A common stock, $.01 par value

 

83,591,353

 

 

 

 

 

 


 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2017

 

 

 

 

    

Page No.

 

 

 

 

 

Part I. 

Financial Information

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2017 and June 30, 2016

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and June 30, 2016

 

5

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity and redeemable noncontrolling interests for the six months ended June 30, 2017

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 2016

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2. 

 

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

 

22

 

 

 

 

 

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

 

38

 

 

 

 

 

Item 6. 

 

Exhibits

 

39

 

 

 

 

 

 

 

Signatures

 

40

 

 

 

 

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

2017

 

 

December 31, 

 

 

 

(Unaudited)

 

 

2016

 

Assets:

    

 

 

    

 

 

    

Cash and cash equivalents

 

$

427,939

 

 

555,102

 

Cash and cash equivalents - restricted

 

 

38,298

 

 

31,137

 

Investment securities

 

 

501,827

 

 

328,750

 

Receivables:

 

 

 

 

 

 

 

Funds and separate accounts

 

 

21,187

 

 

27,181

 

Customers and other

 

 

99,272

 

 

128,095

 

Prepaid expenses and other current assets

 

 

23,810

 

 

21,574

 

Total current assets

 

 

1,112,333

 

 

1,091,839

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

95,455

 

 

102,449

 

Goodwill and identifiable intangible assets

 

 

147,069

 

 

148,569

 

Deferred income taxes

 

 

32,928

 

 

31,430

 

Other non-current assets

 

 

24,541

 

 

31,985

 

Total assets

 

$

1,412,326

 

 

1,406,272

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

28,590

 

 

28,023

 

Payable to investment companies for securities

 

 

63,967

 

 

53,691

 

Payable to third party brokers

 

 

24,363

 

 

31,735

 

Payable to customers

 

 

38,699

 

 

82,918

 

Short-term notes payable

 

 

94,945

 

 

 —

 

Accrued compensation

 

 

40,198

 

 

41,672

 

Other current liabilities

 

 

96,133

 

 

58,939

 

Total current liabilities

 

 

386,895

 

 

296,978

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

94,747

 

 

189,605

 

Accrued pension and postretirement costs

 

 

31,959

 

 

38,379

 

Other non-current liabilities

 

 

25,839

 

 

26,655

 

Total liabilities

 

 

539,440

 

 

551,617

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

28,718

 

 

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; 83,598 shares outstanding (83,118 at December 31, 2016)

 

 

997

 

 

997

 

Additional paid-in capital

 

 

282,576

 

 

291,908

 

Retained earnings

 

 

1,112,697

 

 

1,135,694

 

Cost of 16,103 common shares in treasury (16,583 at December 31, 2016)

 

 

(505,120)

 

 

(531,268)

 

Accumulated other comprehensive loss

 

 

(46,982)

 

 

(53,329)

 

Total stockholders’ equity

 

 

844,168

 

 

844,002

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

1,412,326

 

 

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 June 30, 

 

For the six months ended June 30, 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

    

 

    

    

 

    

    

 

 

    

 

 

    

Investment management fees

 

$

130,878

 

 

140,880

 

$

261,314

 

 

285,658

 

Underwriting and distribution fees

 

 

128,776

 

 

146,312

 

 

257,607

 

 

292,970

 

Shareholder service fees

 

 

27,003

 

 

32,016

 

 

54,300

 

 

64,396

 

Total

 

 

286,657

 

 

319,208

 

 

573,221

 

 

643,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

 

151,119

 

 

181,245

 

 

301,443

 

 

355,081

 

Compensation and related costs (including share-based compensation of $14,054, $12,625, $28,239 and $26,147, respectively)

 

 

47,224

 

 

58,341

 

 

96,630

 

 

111,281

 

General and administrative

 

 

28,153

 

 

19,276

 

 

53,877

 

 

38,428

 

Subadvisory fees

 

 

3,194

 

 

2,325

 

 

5,891

 

 

4,418

 

Depreciation

 

 

5,175

 

 

4,260

 

 

10,396

 

 

8,622

 

Intangible asset impairment

 

 

900

 

 

 —

 

 

1,500

 

 

 —

 

Total

 

 

235,765

 

 

265,447

 

 

469,737

 

 

517,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

50,892

 

 

53,761

 

 

103,484

 

 

125,194

 

Investment and other income (loss)

 

 

2,021

 

 

687

 

 

4,150

 

 

(9,531)

 

Interest expense

 

 

(2,788)

 

 

(2,776)

 

 

(5,574)

 

 

(5,544)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

50,125

 

 

51,672

 

 

102,060

 

 

110,119

 

Provision for income taxes

 

 

26,162

 

 

18,101

 

 

44,561

 

 

39,079

 

Net income

 

 

23,963

 

 

33,571

 

 

57,499

 

 

71,040

 

Net income (loss) attributable to redeemable noncontrolling interests

 

 

656

 

 

(124)

 

 

1,136

 

 

377

 

Net income attributable to Waddell & Reed Financial, Inc.

 

$

23,307

 

 

33,695

 

$

56,363

 

 

70,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.28

 

 

0.41

 

$

0.67

 

 

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

 

83,611

 

 

82,947

 

 

83,843

 

 

82,526

 

 

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, 

 

 

 

2017

    

2016

    

2017

    

2016

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,963

 

 

33,571

 

$

57,499

 

 

71,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation of available for sale investment securities during the period, net of income tax benefit of $192, $0, $1,673, and $0, respectively

 

 

1,235

 

 

1,884

 

 

4,834

 

 

1,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit, net of income tax expense of $429, $566, $894, and $1,185, respectively

 

 

727

 

 

960

 

 

1,513

 

 

2,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

25,925

 

 

36,415

 

 

63,846

 

 

75,037

 

Comprehensive income (loss) attributable to redeemable noncontrolling interests

 

 

656

 

 

(124)

 

 

1,136

 

 

377

 

Comprehensive income attributable to Waddell & Reed Financial, Inc.

 

$

25,269

 

 

36,539

 

$

62,710

 

 

74,660

 

 

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, 2017

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total 

 

Non

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

Controlling

 

 

    

Shares

    

Amount

    

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

 

 —

 

 

 —

 

 —

 

56,363

 

 —

 

 —

 

56,363

 

1,136

 

Net subscription of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

16,929

 

Recognition of equity compensation

 

 —

 

 

 —

 

25,325

 

297

 

 —

 

 —

 

25,622

 

 —

 

Net issuance/forfeiture of nonvested shares

 

 —

 

 

 —

 

(38,161)

 

 

 

38,161

 

 

 

 —

 

 —

 

Dividends accrued, $0.92 per share

 

 —

 

 

 —

 

 —

 

(77,457)

 

 —

 

 —

 

(77,457)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(12,013)

 

 —

 

(12,013)

 

 —

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

6,347

 

6,347

 

 —

 

Balance at June 30, 2017

 

99,701

 

$

997

 

282,576

 

1,112,697

 

(505,120)

 

(46,982)

 

844,168

 

28,718

 

 

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, 

 

 

 

2017

    

2016

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

57,499

 

 

71,040

 

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

 

 

 

 

 

 

 

Depreciation and  amortization

 

 

10,396

 

 

8,627

 

Amortization of deferred sales commissions

 

 

2,675

 

 

19,661

 

Share-based compensation

 

 

25,622

 

 

26,147

 

Investments gain, net

 

 

(4,662)

 

 

(8,560)

 

Net purchases of trading securities

 

 

(15,613)

 

 

(24,996)

 

Net change in trading securities held by consolidated sponsored funds

 

 

(114,407)

 

 

(45,455)

 

Other

 

 

2,388

 

 

(908)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Cash and cash equivalents - restricted

 

 

(7,161)

 

 

33,680

 

Customer and other receivables

 

 

28,823

 

 

54,004

 

Payable to investment companies for securities and payable to customers

 

 

(33,943)

 

 

(100,595)

 

Receivables from funds and separate accounts

 

 

5,994

 

 

8,309

 

Other assets

 

 

1,600

 

 

6,560

 

Accounts payable and payable to third party brokers

 

 

(6,805)

 

 

(22,852)

 

Other liabilities

 

 

10,332

 

 

(6,216)

 

Net cash provided by operating activities

 

$

(37,262)

 

 

18,446

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available for sale and equity method securities

 

 

(28,881)

 

 

(104)

 

Proceeds from sales of available for sale and equity method securities

 

 

14,917

 

 

17,986

 

Additions to property and equipment

 

 

(3,704)

 

 

(9,265)

 

Net cash of sponsored funds on consolidation

 

 

 —

 

 

6,887

 

Other

 

 

 —

 

 

(196)

 

Net cash (used in) provided by investing activities

 

$

(17,668)

 

 

15,308

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(77,236)

 

 

(76,616)

 

Repurchase of common stock

 

 

(12,013)

 

 

(47,461)

 

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

 

 

16,929

 

 

(2,224)

 

Other

 

 

87

 

 

1,510

 

Net cash used in financing activities

 

$

(72,233)

 

 

(124,791)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(127,163)

 

 

(91,037)

 

Cash and cash equivalents at beginning of period

 

 

555,102

 

 

558,495

 

Cash and cash equivalents at end of period

 

$

427,939

 

 

467,458

 

 

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 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”). In April of 2017, we launched index funds in partnership with ProShares® Advisors LLC (“Ivy ProShares”) (collectively, the Advisors Funds, Ivy Funds, Ivy VIP, InvestEd, IVH, Ivy NextShares and Ivy ProShares are referred to as the “Funds”). As of June 30, 2017, we had $80.4 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 resulting from share-based compensation 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 a 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. 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

8


 

individual tax rate is consistent with the thresholds meeting the classification of an equity award and, therefore, a retrospective classification 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 June 30, 2017, and the results of operations and cash flows for the six months ended June 30, 2017 and 2016 in conformity with accounting principles generally accepted in the United States.

 

2.New Accounting Guidance

 

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.  The Company has assessed its revenue streams to identify contracts that are subject to the requirements of the new standard.  The Company plans to review the identified contracts and while we have not identified material changes in the timing of revenue recognition, we continue to evaluate the quantitative impact the ASU will have on the 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.

 

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.

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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.

 

In May 2017, FASB issued ASU 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting.”  This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718, “Compensation – Stock Compensation Topic.”  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.

 

3.Investment Securities

 

Investment securities at June 30, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

 

2016

 

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

Certificates of deposit

 

$

10,001

 

 —

 

Commercial paper

 

 

4,985

 

 —

 

Corporate bonds

 

 

34,147

 

 —

 

Sponsored funds

 

 

145,937

 

122,806

 

Sponsored privately offered funds

 

 

 —

 

570

 

Total available for sale securities

 

 

195,070

 

123,376

 

Trading securities:

 

 

 

 

 

 

Mortgage-backed securities

 

 

12

 

13

 

Corporate bonds

 

 

16,098

 

 —

 

Common stock

 

 

110

 

101

 

Consolidated sponsored funds

 

 

215,116

 

145,710

 

Sponsored funds

 

 

30,945

 

29,541

 

Sponsored privately offered funds

 

 

631

 

 —

 

Total trading securities 

 

 

262,912

 

175,365

 

Equity method securities:

 

 

 

 

 

 

Sponsored funds

 

 

40,154

 

26,775

 

Sponsored privately offered funds

 

 

3,691

 

3,234

 

Total equity method securities

 

 

43,845

 

30,009

 

Total securities

 

$

501,827

 

328,750

 

Certificates of deposit, commercial paper and corporate bonds accounted for as available for sale and held as of June 30, 2017 mature as follows:

 

 

 

 

 

 

 

Amortized

    

 

 

 

cost

 

Fair value

  

 

(in thousands)

Within one year

$

24,008

 

24,007

After one year but within five years

 

20,140

 

20,126

After 10 years

 

5,000

 

5,000

 

$

49,148

 

49,133

 

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Mortgage-backed securities and corporate bonds accounted for as trading and held as of June 30, 2017 mature as follows:

 

 

 

 

 

Fair value

  

 

(in thousands)

Within one year

$

6,014

After one year but within five years

 

10,089

After five years but within 10 years

 

 7

 

$

16,110

 

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

  

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

10,000

 

 2

 

(1)

 

10,001

 

Commercial paper

 

 

4,981

 

 4

 

 —

 

4,985

 

Corporate bonds

 

 

34,166

 

 1

 

(20)

 

34,147

 

Sponsored funds

 

 

149,078

 

1,630

 

(4,771)

 

145,937

 

  

 

$

198,225

 

1,637

 

(4,792)

 

195,070

 

 

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 investment securities with fair values below carrying values at June 30, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

June 30, 2017

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

(in thousands)

Certificates of deposit

    

$

4,999

    

(1)

    

 —

    

 —

    

4,999

    

(1)

Corporate bonds

 

 

24,146

 

(20)

 

 —

 

 —

 

24,146

 

(20)

Sponsored funds

 

 

33,506

 

(1,190)

 

35,900

 

(3,581)

 

69,406

 

(4,771)

 

 

$

62,651

 

(1,211)

 

35,900

 

(3,581)

 

98,551

 

(4,792)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 investment securities, the time frame the investments have been in a loss position and our intent to hold the investment securities until they have recovered, we determined that a write-down was not necessary at June 30, 2017.

 

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Sponsored Funds

 

The Company has classified its investments in the Ivy Funds, Ivy Nextshares, Ivy ProShares 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 Ivy Funds, Ivy NextShares and Ivy ProShares 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 June 30, 2017, and at December 31, 2016, as well as the Company’s net interest in these funds:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

 

December 31, 

 

 

2017

    

 

2016

 

    

(in thousands)

Cash

 

$

3,706

 

 

6,885

Investments

 

 

215,116

 

 

145,710

Other assets

 

 

7,847

 

 

763

Other liabilities

 

 

(6,800)

 

 

(390)

Redeemable noncontrolling interests

 

 

(28,718)

 

 

(10,653)

Net interest in consolidated sponsored funds

 

$

191,151

 

 

142,315

 

During the six months ended June 30, 2017, we consolidated certain of the Ivy Funds, Ivy NextShares and Ivy ProShares 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 consolidated financial statements.  During the first six months of 2017, we closed three IGI Funds and deconsolidated three Ivy ProShares, as we no longer have a controlling interest in the funds. Accordingly, we deconsolidated $2.6 million from cash and cash equivalents, $7.3 million from investments and $9.9 million from redeemable noncontrolling interests. Four IGI Funds remain consolidated as of June 30, 2017. There was no impact to the consolidated statements of income as a result of the closures and deconsolidations, as the funds were carried at fair value.

 

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.

 

·

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.

 

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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 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. 

 

The following tables summarize our investment securities as of June 30, 2017 and December 31, 2016 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Not Held at Fair Value

 

Total

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 —

 

10,001

 

 —

 

 —

 

10,001

 

Commercial paper

 

 

 —

 

4,985

 

 —

 

 —

 

4,985