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EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INCwdr-20170930ex32269a612.htm
EX-32.1 - EX-32.1 - WADDELL & REED FINANCIAL INCwdr-20170930ex321cf82e7.htm
EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INCwdr-20170930ex31228049a.htm
EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INCwdr-20170930ex311ba1991.htm
EX-10.1 - EX-10.1 - WADDELL & REED FINANCIAL INCwdr-20170930ex1019eb671.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 September 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 October 20, 2017

Class A common stock, $.01 par value

 

83,371,059

 

 

 

 

 

 


 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2017

 

 

 

 

    

Page No.

 

 

 

 

 

Part I. 

Financial Information

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2017 and September 30, 2016

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and September 30, 2016

 

5

 

 

 

 

 

 

 

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

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and September 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

 

38

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

38

 

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

39

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 6. 

 

Exhibits

 

40

 

 

 

 

 

 

 

Signatures

 

41

 

 

 

 

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

2017

 

 

December 31, 

 

 

 

(Unaudited)

 

 

2016

 

Assets:

    

 

 

    

 

 

    

Cash and cash equivalents

 

$

225,922

 

 

555,102

 

Cash and cash equivalents - restricted

 

 

35,551

 

 

31,137

 

Investment securities

 

 

697,138

 

 

328,750

 

Receivables:

 

 

 

 

 

 

 

Funds and separate accounts

 

 

22,510

 

 

27,181

 

Customers and other

 

 

114,723

 

 

128,095

 

Prepaid expenses and other current assets

 

 

22,943

 

 

21,574

 

Total current assets

 

 

1,118,787

 

 

1,091,839

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

91,708

 

 

102,449

 

Goodwill and identifiable intangible assets

 

 

147,069

 

 

148,569

 

Deferred income taxes

 

 

20,457

 

 

31,430

 

Other non-current assets

 

 

20,834

 

 

31,985

 

Total assets

 

$

1,398,855

 

 

1,406,272

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

31,391

 

 

28,023

 

Payable to investment companies for securities

 

 

50,320

 

 

53,691

 

Payable to third party brokers

 

 

24,857

 

 

31,735

 

Payable to customers

 

 

60,118

 

 

82,918

 

Short-term notes payable

 

 

94,971

 

 

 —

 

Accrued compensation

 

 

49,680

 

 

41,672

 

Other current liabilities

 

 

58,867

 

 

58,939

 

Total current liabilities

 

 

370,204

 

 

296,978

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

94,765

 

 

189,605

 

Accrued pension and postretirement costs

 

 

8,874

 

 

38,379

 

Other non-current liabilities

 

 

24,071

 

 

26,655

 

Total liabilities

 

 

497,914

 

 

551,617

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

30,636

 

 

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; 83,373 shares outstanding (83,118 at December 31, 2016)

 

 

997

 

 

997

 

Additional paid-in capital

 

 

296,116

 

 

291,908

 

Retained earnings

 

 

1,112,374

 

 

1,135,694

 

Cost of 16,328 common shares in treasury (16,583 at December 31, 2016)

 

 

(509,870)

 

 

(531,268)

 

Accumulated other comprehensive loss

 

 

(29,312)

 

 

(53,329)

 

Total stockholders’ equity

 

 

870,305

 

 

844,002

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

1,398,855

 

 

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 September 30, 

 

For the nine months ended September 30, 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

    

 

    

    

 

    

    

 

 

    

 

 

    

Investment management fees

 

$

134,149

 

 

138,745

 

$

395,463

 

 

424,403

 

Underwriting and distribution fees

 

 

128,892

 

 

135,778

 

 

386,499

 

 

428,748

 

Shareholder service fees

 

 

26,406

 

 

28,563

 

 

80,706

 

 

92,959

 

Total

 

 

289,447

 

 

303,086

 

 

862,668

 

 

946,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

 

149,400

 

 

152,999

 

 

450,843

 

 

508,080

 

Compensation and related costs (including share-based compensation of $14,180, $12,425, $42,419 and $38,573, respectively)

 

 

48,340

 

 

40,214

 

 

144,970

 

 

151,495

 

General and administrative

 

 

27,832

 

 

23,280

 

 

81,709

 

 

61,708

 

Subadvisory fees

 

 

3,566

 

 

2,566

 

 

9,457

 

 

6,984

 

Depreciation

 

 

5,230

 

 

4,541

 

 

15,626

 

 

13,163

 

Intangible asset impairment

 

 

 —

 

 

5,700

 

 

1,500

 

 

5,700

 

Total

 

 

234,368

 

 

229,300

 

 

704,105

 

 

747,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

55,079

 

 

73,786

 

 

158,563

 

 

198,980

 

Investment and other income (loss)

 

 

7,236

 

 

7,878

 

 

11,386

 

 

(1,653)

 

Interest expense

 

 

(2,796)

 

 

(2,792)

 

 

(8,370)

 

 

(8,336)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

59,519

 

 

78,872

 

 

161,579

 

 

188,991

 

Provision for income taxes

 

 

20,296

 

 

24,067

 

 

64,857

 

 

63,146

 

Net income

 

 

39,223

 

 

54,805

 

 

96,722

 

 

125,845

 

Net income attributable to redeemable noncontrolling interests

 

 

1,272

 

 

978

 

 

2,408

 

 

1,355

 

Net income attributable to Waddell & Reed Financial, Inc.

 

$

37,951

 

 

53,827

 

$

94,314

 

 

124,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.45

 

 

0.65

 

$

1.13

 

 

1.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

 

83,476

 

 

82,834

 

 

83,719

 

 

82,629

 

 

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 September 30, 

 

For the nine months ended September 30, 

 

 

 

2017

    

2016

    

2017

    

2016

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,223

 

 

54,805

 

$

96,722

 

 

125,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $364, $1, $(1,310), and $2, respectively

 

 

2,070

 

 

(344)

 

 

6,904

 

 

1,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit, net of income tax expense (benefit) of $9,186, $(167), $10,080, and $1,018, respectively

 

 

15,601

 

 

(167)

 

 

17,113

 

 

1,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

56,894

 

 

54,294

 

 

120,739

 

 

129,331

 

Comprehensive income attributable to redeemable noncontrolling interests

 

 

1,272

 

 

978

 

 

2,408

 

 

1,355

 

Comprehensive income attributable to Waddell & Reed Financial, Inc.

 

$

55,622

 

 

53,316

 

$

118,331

 

 

127,976

 

 

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 Nine Months Ended September 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

 

 —

 

 

 —

 

 —

 

94,314

 

 —

 

 —

 

94,314

 

2,408

 

Net subscription of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

17,575

 

Recognition of equity compensation

 

 —

 

 

 —

 

37,737

 

374

 

 —

 

 —

 

38,111

 

 —

 

Net issuance/forfeiture of nonvested shares

 

 —

 

 

 —

 

(37,033)

 

 

 

37,033

 

 

 

 —

 

 —

 

Dividends accrued, $1.38 per share

 

 —

 

 

 —

 

 —

 

(115,808)

 

 —

 

 —

 

(115,808)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(15,635)

 

 —

 

(15,635)

 

 —

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

24,017

 

24,017

 

 —

 

Balance at September 30, 2017

 

99,701

 

$

997

 

296,116

 

1,112,374

 

(509,870)

 

(29,312)

 

870,305

 

30,636

 

 

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 nine months ended September 30, 

 

 

 

2017

    

2016

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

96,722

 

 

125,845

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15,626

 

 

13,163

 

Write-down of impaired assets

 

 

1,500

 

 

5,700

 

Amortization of deferred sales commissions

 

 

3,799

 

 

21,842

 

Share-based compensation

 

 

38,111

 

 

38,573

 

Investments gain, net

 

 

(9,157)

 

 

(13,834)

 

Net purchases of trading securities

 

 

(36,643)

 

 

(24,353)

 

Net change in trading securities held by consolidated sponsored funds

 

 

(123,865)

 

 

(57,444)

 

Other

 

 

4,473

 

 

3,131

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Cash and cash equivalents - restricted

 

 

(4,414)

 

 

44,816

 

Customer and other receivables

 

 

13,372

 

 

67,338

 

Payable to investment companies for securities and payable to customers

 

 

(26,171)

 

 

(131,120)

 

Receivables from funds and separate accounts

 

 

4,671

 

 

8,729

 

Other assets

 

 

5,050

 

 

(2,826)

 

Accounts payable and payable to third party brokers

 

 

(3,510)

 

 

(21,738)

 

Other liabilities

 

 

3,856

 

 

(11,763)

 

Net cash (used in) provided by operating activities

 

$

(16,580)

 

 

66,059

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available for sale and equity method securities

 

 

(291,539)

 

 

(71,852)

 

Proceeds from sales of available for sale and equity method securities

 

 

97,917

 

 

148,373

 

Additions to property and equipment

 

 

(5,358)

 

 

(13,933)

 

Net cash of sponsored funds on consolidation

 

 

 —

 

 

6,887

 

Other

 

 

 —

 

 

(194)

 

Net cash (used in) provided by investing activities

 

$

(198,980)

 

 

69,281

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(115,691)

 

 

(114,736)

 

Repurchase of common stock

 

 

(15,635)

 

 

(47,984)

 

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

 

 

17,575

 

 

(3,695)

 

Other

 

 

131

 

 

2,364

 

Net cash used in financing activities

 

$

(113,620)

 

 

(164,051)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(329,180)

 

 

(28,711)

 

Cash and cash equivalents at beginning of period

 

 

555,102

 

 

558,495

 

Cash and cash equivalents at end of period

 

$

225,922

 

 

529,784

 

 

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 the second quarter 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 September 30, 2017, we had $80.9 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 primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees.  Transfer agency fees are asset-based and/or account-based revenues. Portfolio accounting and administration fees are asset-based revenues. Custodian fees from retirement plan accounts are based on the 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

8


 

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 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 September 30, 2017 and the results of operations and cash flows for the nine months ended September 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 have concluded that the adoption of this ASU will have an immaterial impact 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. Upon adoption of this ASU on January 1, 2018, we will include cash and cash equivalents – restricted

9


 

as a component of cash and cash equivalents on the Company’s consolidated statements of cash flows for all periods presented, and will remove the change in cash and cash equivalents-restricted as a component of net cash (used in) provided by operating activities.

 

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 have concluded that the adoption of this ASU will have no effect on our net income because it only impacts the classification of certain information on the consolidated statement of income. The service cost component of net periodic benefit cost was recognized in underwriting and distribution, and compensation and related costs through September 30, 2017. An amendment to freeze our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) was approved effective September 30, 2017; therefore, after September 30, 2017 we will no longer incur service cost. The other components of net periodic cost will be reclassified to investment and other income (loss) on a retrospective basis.

 

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 Topic 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 have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

 

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3.Investment Securities

 

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

 

2016

 

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

Certificates of deposit

 

$

13,004

 

 —

 

Commercial paper

 

 

29,882

 

 —

 

Corporate bonds

 

 

171,099

 

 —

 

U.S. treasury bills

 

 

19,937

 

 —

 

Sponsored funds

 

 

144,423

 

122,806

 

Sponsored privately offered funds

 

 

 —

 

570

 

Total available for sale securities

 

 

378,345

 

123,376

 

Trading securities:

 

 

 

 

 

 

Certificates of deposit

 

 

2,000

 

 —

 

U.S. treasury bills

 

 

4,964

 

 —

 

Corporate bonds

 

 

48,712

 

 —

 

Mortgage-backed securities

 

 

11

 

13

 

Common stock

 

 

117

 

101

 

Consolidated sponsored funds

 

 

191,932

 

145,710

 

Consolidated sponsored privately offered funds

 

 

4,564

 

 —

 

Sponsored funds

 

 

13,456

 

29,541

 

Sponsored privately offered funds

 

 

657

 

 —

 

Total trading securities 

 

 

266,413

 

175,365

 

Equity method securities:

 

 

 

 

 

 

Sponsored funds

 

 

52,380

 

26,775

 

Sponsored privately offered funds

 

 

 —

 

3,234

 

Total equity method securities

 

 

52,380

 

30,009

 

Total securities

 

$

697,138

 

328,750

 

Certificates of deposit, commercial paper, corporate bonds and U.S. treasury bills accounted for as available for sale and held as of September 30, 2017 mature as follows:

 

 

 

 

 

 

 

Amortized

 

 

 

 

cost

 

Fair value

  

 

(in thousands)

Within one year

$

75,335

 

75,349

After one year but within five years

 

158,845

 

158,573

 

$

234,180

 

233,922

Certificates of deposit, commercial paper, corporate bonds and mortgage-backed securities accounted for as trading and held as of September 30, 2017 mature as follows:

 

 

 

 

 

 

 

 

 

Fair value

  

 

 

 

(in thousands)

Within one year

 

 

$

10,084

After one year but within five years

 

 

 

40,603

After 10 years

 

 

 

5,000

 

 

 

$

55,687

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

  

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

13,000

 

 4

 

 —

 

13,004

 

Commercial paper

 

 

29,855

 

27

 

 —

 

29,882

 

Corporate bonds

 

 

171,306

 

34

 

(241)

 

171,099

 

U.S. treasury bills

 

 

20,020

 

 —

 

(83)

 

19,937

 

Sponsored funds

 

 

144,886

 

1,961

 

(2,424)

 

144,423

 

 

 

$

379,067

 

2,026

 

(2,748)

 

378,345

 

  

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

September 30, 2017

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

(in thousands)

Corporate bonds

 

$

141,950

 

(241)

 

 —

 

 —

 

141,950

 

(241)

U.S. treasury bills

 

 

19,937

 

(83)

 

 —

 

 —

 

19,937

 

(83)

Sponsored funds

 

 

12,663

 

(153)

 

44,593

 

(2,271)

 

57,256

 

(2,424)

 

 

$

174,550

 

(477)

 

44,593

 

(2,271)

 

219,143

 

(2,748)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017.

 

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.

 

12


 

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 September 30, 2017, and at December 31, 2016, as well as the Company’s net interest in these funds:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

2017

    

 

2016

 

    

(in thousands)

Cash

 

$

4,877

 

 

6,885

Investments

 

 

196,496

 

 

145,710

Other assets

 

 

6,334

 

 

763

Other liabilities