Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - WADDELL & REED FINANCIAL INC | wdr-20180630ex3223b0c27.htm |
EX-32.1 - EX-32.1 - WADDELL & REED FINANCIAL INC | wdr-20180630ex321aefd7c.htm |
EX-31.2 - EX-31.2 - WADDELL & REED FINANCIAL INC | wdr-20180630ex3120f9bb0.htm |
EX-31.1 - EX-31.1 - WADDELL & REED FINANCIAL INC | wdr-20180630ex311cf71f5.htm |
EX-10.1 - EX-10.1 - WADDELL & REED FINANCIAL INC | wdr-20180630ex10184f917.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, 2018
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 27, 2018 |
Class A common stock, $.01 par value |
|
79,759,291 |
WADDELL & REED FINANCIAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Quarter Ended June 30, 2018
2
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
(in thousands)
|
|
June 30, |
|
|
|
|
|
|
|
2018 |
|
|
December 31, |
|
|
|
|
(Unaudited) |
|
|
2017 |
|
|
Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
240,420 |
|
|
207,829 |
|
Cash and cash equivalents - restricted |
|
|
25,872 |
|
|
28,156 |
|
Investment securities |
|
|
584,769 |
|
|
700,492 |
|
Receivables: |
|
|
|
|
|
|
|
Funds and separate accounts |
|
|
23,176 |
|
|
25,664 |
|
Customers and other |
|
|
133,915 |
|
|
131,108 |
|
Prepaid expenses and other current assets |
|
|
34,768 |
|
|
25,593 |
|
Total current assets |
|
|
1,042,920 |
|
|
1,118,842 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
77,154 |
|
|
87,667 |
|
Goodwill and identifiable intangible assets |
|
|
145,869 |
|
|
147,069 |
|
Deferred income taxes |
|
|
10,531 |
|
|
13,308 |
|
Other non-current assets |
|
|
11,308 |
|
|
17,476 |
|
Total assets |
|
$ |
1,287,782 |
|
|
1,384,362 |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
36,208 |
|
|
38,998 |
|
Payable to investment companies for securities |
|
|
61,695 |
|
|
43,422 |
|
Payable to third party brokers |
|
|
24,237 |
|
|
25,153 |
|
Payable to customers |
|
|
51,236 |
|
|
66,830 |
|
Short-term notes payable |
|
|
— |
|
|
94,996 |
|
Accrued compensation |
|
|
46,192 |
|
|
47,643 |
|
Other current liabilities |
|
|
41,925 |
|
|
44,797 |
|
Total current liabilities |
|
|
261,493 |
|
|
361,839 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
94,819 |
|
|
94,783 |
|
Accrued pension and postretirement costs |
|
|
14,027 |
|
|
15,137 |
|
Other non-current liabilities |
|
|
14,673 |
|
|
25,210 |
|
Total liabilities |
|
|
385,012 |
|
|
496,969 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
|
17,052 |
|
|
14,509 |
|
|
|
|
|
|
|
|
|
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; 80,355 shares outstanding (82,687 at December 31, 2017) |
|
|
997 |
|
|
997 |
|
Additional paid-in capital |
|
|
302,144 |
|
|
301,410 |
|
Retained earnings |
|
|
1,144,090 |
|
|
1,092,394 |
|
Cost of 19,346 common shares in treasury (17,014 at December 31, 2017) |
|
|
(560,181) |
|
|
(522,441) |
|
Accumulated other comprehensive (loss) income |
|
|
(1,332) |
|
|
524 |
|
Total stockholders’ equity |
|
|
885,718 |
|
|
872,884 |
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable noncontrolling interests and stockholders’ equity |
|
$ |
1,287,782 |
|
|
1,384,362 |
|
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, |
|
||||||||
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management fees |
|
$ |
130,391 |
|
|
130,878 |
|
$ |
264,083 |
|
|
261,314 |
|
Underwriting and distribution fees |
|
|
137,873 |
|
|
128,776 |
|
|
275,914 |
|
|
257,607 |
|
Shareholder service fees |
|
|
27,074 |
|
|
27,003 |
|
|
52,956 |
|
|
54,300 |
|
Total |
|
|
295,338 |
|
|
286,657 |
|
|
592,953 |
|
|
573,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
114,315 |
|
|
109,060 |
|
|
228,785 |
|
|
217,497 |
|
Compensation and benefits (including share-based compensation of $14,902, $14,054, $29,670 and $28,239, respectively) |
|
|
65,828 |
|
|
65,332 |
|
|
134,613 |
|
|
132,367 |
|
General and administrative |
|
|
19,143 |
|
|
23,287 |
|
|
38,681 |
|
|
45,482 |
|
Technology |
|
|
17,235 |
|
|
17,780 |
|
|
33,879 |
|
|
34,757 |
|
Occupancy |
|
|
6,969 |
|
|
7,548 |
|
|
13,933 |
|
|
15,333 |
|
Marketing and advertising |
|
|
2,896 |
|
|
3,264 |
|
|
5,177 |
|
|
5,875 |
|
Depreciation |
|
|
5,819 |
|
|
5,175 |
|
|
11,121 |
|
|
10,396 |
|
Subadvisory fees |
|
|
3,683 |
|
|
3,194 |
|
|
7,391 |
|
|
5,891 |
|
Intangible asset impairment |
|
|
1,200 |
|
|
900 |
|
|
1,200 |
|
|
1,500 |
|
Total |
|
|
237,088 |
|
|
235,540 |
|
|
474,780 |
|
|
469,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
58,250 |
|
|
51,117 |
|
|
118,173 |
|
|
104,123 |
|
Investment and other income |
|
|
841 |
|
|
2,997 |
|
|
3,657 |
|
|
6,009 |
|
Interest expense |
|
|
(1,551) |
|
|
(2,788) |
|
|
(3,353) |
|
|
(5,574) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
57,540 |
|
|
51,326 |
|
|
118,477 |
|
|
104,558 |
|
Provision for income taxes |
|
|
13,284 |
|
|
26,608 |
|
|
28,250 |
|
|
45,489 |
|
Net income |
|
|
44,256 |
|
|
24,718 |
|
|
90,227 |
|
|
59,069 |
|
Net (loss) income attributable to redeemable noncontrolling interests |
|
|
(222) |
|
|
656 |
|
|
(588) |
|
|
1,136 |
|
Net income attributable to Waddell & Reed Financial, Inc. |
|
$ |
44,478 |
|
|
24,062 |
|
$ |
90,815 |
|
|
57,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted: |
|
$ |
0.55 |
|
|
0.29 |
|
$ |
1.10 |
|
|
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted: |
|
|
81,449 |
|
|
83,611 |
|
|
82,275 |
|
|
83,843 |
|
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, |
|
||||||||
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
44,256 |
|
|
24,718 |
|
$ |
90,227 |
|
|
59,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $53, $(192), $(298) and $(1,673), respectively |
|
|
169 |
|
|
1,235 |
|
|
(962) |
|
|
4,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit, net of income tax benefit of $(7) , $(17), $(15) and $(34), respectively |
|
|
(23) |
|
|
(28) |
|
|
(46) |
|
|
(57) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
44,402 |
|
|
25,925 |
|
|
89,219 |
|
|
63,846 |
|
Comprehensive (loss) income attributable to redeemable noncontrolling interests |
|
|
(222) |
|
|
656 |
|
|
(588) |
|
|
1,136 |
|
Comprehensive income attributable to Waddell & Reed Financial, Inc. |
|
$ |
44,624 |
|
|
25,269 |
|
$ |
89,807 |
|
|
62,710 |
|
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, 2018
(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, 2017 |
|
99,701 |
|
|
997 |
|
301,410 |
|
1,092,394 |
|
(522,441) |
|
524 |
|
872,884 |
|
14,509 |
|
Adoption of recognition and measurement of financial assets and liabilities guidance (ASU 2016-01) on January 1, 2018 |
|
— |
|
|
— |
|
— |
|
812 |
|
— |
|
(812) |
|
— |
|
— |
|
Adoption of reclassification of tax effects from accumulated other comprehensive income (loss) guidance (ASU 2018-02) on January 1, 2018 |
|
|
|
|
|
|
|
|
36 |
|
|
|
(36) |
|
— |
|
|
|
Net income |
|
— |
|
|
— |
|
— |
|
90,815 |
|
— |
|
— |
|
90,815 |
|
(588) |
|
Net subscription of redeemable noncontrolling interests in sponsored funds |
|
— |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
3,131 |
|
Recognition of equity compensation |
|
— |
|
|
— |
|
23,643 |
|
913 |
|
— |
|
— |
|
24,556 |
|
— |
|
Net issuance/forfeiture of nonvested shares |
|
— |
|
|
— |
|
(22,909) |
|
|
|
22,909 |
|
|
|
— |
|
— |
|
Dividends accrued, $0.50 per share |
|
— |
|
|
— |
|
— |
|
(40,880) |
|
— |
|
— |
|
(40,880) |
|
— |
|
Repurchase of common stock |
|
— |
|
|
— |
|
— |
|
— |
|
(60,649) |
|
— |
|
(60,649) |
|
— |
|
Other comprehensive loss |
|
— |
|
|
— |
|
— |
|
— |
|
— |
|
(1,008) |
|
(1,008) |
|
— |
|
Balance at June 30, 2018 |
|
99,701 |
|
$ |
997 |
|
302,144 |
|
1,144,090 |
|
(560,181) |
|
(1,332) |
|
885,718 |
|
17,052 |
|
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, |
|
||||
|
|
2018 |
|
2017 |
|
||
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
90,227 |
|
|
59,069 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
11,121 |
|
|
10,396 |
|
Write-down of impaired assets |
|
|
1,200 |
|
|
1,500 |
|
Amortization of deferred sales commissions |
|
|
1,890 |
|
|
2,675 |
|
Share-based compensation |
|
|
29,670 |
|
|
28,239 |
|
Investments loss (gain), net |
|
|
4,536 |
|
|
(4,662) |
|
Net purchases of trading securities |
|
|
(8,338) |
|
|
(15,613) |
|
Deferred income taxes |
|
|
3,090 |
|
|
1,515 |
|
Net change in equity securities and trading debt securities held by consolidated sponsored funds |
|
|
70,759 |
|
|
(114,407) |
|
Other |
|
|
2,092 |
|
|
209 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Customer and other receivables |
|
|
(2,807) |
|
|
28,823 |
|
Payable to investment companies for securities and payable to customers |
|
|
2,679 |
|
|
(33,943) |
|
Receivables from funds and separate accounts |
|
|
2,488 |
|
|
5,994 |
|
Other assets |
|
|
(1,932) |
|
|
3,052 |
|
Accounts payable and payable to third party brokers |
|
|
(3,706) |
|
|
(6,805) |
|
Other liabilities |
|
|
(29,888) |
|
|
3,857 |
|
Net cash provided by (used in) operating activities |
|
$ |
173,081 |
|
|
(30,101) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchases of available for sale and equity method securities |
|
|
(27,093) |
|
|
(28,881) |
|
Proceeds from sales of equity and equity method securities |
|
|
— |
|
|
14,917 |
|
Proceeds from maturities of available for sale securities |
|
|
77,966 |
|
|
— |
|
Additions to property and equipment |
|
|
(1,142) |
|
|
(3,704) |
|
Net cash provided by (used in) investing activities |
|
$ |
49,731 |
|
|
(17,668) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Dividends paid |
|
|
(41,481) |
|
|
(77,236) |
|
Repurchase of common stock |
|
|
(59,195) |
|
|
(12,013) |
|
Repayment of short-term debt, net of debt issuance costs |
|
|
(94,960) |
|
|
— |
|
Net subscriptions, (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds |
|
|
3,131 |
|
|
16,929 |
|
Other |
|
|
— |
|
|
87 |
|
Net cash used in financing activities |
|
$ |
(192,505) |
|
|
(72,233) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
30,307 |
|
|
(120,002) |
|
Cash, cash equivalents, and restricted cash at beginning of period |
|
|
235,985 |
|
|
586,239 |
|
Cash, cash equivalents, and restricted cash at end of period |
|
$ |
266,292 |
|
|
466,237 |
|
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”); and the Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”). In 2016, we introduced the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”) (collectively, Ivy Funds, Ivy VIP, InvestEd, IVH, and Ivy NextShares are referred to as the “Funds”). On February 26, 2018, we completed the merger of Advisor Funds into Ivy Funds with substantially similar objectives and strategies. As of June 30, 2018, we had $78.7 billion in assets under management.
We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds and institutional and separately managed accounts. Investment management and/or advisory 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 programs and related advisory services, asset‑based service and distribution fees promulgated under the 1940 Act (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance 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, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts. Our major expenses are for commissions, employee compensation, field services, dealer services, information technology, occupancy and marketing and advertising.
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, 2017 (the “2017 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 2017 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts from Customers,” ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” ASU 2017-07, “Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” and ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” with all ASUs effective January 1, 2018.
8
The implementation of ASU 2014-09 did not have a material impact on the measurement or recognition of revenue from prior periods. See Note 3 – Revenue Recognition, for additional accounting policy information and the additional disclosures required by this ASU. Upon adoption of ASU 2016-01, we reclassified net unrealized holding gains, net of taxes, related to our available for sale investment portfolio from accumulated other comprehensive income to retained earnings. See consolidated statement of stockholders’ equity and redeemable noncontrolling interests for the financial statement reclassification impact of adopting this ASU. Upon adoption of ASU 2016-18, the Cash and cash equivalents – restricted financial statement line item is included as a component of cash and cash equivalents on the Company’s consolidated statements of cash flows for all periods presented. The adoption of ASU 2017-07 changed the income statement presentation of our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, mark-to-market gains and losses, curtailments and settlements, etc.). In addition, only the service cost component is eligible for capitalization as part of an asset. The adoption of this ASU had no effect on our net income because it only impacts the classification of certain information on the consolidated statements of income. An amendment to freeze the Pension Plan was approved effective September 30, 2017; therefore, after September 30, 2017, we no longer incur service costs. The service cost component of net periodic benefit cost was recognized in compensation and related costs through September 30, 2017. The other components of net periodic cost were reclassified to investment and other income (loss) on a retrospective basis. Upon early adoption of ASU 2018-02 tax effects that were stranded in other comprehensive income due to the Tax Reform Act were reclassified from accumulated other comprehensive income to retained earnings. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures. See consolidated statement of stockholders’ equity and redeemable noncontrolling interests for the financial statement reclassification impact of adopting this ASU.
Additionally, during the first quarter of 2018, we changed the presentation of certain line items in the consolidated statements of income that are intended to improve the transparency of the Company’s financial statements through clearer alignment of operating expenses with financial statement captions. Specifically, the Company revised its accounting policy related to the reporting of indirect underwriting and distribution expenses in the former underwriting and distribution caption and certain expenses historically reported as general and administrative. Expenses previously recorded as Underwriting and distribution expenses were retrospectively reclassified into (a) the following existing operating expense captions: Compensation and benefits and General and administrative, and (b) the following newly created operating expense captions: Distribution, Technology, Occupancy, and Marketing and advertising. Certain expenses historically reported as general and administrative were retrospectively reclassified into the following newly created operating expense captions: Technology, Occupancy, and Marketing and advertising. The Company considers the change in policy to be preferable and does not consider the change to be material to its consolidated financial statements. These changes were applied retrospectively to all periods presented and do not affect net income attributable to the Company.
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, 2018 and the results of operations and cash flows for the six months ended June 30, 2018 and 2017 in conformity with accounting principles generally accepted in the United States.
9
2.New Accounting Guidance
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases,” which increases transparency and comparability among organizations by establishing a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet with additional disclosures of key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and certain practical expedients are available. The Company expects to adopt the provisions of this guidance on January 1, 2019. The Company is in the process of identifying its impacted leases and continues to evaluate the impact that the ASU will have on its consolidated financial statements and related disclosures.
In June 2018, FASB issued ASU 2018-07, Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, 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.Revenue Recognition
As of January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” and all subsequent ASUs that modified ASC 606, “Revenue from Contracts with Customers.” The Company elected to apply the standard utilizing the cumulative effect approach. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue.
Investment Management and Advisory Fees
We recognize investment management fees as earned over the period in which investment management services are provided. While our investment management contracts are long-term in nature, the performance obligations are generally satisfied daily or monthly based on assets under management. We calculate investment management fees from the Funds daily based upon average daily net assets under management in accordance with investment management agreements between the Funds and the Company. The majority of investment and/or advisory fees earned from institutional and separate accounts are calculated either monthly or quarterly based upon an average of net assets under management in accordance with such investment management agreements. The Company may waive certain fees for investment management services at its discretion, or in accordance with contractual expense limitations, and these waivers are reflected as a reduction to investment management fees on the consolidated statements of income.
Our investment advisory business receives research products and services from broker-dealers through soft dollar arrangements. Consistent with the soft dollar safe harbor established by Section 28(e) of the Securities Exchange Act of 1934, as amended, the investment advisory business does not have any contractual obligation requiring it to pay for research products and services obtained through soft dollar arrangements with brokers. As a result, we present soft dollar arrangements on a net basis.
The Company has contractual arrangements with third parties to provide subadvisory services. Investment advisory fees are recorded gross of any subadvisory payments and are included in investment management fees based on management’s determination that the Company is acting in the capacity of principal service provider with respect to its relationship with the Funds. Any corresponding fees paid to subadvisors are included in operating expenses.
10
Underwriting, Distribution and Shareholder Service Fees
Fee‑based asset allocation revenues are calculated monthly based upon average daily net assets under management. For certain types of investment products, primarily variable annuities, distribution revenues are generally calculated based upon average daily net assets under management. Fees collected from independent financial advisors associated with Waddell & Reed, Inc. for various services are recorded in underwriting and distribution fees on a gross basis, as the Company is the principal in these arrangements.
Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net assets under management for Ivy Funds Class B, C, E and Y shares for expenses paid to broker-dealers and other sales professionals in connection with providing ongoing services to the Funds’ shareholders and/or maintaining the Funds’ shareholder accounts, with the exception of the Funds’ Class R shares, for which the maximum fee is 0.50%. The Funds’ Class B and Class C shares may charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan to broker-dealers and other sales professionals for their services in connection with distributing shares of that class. The Funds’ Class A shares may charge a maximum fee of 0.25% of the average daily net assets under management under a Rule 12b-1 service and distribution plan for expenses detailed previously. The Rule 12b-1 plans are subject to annual approval by the Funds’ board of trustees, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. All Funds may terminate the service and distribution plans at any time with approval of fund trustees or portfolio shareholders (a majority of either) without penalty.
Underwriting and distribution commission revenues resulting from the sale of investment products are recorded upon satisfaction of performance obligations, which occurs on the trade date. When a client purchases Class A or Class E shares (front-end load), the client pays an initial sales charge of up to 5.75% of the amount invested. The sales charge for Class A or Class E shares typically declines as the investment amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a reduced sales charge. When a client invests in a fee-based asset allocation product, Class I or Y shares are purchased at net asset value, and we do not charge an initial sales charge.
Underwriting and distribution revenues resulting from payments from independent financial advisors for office space, compliance oversight and affiliation fees are earned over the period in which the service is provided, which is generally monthly and is based on a fee schedule.
Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. Transfer agency fees and portfolio accounting and administration fees are asset‑based revenues or account‑based revenues, while custodian fees from retirement plan accounts are based on the number of client accounts. Custodian fees, transfer agency fees and portfolio accounting and administration fees are earned upon completion of the service when all performance obligations have been satisfied.
11
All revenue recognized in the consolidated statements of income is considered to be revenue from contracts with customers. The vast majority of revenue is determined based on average assets and is earned daily or monthly or is transactional and is earned on the trade date. As such, revenue from remaining performance obligations is not significant. The following table depicts the disaggregation of revenue by product and distribution channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Three months ended |
|
Six months ended |
|
Six months ended |
|
|
|
|
(in thousands) |
|
(in thousands) |
|
||||
Investment management fees: |
|
|
|
|
|
|
|
|
|
|
Unaffiliated and Broker-Dealer |
|
$ |
124,766 |
|
124,686 |
|
252,429 |
|
248,486 |
|
Institutional |
|
|
5,625 |
|
6,192 |
|
11,654 |
|
12,828 |
|
Total investment management fees |
|
$ |
130,391 |
|
130,878 |
|
264,083 |
|
261,314 |
|
Underwriting and distribution fees: |
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
|
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees |
|
$ |
20,051 |
|
22,852 |
|
41,027 |
|
46,869 |
|
Sales commissions on front-end load mutual fund and variable annuity sales |
|
|
507 |
|
319 |
|
977 |
|
765 |
|
Other revenues |
|
|
148 |
|
353 |
|
333 |
|
779 |
|
Total unaffiliated distribution fees |
|
$ |
20,706 |
|
23,524 |
|
42,337 |
|
48,413 |
|
Broker-Dealer |
|
|
|
|
|
|
|
|
|
|
Fee-based asset allocation product revenues |
|
$ |
66,580 |
|
58,313 |
|
132,097 |
|
115,069 |
|
Rule 12b-1 service and distribution fees |
|
|
18,109 |
|
18,863 |
|
36,486 |
|
37,518 |
|
Sales commissions on front-end load mutual fund and variable annuity sales |
|
|
13,823 |
|
14,529 |
|
28,249 |
|
28,855 |
|
Sales commissions on other products |
|
|
9,065 |
|
8,460 |
|
17,487 |
|
15,697 |
|
Other revenues |
|
|
9,590 |
|
5,087 |
|
19,258 |
|
12,055 |
|
Total broker-dealer distribution fees |
|
|
117,167 |
|
105,252 |
|
233,577 |
|
209,194 |
|
Total distribution fees |
|
$ |
137,873 |
|
128,776 |
|
275,914 |
|
257,607 |
|
Shareholder service fees: |
|
|
|
|
|
|
|
|
|
|
Total shareholder service fees |
|
$ |
27,074 |
|
27,003 |
|
52,956 |
|
54,300 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
295,338 |
|
286,657 |
|
592,953 |
|
573,221 |
|
|
|
|
|
|
|
|
|
|
|
|
12
4.Investment Securities
Investment securities at June 30, 2018 and December 31, 2017 are as follows:
|
|
June 30, |
|
December 31, |
|
|
|
|
2018 |
|
2017 |
|
|
|
|
|
(in thousands) |
|
||
Available for sale securities: |
|
|
|
|
|
|
Certificates of deposit |
|
$ |
8,000 |
|
12,999 |
|
Commercial paper |
|
|
— |
|
34,978 |
|
Corporate bonds |
|
|
186,136 |
|
197,442 |
|
U.S. Treasury bills |
|
|
22,538 |
|
19,779 |
|
Total available for sale securities |
|
|
216,674 |
|
265,198 |
|
Trading debt securities: |
||||||
Certificates of deposit |
|
|
2,000 |
|
1,999 |
|
Corporate bonds |
|
|
59,671 |
|
55,414 |
|
U.S. Treasury bills |
|
|
6,855 |
|
4,929 |
|
Mortgage-backed securities |
|
|
9 |
|
10 |
|
Consolidated sponsored funds |
|
|
37,342 |
|
62,038 |
|
Total trading securities |
|
|
105,877 |
|
124,390 |
|
Equity securities: |
|
|
|
|
|
|
Common stock |
|
|
202 |
|
116 |
|
Sponsored funds(1) |
|
|
167,777 |
|
137,857 |
|
Sponsored privately offered funds |
|
|
782 |
|
695 |
|
Consolidated sponsored funds |
|
|
30,985 |
|
77,048 |
|
Total equity securities |
|
|
199,746 |
|
215,716 |
|
Equity method securities: |
|
|
|
|
|
|
Sponsored funds |
|
|
62,472 |
|
95,188 |
|
Total securities |
|
$ |
584,769 |
|
700,492 |
|
(1)Includes $124.0 million of investments at December 31, 2017, that were previously reported as available for sale securities prior to the adoption of ASU 2016-01 on January 1, 2018. Refer to Note 1 – Description of Business and Significant Accounting Policies – Basis of Presentation.
Certificates of deposit, corporate bonds and U.S. Treasury bills accounted for as available for sale and held as of June 30, 2018 mature as follows:
|
|
Amortized |
|
|
|
|
cost |
|
Fair value |
|
|
(in thousands) |
||
Within one year |
$ |
82,240 |
|
81,761 |
After one year but within five years |
|
136,756 |
|
134,913 |
|
$ |
218,996 |
|
216,674 |
Certificates of deposit, corporate bonds, U.S. Treasury bills and mortgage-backed securities accounted for as trading and held as of June 30, 2018 mature as follows:
|
|
|
|
Fair value |
|
|
|
|
(in thousands) |
Within one year |
|
|
$ |
19,143 |
After one year but within five years |
|
|
|
44,619 |
After 10 years |
|
|
|
4,773 |
|
|
|
$ |
68,535 |
13
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at June 30, 2018: