Table of contents


 

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, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T   (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐

 

 

 

 

 

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 26, 2018

Class A common stock, $.01 par value

 

78,318,708

 

 

 

 

 

 


 

 

 

Table of contents

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2018

 

 

 

 

    

Page No.

 

 

 

 

 

Part I .  

Financial Information

 

 

 

 

 

 

 

Item 1.  

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2018 and September 30, 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and September 30, 2017

 

5

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity and Redeemable Noncontrolling Interests for the nine months ended September 30, 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and September 30, 2017

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.  

 

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

 

26

 

 

 

 

 

Item 3.  

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

Item 4.  

 

Controls and Procedures

 

40

 

 

 

 

 

Part II.  

Other Information

 

 

 

 

 

 

 

Item 1.  

 

Legal Proceedings

 

41

 

 

 

 

 

Item 1A.  

 

Risk Factors

 

41

 

 

 

 

 

Item 2.  

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

Item 6.  

 

Exhibits

 

42

 

 

 

 

 

 

 

Signatures

 

43

 

 

 

 

2


 

 

 

Table of contents

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

2018

 

 

December 31, 

 

 

 

(Unaudited)

 

 

2017

 

Assets:

    

 

 

    

 

 

    

Cash and cash equivalents

 

$

270,478

 

 

207,829

 

Cash and cash equivalents - restricted

 

 

29,175

 

 

28,156

 

Investment securities

 

 

588,407

 

 

700,492

 

Receivables:

 

 

 

 

 

 

 

Funds and separate accounts

 

 

22,319

 

 

25,664

 

Customers and other

 

 

121,822

 

 

131,108

 

Prepaid expenses and other current assets

 

 

27,762

 

 

25,593

 

Total current assets

 

 

1,059,963

 

 

1,118,842

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

69,340

 

 

87,667

 

Goodwill and identifiable intangible assets

 

 

145,869

 

 

147,069

 

Deferred income taxes

 

 

8,241

 

 

13,308

 

Other non-current assets

 

 

9,382

 

 

17,476

 

Total assets

 

$

1,292,795

 

 

1,384,362

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

40,479

 

 

38,998

 

Payable to investment companies for securities

 

 

37,941

 

 

43,422

 

Payable to third party brokers

 

 

22,284

 

 

25,153

 

Payable to customers

 

 

57,917

 

 

66,830

 

Short-term notes payable

 

 

 —

 

 

94,996

 

Accrued compensation

 

 

58,467

 

 

47,643

 

Other current liabilities

 

 

45,556

 

 

44,797

 

Total current liabilities

 

 

262,644

 

 

361,839

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

94,836

 

 

94,783

 

Accrued pension and postretirement costs

 

 

9,472

 

 

15,137

 

Other non-current liabilities

 

 

16,200

 

 

25,210

 

Total liabilities

 

 

383,152

 

 

496,969

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

16,133

 

 

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; 78,904 shares outstanding (82,687 at December 31, 2017)

 

 

997

 

 

997

 

Additional paid-in capital

 

 

312,213

 

 

301,410

 

Retained earnings

 

 

1,170,785

 

 

1,092,394

 

Cost of 20,797 common shares in treasury (17,014 at December 31, 2017)

 

 

(589,391)

 

 

(522,441)

 

Accumulated other comprehensive (loss) income

 

 

(1,094)

 

 

524

 

Total stockholders’ equity

 

 

893,510

 

 

872,884

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

1,292,795

 

 

1,384,362

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

3


 

 

 

Table of contents

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, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

    

 

    

    

 

    

    

 

 

    

 

 

    

Investment management fees

 

$

129,302

 

 

134,149

 

$

393,385

 

 

395,463

 

Underwriting and distribution fees

 

 

140,308

 

 

128,892

 

 

416,222

 

 

386,499

 

Shareholder service fees

 

 

25,508

 

 

26,406

 

 

78,464

 

 

80,706

 

Total

 

 

295,118

 

 

289,447

 

 

888,071

 

 

862,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution

 

 

116,591

 

 

106,878

 

 

345,376

 

 

324,375

 

Compensation and benefits (including share-based compensation of $12,856, $14,180, $42,526 and $42,419, respectively)

 

 

64,561

 

 

69,636

 

 

199,174

 

 

202,003

 

General and administrative

 

 

17,559

 

 

23,400

 

 

56,240

 

 

68,882

 

Technology

 

 

15,414

 

 

16,039

 

 

49,293

 

 

50,796

 

Occupancy

 

 

7,148

 

 

7,645

 

 

21,081

 

 

22,978

 

Marketing and advertising

 

 

2,461

 

 

3,197

 

 

7,638

 

 

9,072

 

Depreciation

 

 

8,141

 

 

5,230

 

 

19,262

 

 

15,626

 

Subadvisory fees

 

 

3,767

 

 

3,566

 

 

11,158

 

 

9,457

 

Intangible asset impairment

 

 

 —

 

 

 —

 

 

1,200

 

 

1,500

 

Total

 

 

235,642

 

 

235,591

 

 

710,422

 

 

704,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

59,476

 

 

53,856

 

 

177,649

 

 

157,979

 

Investment and other income

 

 

1,697

 

 

33,293

 

 

5,354

 

 

39,302

 

Interest expense

 

 

(1,555)

 

 

(2,796)

 

 

(4,908)

 

 

(8,370)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

59,618

 

 

84,353

 

 

178,095

 

 

188,911

 

Provision for income taxes

 

 

13,105

 

 

29,499

 

 

41,355

 

 

74,988

 

Net income

 

 

46,513

 

 

54,854

 

 

136,740

 

 

113,923

 

Net income (loss) attributable to redeemable noncontrolling interests

 

 

208

 

 

1,272

 

 

(380)

 

 

2,408

 

Net income attributable to Waddell & Reed Financial, Inc.

 

$

46,305

 

 

53,582

 

$

137,120

 

 

111,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.58

 

 

0.64

 

$

1.69

 

 

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

 

79,595

 

 

83,476

 

 

81,372

 

 

83,719

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4


 

 

 

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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, 

 

 

 

2018

    

2017

    

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

46,513

 

 

54,854

 

$

136,740

 

 

113,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $80, $364, $(218) and $(1,310), respectively

 

 

262

 

 

2,070

 

 

(700)

 

 

6,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit, net of income tax benefit of $(7), $(16), $(22) and $(51), respectively

 

 

(24)

 

 

(30)

 

 

(70)

 

 

(87)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

46,751

 

 

56,894

 

 

135,970

 

 

120,740

 

Comprehensive income (loss) attributable to redeemable noncontrolling interests

 

 

208

 

 

1,272

 

 

(380)

 

 

2,408

 

Comprehensive income attributable to Waddell & Reed Financial, Inc.

 

$

46,543

 

 

55,622

 

$

136,350

 

 

118,332

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


 

 

 

Table of contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity and Redeemable Noncontrolling Interests

For the Nine Months Ended September 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 (loss)

 

 —

 

 

 —

 

 —

 

137,120

 

 —

 

 —

 

137,120

 

(380)

 

Net subscription of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

2,004

 

Recognition of equity compensation

 

 —

 

 

 —

 

32,871

 

991

 

 —

 

 —

 

33,862

 

 —

 

Net issuance/forfeiture of nonvested shares

 

 —

 

 

 —

 

(22,068)

 

 

 

22,068

 

 

 

 —

 

 —

 

Dividends accrued, $0.75 per share

 

 —

 

 

 —

 

 —

 

(60,568)

 

 —

 

 —

 

(60,568)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(89,018)

 

 —

 

(89,018)

 

 —

 

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

(770)

 

(770)

 

 —

 

Balance at September 30, 2018

 

99,701

 

$

997

 

312,213

 

1,170,785

 

(589,391)

 

(1,094)

 

893,510

 

16,133

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


 

 

 

Table of contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

    

For the nine months ended September 30, 

 

 

 

2018

    

2017

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

136,740

 

 

113,923

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,262

 

 

15,626

 

Write-down of impaired assets

 

 

1,200

 

 

1,500

 

Amortization of deferred sales commissions

 

 

2,682

 

 

3,799

 

Share-based compensation

 

 

42,526

 

 

42,419

 

Investments loss (gain), net

 

 

2,521

 

 

(9,157)

 

Net purchases of trading securities

 

 

(4,387)

 

 

(36,643)

 

Deferred income taxes

 

 

5,307

 

 

13,638

 

Net change in equity securities and trading debt securities held by consolidated sponsored funds

 

 

71,452

 

 

(123,865)

 

Other

 

 

2,973

 

 

(30,793)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Customer and other receivables

 

 

9,286

 

 

13,372

 

Payable to investment companies for securities and payable to customers

 

 

(14,394)

 

 

(26,171)

 

Receivables from funds and separate accounts

 

 

3,345

 

 

4,671

 

Other assets

 

 

7,650

 

 

5,050

 

Accounts payable and payable to third party brokers

 

 

(1,388)

 

 

(3,510)

 

Other liabilities

 

 

(21,042)

 

 

3,975

 

Net cash provided by (used in) operating activities

 

$

263,733

 

 

(12,166)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available for sale and equity method securities

 

 

(56,840)

 

 

(291,539)

 

Proceeds from sales of available for sale and equity method securities

 

 

1,157

 

 

92,936

 

Proceeds from maturities of available for sale securities

 

 

100,085

 

 

4,981

 

Additions to property and equipment

 

 

(1,831)

 

 

(5,358)

 

Net cash provided by (used in) investing activities

 

$

42,571

 

 

(198,980)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(61,531)

 

 

(115,691)

 

Repurchase of common stock

 

 

(88,166)

 

 

(15,635)

 

Repayment of short-term debt, net of debt issuance costs

 

 

(94,943)

 

 

 —

 

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

 

 

2,004

 

 

17,575

 

Other

 

 

 —

 

 

131

 

Net cash used in financing activities

 

$

(242,636)

 

 

(113,620)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

63,668

 

 

(324,766)

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

235,985

 

 

586,239

 

Cash, cash equivalents, and restricted cash at end of period

 

$

299,653

 

 

261,473

 

 

See accompanying notes to the unaudited consolidated financial statements.

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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 September 30, 2018, we had $79.5 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,” which all became effective January 1, 2018. 

 

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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 was 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 impacted 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 were 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 considered the change in policy to be preferable and did not consider the change to be material to its consolidated financial statements. These changes were applied retrospectively to all periods presented and did 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 September 30, 2018 and the results of operations and cash flows for the nine months ended September 30, 2018 and 2017 in conformity with accounting principles generally accepted in the United States.

 

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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 will adopt the provisions of this guidance on January 1, 2019.  We expect to elect the ‘package of practical expedients’, which allows us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also expect to elect a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets.  Additionally, we currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company has identified its population of impacted leases   and continues to evaluate the impact that the ASU will have on its consolidated financial statements and related disclosures. While we continue to assess all of the effects of adoption, we currently believe the most significant effects on our financial statements relate to the recognition of new right-of-use assets and lease liabilities on our balance sheet for our real estate operating leases and providing new disclosures about our leasing activities.

 

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. The Company will adopt the provisions of this guidance on January 1, 2019. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures. 

 

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In August 2018, FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

 

In August 2018, FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluating the 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 Accounting Standards Codification (“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.

 

 

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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.

 

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.

 

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 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 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.

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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. 

 

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
September 30, 2018

 

Three months ended
September 30, 2017

 

Nine months ended
September 30, 2018

 

Nine months ended
September 30, 2017

 

 

 

 

(in thousands)

 

(in thousands)

 

Investment management fees:

 

 

    

    

    

    

    

    

    

 

Funds

 

$

123,764

 

128,078

 

376,193

 

376,563

 

Institutional

 

 

5,538

 

6,071

 

17,192

 

18,900

 

Total investment management fees

 

$

129,302

 

134,149

 

393,385

 

395,463

 

Underwriting and distribution fees:

 

 

 

 

 

 

 

 

 

 

Unaffiliated

 

 

 

 

 

 

 

 

 

 

Rule 12b-1 service and distribution fees

 

$

19,707

 

22,322

 

60,734

 

69,191

 

Sales commissions on front-end load mutual fund and variable annuity sales

 

 

441

 

353

 

1,418

 

1,118

 

Other revenues

 

 

126

 

217

 

459

 

996

 

Total unaffiliated distribution fees

 

$

20,274

 

22,892

 

62,611

 

71,305

 

Broker-Dealer

 

 

 

 

 

 

 

 

 

 

Fee-based asset allocation product revenues

 

$

69,468

 

61,115

 

201,565

 

176,184

 

Rule 12b-1 service and distribution fees

 

 

18,106

 

19,026

 

54,591

 

56,544

 

Sales commissions on front-end load mutual fund and variable annuity sales

 

 

13,651

 

12,941

 

41,900

 

41,796

 

Sales commissions on other products

 

 

9,111

 

7,974

 

26,632

 

23,671

 

Other revenues

 

 

9,698

 

4,944

 

28,923

 

16,999

 

Total broker-dealer distribution fees

 

 

120,034

 

106,000

 

353,611

 

315,194

 

Total distribution fees

 

$

140,308

 

128,892

 

416,222

 

386,499

 

Shareholder service fees:

 

 

 

 

 

 

 

 

 

 

Total shareholder service fees

 

$

25,508

 

26,406

 

78,464

 

80,706

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

295,118

 

289,447

 

888,071

 

862,668

 

 

 

 

 

 

 

 

 

 

 

 

 

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4. Investment Securities

 

Investment securities at September 30, 2018 and December 31, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

 

2017

 

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

Certificates of deposit

 

$

5,002

 

12,999

 

Commercial paper

 

 

7,920

 

34,978

 

Corporate bonds

 

 

180,780

 

197,442

 

U.S. Treasury bills

 

 

25,445

 

19,779

 

Total available for sale securities

 

 

219,147

 

265,198

 

Trading debt securities:

 

 

 

 

 

 

Certificates of deposit

 

 

 —

 

1,999

 

Commercial paper

 

 

1,981

 

 —

 

Corporate bonds

 

 

58,545

 

55,414

 

U.S. Treasury bills

 

 

8,810

 

4,929

 

Mortgage-backed securities

 

 

 8

 

10

 

Consolidated sponsored funds

 

 

35,086

 

62,038

 

Total trading securities 

 

 

104,430

 

124,390

 

Equity securities:

 

 

 

 

 

 

Common stock

 

 

8,088

 

116

 

Sponsored funds (1)  

 

 

160,852

 

137,857

 

Sponsored privately offered funds

 

 

839

 

695

 

Consolidated sponsored funds

 

 

32,548

 

77,048

 

Total equity securities

 

 

202,327

 

215,716

 

Equity method securities:

 

 

 

 

 

 

Sponsored funds

 

 

62,503

 

95,188

 

Total securities

 

$

588,407

 

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, commercial paper, corporate bonds and U.S. Treasury bills accounted for as available for sale and held as of September 30, 2018 mature as follows:

 

 

 

 

 

 

 

Amortized

 

 

 

 

cost

 

Fair value

  

 

(in thousands)

Within one year

$

90,565

 

90,143

After one year but within five years

 

130,562

 

129,004

 

$

221,127

 

219,147

Commercial paper, corporate bonds, U.S. Treasury bills and mortgage-backed securities accounted for as trading and held as of September 30, 2018 mature as follows:

 

 

 

 

 

 

 

 

 

Fair value

  

 

 

 

(in thousands)

Within one year

 

 

$

25,031

After one year but within five years

 

 

 

39,654

After 10 years

 

 

 

4,659

 

 

 

$

69,344

 

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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, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

  

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

5,000

 

 2

 

 —

 

5,002

 

Commercial paper

 

 

7,902

 

18

 

 —

 

7,920

 

Corporate bonds

 

 

182,276

 

 7

 

(1,503)

 

180,780

 

U.S. Treasury bills

 

 

25,949

 

 —

 

(504)

 

25,445

 

 

 

$

221,127

 

27

 

(2,007)

 

219,147

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

13,000

 

 1

 

(2)

 

12,999

 

Commercial paper

 

 

34,836

 

142

 

 —

 

34,978

 

Corporate bonds

 

 

198,404

 

33

 

(995)

 

197,442

 

U.S. Treasury bills

 

 

20,019

 

 —

 

(240)

 

19,779

 

 

 

$

266,259

 

176

 

(1,237)

 

265,198

 

 

A summary of available for sale investment securities with fair values below carrying values at September 30, 2018 and December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

September 30, 2018

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

(in thousands)

Corporate bonds

 

$

55,682

 

(293)

 

112,246

 

(1,210)

 

167,928

 

(1,503)

U.S. Treasury bills

 

 

5,920

 

(16)

 

19,525

 

(488)

 

25,445

 

(504)

 

 

$

61,602

 

(309)

 

131,771

 

(1,698)

 

193,373

 

(2,007)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

December 31, 2017

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

(in thousands)

Certificates of deposit

 

$

2,998

    

(2)

    

 —

    

 —

    

2,998

    

(2)

Corporate bonds

 

 

192,409

 

(995)

 

 —

 

 —

 

192,409

 

(995)

U.S. Treasury bills

 

 

19,779

 

(240)

 

 —

 

 —

 

19,779

 

(240)

 

 

$

215,186

 

(1,237)

 

 —

 

 —

 

215,186

 

(1,237)

 

 

The Company’s investment portfolio included 46 securities, having an aggregate fair value of $193.4 million, which were in an unrealized loss position at September 30, 2018, compared to 53 securities, with an aggregate fair value of $215.2 million at December 31, 2017.

 

The Company evaluated all of the available for sale securities in an unrealized loss position at September 30, 2018 and December 31, 2017, and concluded no other-than-temporary impairment existed at September 30, 2018 or December 31, 2017.  The unrealized losses in the Company’s investment portfolio at September 30, 2018 were primarily caused by changes in interest rates. At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.

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Sponsored Funds

 

The Company has classified its equity investments in the Ivy Funds as equity method investments (when the Company owns between 20% and 50% of the fund) or equity securities (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 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. 

 

Sponsored Privately Offered Funds

 

The Company holds an interest in a privately offered fund structured in the form of a limited liability company.  The members of this entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote.  This entity does not meet the criteria of a VIE and is considered to be a VOE.

 

Consolidated Sponsored Funds

 

The following table details the balances related to consolidated sponsored funds at September 30, 2018, and at December 31, 2017, as well as the Company’s net interest in these funds:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

2018

    

 

2017

 

    

(in thousands)

Cash

 

$

77,480

 

 

8,472

Investments

 

 

67,634

 

 

139,086

Other assets

 

 

2,661

 

 

1,588

Other liabilities

 

 

(1,125)

 

 

(1,040)

Redeemable noncontrolling interests

 

 

(16,133)

 

 

(14,509)

Net interest in consolidated sponsored funds

 

$

130,517

 

 

133,597

 

During the three months ended September 30, 2018, we consolidated an Ivy Fund, Ivy NextShares and Ivy Global Investors Funds in which we provided initial seed capital at the time of the funds’ formation. In May, we started the process of liquidating the Ivy Global Investors Société d’Investissement à Capital Variable and its Ivy Global Investors sub-funds, including converting the investments held by the sub-funds to cash. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements. 

 

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 different evaluated pricing approaches depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short-time between purchase and expected maturity of the investments. Depending on the nature of the inputs, these investments are generally classified as Level 1 or 2 within the fair value hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.

 

The following tables summarize our investment securities as of September 30, 2018 and December 31, 2017 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Held at Net Asset Value

 

Total

 

 

 

(in thousands)

 

Cash equivalents: (1)

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

112,289

 

 —

 

 —

 

 —

 

112,289

 

Commercial paper

 

 

 —

 

48,554

 

 —

 

 —

 

48,554

 

Total cash equivalents

 

$

112,289

 

48,554

 

 —

 

 —

 

160,843

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 —

 

5,002

 

 —

 

 —

 

5,002

 

Commercial paper

 

 

 —

 

7,920

 

 —

 

 —

 

7,920

 

Corporate bonds

 

 

 —

 

180,780

 

 —

 

 —

 

180,780

 

U.S. Treasury bills

 

 

 —

 

25,445

 

 —

 

 —

 

25,445

 

Trading debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 —

 

1,981

 

 —

 

 —

 

1,981

 

Corporate bonds

 

 

 —

 

58,545

 

 —

 

 

 

58,545

 

U.S. Treasury bills

 

 

 —

 

8,810

 

 —

 

 —

 

8,810

 

Mortgage-backed securities

    

 

 —

    

 8

    

 —

    

 —

 

 8

 

Consolidated sponsored funds

 

 

 —

 

35,086

 

 —

 

 —

 

35,086

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

8,049

 

 —

 

39

 

 —

 

8,088

 

Sponsored funds

 

 

160,852

 

 —

 

 —

 

 —

 

160,852

 

Sponsored privately offered funds measured at net asset value (2)

 

 

 —

 

 —

 

 —

 

839

 

839

 

Consolidated sponsored funds

 

 

32,548

 

 —

 

 —

 

 —

 

32,548

 

Equity method securities: (3)

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

 

62,503

 

 —

 

 —

 

 —

 

62,503

 

Total

 

$

263,952

 

323,577

 

39

 

839

 

588,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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December 31, 2017

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Held at Net Asset Value

 

Total

 

 

 

(in thousands)

 

Cash equivalents: (1)

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

145,785

 

 —

 

 —

 

 —

 

145,785

 

Commercial paper

 

 

 —

 

11,064

 

 —

 

 —

 

11,064

 

Total cash equivalents

 

$

145,785

 

11,064

 

 —

 

 —

 

156,849

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 —

 

12,999

 

 —

 

 —

 

12,999

 

Commercial paper

 

 

 —

 

34,978

 

 —

 

 —

 

34,978

 

Corporate bonds

 

 

 —

 

197,442

 

 —

 

 —

 

197,442

 

U.S. Treasury bills

 

 

 —

 

19,779

 

 —

 

 —

 

19,779

 

Trading debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 —

 

1,999

 

 —

 

 —

 

1,999

 

Corporate bonds

 

 

 —

 

55,414

 

 —

 

 

 

55,414

 

U.S. Treasury bills

 

 

 —

 

4,929

 

 —

 

 —

 

4,929

 

Mortgage-backed securities

    

 

 —

    

10

    

 —

    

 —

 

10

 

Consolidated sponsored funds

 

 

 —

 

62,038

 

 —

 

 —

 

62,038

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

116

 

 —

 

 —

 

 —

 

116

 

Sponsored funds

 

 

137,857

 

 —

 

 —

 

 —

 

137,857

 

Sponsored privately offered funds measured at net asset value (2)

 

 

 —

 

 —

 

 —

 

695

 

695

 

Consolidated sponsored funds

 

 

77,048

 

 —

 

 —

 

 —

 

77,048

 

Equity method securities: (3)

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored funds

 

 

95,188

 

 —

 

 —

 

 —

 

95,188

 

Total

 

$

310,209

 

389,588

 

 —

 

695

 

700,492

 


 

(1)

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at NAV and are classified as Level 1. Cash investments in commercial paper are measured at cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization, and are classified as Level 2.

 

(2)

Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.  The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

 

(3)

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

 

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The following table summarizes the activity of investments categorized as Level 3 for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

For the nine months ended

 

 

 

 

September 30, 2018

 

 

 

 

(in thousands)

 

 

Level 3 assets at December 31, 2017

 

$

 —

 

 

Additions

 

 

419

 

 

Valuation change

 

 

(63)

 

 

Redemptions

 

 

(317)

 

 

Level 3 assets at September 30, 2018

 

$

39

 

 

 

 

5. Derivative Financial Instruments

 

The Company has in place an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in certain sponsored funds.  Certain of the consolidated sponsored funds may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives.  We do not hedge for speculative purposes.

 

Excluding derivative financial instruments held in certain consolidated sponsored funds, the Company was party to five total return swap contracts with a combined notional value of $198.4 million and six total return swap contracts with a combined notional value of $213.9 million as of September 30, 2018 and December 31, 2017, respectively. These derivative financial instruments are not designated as hedges for accounting purposes.  Changes in fair value of the total return swap contracts are recognized in investment and other income on the Company’s consolidated statements of income. 

 

The Company posted $6.4 million and $9.7 million in cash collateral with the counterparties of the total return swap contracts as of September 30, 2018 and December 31, 2017, respectively.  The cash collateral is included in Customers and other receivables on the Company’s consolidated balance sheet.  The Company does not record its fair value in derivative transactions against the posted collateral.

 

The following table presents the fair value of the derivative financial instruments, excluding derivative financial instruments held in certain consolidated sponsored funds as of September 30, 2018 and December 31, 2017 and is calculated based on Level 2 inputs:

 

The following table presents the fair value of the derivative financial instruments, excluding The following table presents the fair value of the derivative financial instruments, excluding derivative financial instruments held in certain consolidated sponsored funds as of September 30, 2018 and December 31, 2017 and is calculated based on Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

 

 

 

2018

 

 

2017

 

 

Balance sheet

 

 

 

 

 

 

 

    

location

    

Fair value

    

Fair value

 

 

 

 

(in thousands)

Total return swap contracts

 

Other current liabilities

 

$

550

 

 

1,093

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The following is a summary of net losses recognized in income for the three and nine months ended September 30, 2018 and September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

Income statement

 

September 30, 

 

September 30, 

 

    

location

    

 

2018

2017

    

 

2018

 

2017

 

 

 

 

(in thousands)

 

(in thousands)

Total return swap contracts

 

Investment and other income

 

$

(6,769)

(8,855)

 

$

(7,313)

 

(27,321)

 

 

6. Goodwill and Identifiable Intangible Assets

 

Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business.  Our goodwill is not deductible for tax purposes.  Goodwill and identifiable intangible assets (all considered indefinite lived) at September 30, 2018 and December 31, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Goodwill

    

$

106,970

    

106,970

 

 

 

 

 

 

 

 

Mutual fund management advisory contracts

 

 

38,699

 

38,699

 

Mutual fund management subadvisory contract

 

 

 —

 

1,200

 

Other

 

 

200

 

200

 

Total identifiable intangible assets

 

 

38,899

 

40,099

 

 

 

 

 

 

 

 

Total

 

$

145,869

 

147,069

 

 

7. Indebtedness

 

Debt is reported at its carrying amount in the consolidated balance sheet.  The fair value of the Company’s senior unsecured note maturing January 13, 2021 is $98.4 million at September 30, 2018 compared to the carrying value net of debt issuance costs of $94.8 million, which is listed under long-term debt in the consolidated balance sheet.  Fair value is calculated based on Level 2 inputs.

 

8. Income Tax Uncertainties

In the accompanying consolidated balance sheet, unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable; unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to non-current deferred income taxes. As of September 30, 2018 and December 31, 2017, the Company’s consolidated balance sheet included unrecognized tax benefits, including penalties and interest, of $2.9 million ($2.5 million net of federal benefit) and $10.9 million ($8.9 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.  The Company finalized a voluntary disclosure agreement with a state tax jurisdiction in June 2018, which reduced unrecognized tax benefits by $9.3 million ($7.6 million net of federal benefit). 

 

The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.  The total amount of penalties and interest, net of federal impact, related to income tax uncertainties recognized in the statement of income for the nine month period ended September 30, 2018 was a benefit of $2.7 million.  The total amount of accrued penalties and interest related to uncertain tax positions recognized in the consolidated balance sheet at September 30, 2018 and December 31, 2017 is $0.8 million ($0.7 million net of federal benefit) and $4.0 million ($3.5 million net of federal benefit), respectively.

 

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain.  In addition, respective tax authorities periodically audit our income tax returns.  These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.  The Company is currently under audit in a state jurisdiction in which it operates.  The Company expects to settle the audit in this jurisdiction within the next 12-month period.  The Company’s liability for unrecognized tax benefits, including

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penalties and interest, is not expected to decrease significantly upon settlement of this audit.  Additionally, such settlement is not anticipated to have a significant impact on the results of operations.

 

The 2015, 2016, and 2017 federal income tax returns are open tax years that remain subject to potential future audit.  State income tax returns for all years after 2013 and, in certain states, income tax returns for 2013, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

 

9. Pension Plan and Postretirement Benefits Other Than Pension

 

Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors approved an amendment to freeze the Pension Plan effective September 30, 2017.  After September 30, 2017, participants in the Pension Plan do not accrue additional benefits for future service or compensation. Participants retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. During the third quarter of 2018, we contributed $4.0 million to the Pension Plan.

 

We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as independent financial advisors associated with Waddell & Reed, Inc.  The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were grandfathered when this plan was established. During the third quarter of 2016, the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016.

 

The components of net periodic pension and other postretirement costs related to these plans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

Pension Benefits

 

Postretirement Benefits

 

Pension Benefits

 

Postretirement Benefits

 

 

 

Three months

ended

September 30, 

 

 

Three months

ended

September 30, 

 

Nine months

ended

September 30, 

 

 

Nine months

ended

September 30, 

 

 

 

2018

 

2017

 

 

2018

 

2017

 

2018

 

2017

 

 

2018

 

2017

 

 

 

 

(in thousands)

 

 

(in thousands)

 

Components of net periodic benefit cost:

    

 

    

    

    

    

    

    

    

    

    

 

 

    

 

    

 

 

    

 

    

Service cost

 

$

 —

 

2,958

 

$

 —

 

 —

 

$

 —

 

8,367

 

$

 —

 

 —

 

Interest cost

 

 

1,497

 

1,522

 

 

14

 

15

 

 

4,490

 

4,780

 

 

41

 

44

 

Expected return on plan assets

 

 

(2,065)

 

(2,510)

 

 

 —

 

 —

 

 

(6,196)

 

(7,627)

 

 

 —

 

 —

 

Actuarial loss

 

 

 —

 

6,552

 

 

 —

 

 —

 

 

 —

 

6,552

 

 

 —

 

 —

 

Actuarial gain amortization

 

 

 —

 

 —

 

 

(30)

 

(45)

 

 

 —

 

 —

 

 

(90)

 

(135)

 

Prior service credit amortization

 

 

 —

 

 —

 

 

(1)

 

(1)

 

 

 —

 

 —

 

 

(2)

 

(3)

 

Curtailment gain

 

 

 —

 

(31,621)

 

 

 —

 

 —

 

 

 

 

(31,621)

 

 

 —

 

 —

 

Total

 

$

(568)

 

(23,099)

 

$

(17)

 

(31)

 

$

(1,706)

 

(19,549)

 

$

(51)

 

(94)

 

 

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10. Stockholders’ Equity

 

Earnings per Share

 

The components of basic and diluted earnings per share were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Waddell & Reed Financial, Inc.

    

$

46,305

    

53,582

    

$

137,120

    

111,515

    

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted

 

 

79,595

 

83,476

 

 

81,372

 

83,719

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted

 

$

0.58

 

0.64

 

$

1.69

 

1.33

 

 

Dividends

 

On July 24, 2018, the Board of Directors approved a dividend on our Class A common stock in the amount of $0.25 per share to stockholders of record on October 11, 2018. The total dividend paid on November 1, 2018 was $19.7 million and was included in other current liabilities as of September 30, 2018.

 

Common Stock Repurchases

 

The Board of Directors has authorized the repurchase of our Class A common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including issuing shares to employees in our stock-based compensation programs.

 

There were 1,424,612 shares and 190,056 shares repurchased in the open market or privately during the three months ended September 30, 2018 and 2017, respectively, which includes 225 shares and 56 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to vesting of stock awards during these two reporting periods. There were 4,519,546 shares and 904,410 shares repurchased in the open market or privately during the nine months ended September 30, 2018 and 2017, respectively, which includes 630,159 shares and 239,410 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to the vesting of stock awards during each of these two reporting periods.

 

 

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Accumulated Other Comprehensive Income (Loss)

 

The following tables summarize accumulated other comprehensive income (loss) activity for the three and nine months ended September 30, 2018 and September 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Unrealized

 

Postretirement

 

accumulated

 

 

 

gains (losses)

 

benefits

 

other

 

 

 

on investment

 

unrealized

 

comprehensive

 

Three months ended September 30, 2018

 

securities

 

gains (losses)

 

income (loss)

 

 

 

(in thousands)

 

Balance at June 30, 2018

    

$

(1,772)

    

440

    

(1,332)

 

Other comprehensive income before reclassification

 

 

218

 

 —

 

218

 

Amount reclassified from accumulated other comprehensive loss

 

 

44

 

(24)

 

20

 

Net current period other comprehensive income (loss)

 

 

262

 

(24)

 

238

 

Balance at September 30, 2018

 

$

(1,510)

 

416

 

(1,094)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in

 

 

 

 

 

 

 

 

 

 

valuation

 

 

 

 

 

 

 

 

 

 

allowance for

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

 

Total

 

 

 

Unrealized

 

gains

 

Postretirement

 

accumulated

 

 

 

gains (losses)

 

(losses) on

 

benefits

 

other

 

 

 

on investment

 

investment

 

unrealized

 

comprehensive

 

Three months ended September 30, 2017

 

securities

 

securities

 

gains (losses)

 

income (loss)

 

 

 

(in thousands)

 

Balance at June 30, 2017

    

$

(1,986)

    

 

(540)

    

546

    

(1,980)

 

Other comprehensive income before reclassification

 

 

1,968

 

 

800

 

 —

 

2,768

 

Amount reclassified from accumulated other comprehensive loss

 

 

(438)

 

 

(260)

 

(30)

 

(728)

 

Net current period other comprehensive income (loss)

 

 

1,530

 

 

540

 

(30)

 

2,040

 

Balance at September 30, 2017

 

$

(456)

 

 

 —

 

516

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Unrealized

 

Postretirement

 

accumulated

 

 

 

gains (losses)

 

benefits

 

other

 

 

 

on investment

 

unrealized

 

comprehensive

 

Nine months ended September 30, 2018

 

securities

 

gains (losses)

 

income (loss)

 

 

 

(in thousands)

 

Balance at December 31, 2017

    

$

145

    

379

    

524

 

Amount reclassified to retained earnings for recently adopted ASUs

 

 

(955)

 

107

 

(848)

 

Other comprehensive loss before reclassification

 

 

(744)

 

 —

 

(744)

 

Amount reclassified from accumulated other comprehensive loss

 

 

44

 

(70)

 

(26)

 

Net current period other comprehensive (loss) income

 

 

(1,655)

 

37

 

(1,618)

 

Balance at September 30, 2018

 

$

(1,510)

 

416

 

(1,094)

 

 

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Change in

 

 

 

 

 

 

 

 

 

 

valuation

 

 

 

 

 

 

 

 

 

 

allowance for

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

 

Total

 

 

 

Unrealized

 

gains

 

Postretirement

 

accumulated

 

 

 

(gains) losses

 

(losses) on

 

benefits

 

other

 

 

 

on investment

 

investment

 

unrealized

 

comprehensive

 

Nine months ended September 30, 2017

 

securities

 

securities

 

gains (losses)

 

income (loss)

 

 

 

(in thousands)

 

Balance at December 31, 2016

    

$

(3,972)

    

 

(3,388)

    

603

    

(6,757)

 

Other comprehensive income before reclassification

 

 

4,113

 

 

3,743

 

 —

 

7,856

 

Amount reclassified from accumulated other comprehensive loss

 

 

(597)

 

 

(355)

 

(87)

 

(1,039)

 

Net current period other comprehensive income (loss)

 

 

3,516

 

 

3,388

 

(87)

 

6,817

 

Balance at September 30, 2017

 

$

(456)

 

 

 —

 

516

 

60

 

 

Reclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

 

 

 

(expense)

 

 

 

Statement of income

 

 

 

Pre-tax

 

benefit

 

Net of tax

 

 line item or retained earnings

 

 

 

(in thousands)

 

 

 

Reclassifications included in net income:

    

 

    

    

    

    

    

    

    

 

Losses on available for sale debt securities

 

$

(58)

 

14

 

(44)

 

Investment and other income (loss)

 

Amortization of postretirement benefits

 

 

31

 

(7)

 

24

 

Compensation and benefits and retained earnings

 

Total

 

$

(27)

 

 7

 

(20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2017

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

 

 

 

(expense)

 

 

 

 

 

 

 

Pre-tax

 

benefit

 

Net of tax

 

Statement of income line item

 

 

 

(in thousands)

 

 

 

Reclassifications included in net income:

    

 

    

    

    

    

    

    

    

 

Sponsored funds investment gains

 

$

698

 

(260)

 

438

 

Investment and other income (loss)

 

Valuation allowance

 

 

 —

 

260

 

260

 

Provision for income taxes

 

Amortization of postretirement benefits

 

 

46

 

(16)

 

30

 

Compensation and benefits and retained earnings

 

Total

 

$

744

 

(16)

 

728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Pre-tax

 

expense

 

Net of tax

 

Statement of income line item

 

 

 

(in thousands)

 

 

 

Reclassifications included in net income or retained earnings for ASUs adopted in 2018:

    

 

    

    

    

    

    

    

    

 

Sponsored funds investment gains

 

$

1,295

 

(340)

 

955

 

Investment and other income (loss)

 

Losses on available for sale debt securities

 

 

(58)

 

14

 

(44)

 

Investment and other income (loss)

 

Amortization of postretirement benefits

 

 

92

 

(129)

 

(37)

 

Compensation and benefits and retained earnings

 

Total

 

$

1,329

 

(455)

 

874

 

 

 

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Table of contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

 

 

 

(expense)

 

 

 

 

 

 

 

Pre-tax

 

benefit

 

Net of tax

 

Statement of income line item

 

 

 

(in thousands)

 

 

 

Reclassifications included in net income:

    

 

    

    

    

    

    

    

    

 

Sponsored funds investment gains

 

$

952

 

(355)

 

597

 

Investment and other income (loss)

 

Valuation allowance

 

 

 —

 

355

 

355

 

Provision for income taxes

 

Amortization of postretirement benefits

 

 

138

 

(51)

 

87

 

Compensation and benefits and retained earnings

 

Total

 

$

1,090

 

(51)

 

1,039

 

 

 

 

 

11. Contingencies

 

The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

The Company establishes reserves for litigation and similar matters when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.

 

Shareholder Derivative Litigation

 

In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan v. Ivy Investment Management Company, et al. (Case No. I6CV02338 Div. 4), plaintiff filed a putative derivative action on behalf of the nominal defendant, a mutual fund trust affiliated with the Company, alleging breach of fiduciary duty and breach of contract claims relating to an investment held in the affiliated mutual fund by the Company's registered investment adviser subsidiary. On behalf of the nominal defendant trust, plaintiff filed claims against the Company’s registered investment adviser subsidiary and current and retired trustees of the trust seeking monetary damages and demanding a jury trial. While the Company denies that any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment management agreement with, the nominal defendant trust, the parties to the litigation reached a settlement. The February 14, 2018 settlement agreement provided a full release for the benefit of defendants and for the payment of $19.9 million (less $6.1 million for attorney’s fees plus nominal costs associated with notice to shareholders), recoverable to the Company through insurance, to the affiliated mutual fund for the benefit of its shareholders. On July 30, 2018, the court entered an order granting final approval of the settlement. 

 

401(k) Plan Class Action Litigation

 

In an action filed on June 23, 2017 and amended on June 26, 2017 in the U.S. District Court for the District of Kansas, Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.), Stacy Schapker, a participant in the Company’s 401(k) and Thrift Plan, as amended and restated (the “401(k) Plan”), filed a lawsuit against the Company, the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and unnamed Jane and John Doe Defendants 1-25. On August 7, 2017, plaintiff filed a second amended complaint, which was filed on behalf of the 401(k) Plan and a proposed class of 401(k) Plan participants, purports to assert claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) based on the 401(k) Plan’s offering of investments managed by the Company or its affiliates during a proposed class period of June 23, 2011 to present.  The second amended complaint dismissed the Company’s Board of Directors as a defendant

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and named as defendants the Company, the Compensation Committee of the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and the individuals who served on those committees during the proposed class period.  Following the denial of their motion to dismiss, on March 8, 2018, defendants filed their answer and defenses to plaintiff’s second amended complaint.  On April 23, 2018, the court entered an initial scheduling order, ordering the parties to complete mediation by August 31, 2018.  While the Company and the other defendants deny any and all liability with respect to the claims, the parties have reached an agreement in principle to settle the litigation.  The parties are finalizing the terms of the proposed settlement, which will be subject to preliminary and final court approval. The payment contemplated by the proposed settlement is recoverable to the Company through insurance.  The Company has recorded a liability and offsetting receivable from insurance, as reflected in the Company's consolidated balance sheet. 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements included elsewhere in this report.  Unless otherwise indicated or the context otherwise requires all references to the “Company,” “we,” “our” or “is” refer to Waddell & Reed Financial, Inc. and its consolidated subsidiaries.

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general.  These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates, stock repurchases and the financial markets and other conditions.  These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature.  Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance.  Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below.  If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected.  Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2017, which include, without limitation:

 

·

The loss of existing distribution relationships or inability to access new distribution relationships;

 

·

A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;

 

·

The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;

 

·

Changes in our business model, operations and procedures, including our methods of distributing our proprietary products, as a result of evolving fiduciary standards;

 

·

The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;

 

·

A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;

 

·

Our inability to reduce expenses rapidly enough to align with declines in our revenues due to various factors, including fee pressure, the level of our assets under management or our business environment;

 

·

Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

 

·

Our inability to attract and retain senior executive management and other key personnel to conduct our business;

 

·

A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and

 

·

Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.

 

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The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the “SEC”), including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2017 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2018.  All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

 

Overview

 

We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions and client activity. Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.

 

Our products are distributed through our unaffiliated channel, or through our broker-dealer channel by Waddell and Reed, Inc. (“W&R”) independent financial advisors. Through our institutional channel, we distribute an array of investment styles to a variety of clients.

 

Through our unaffiliated channel, we distribute mutual funds through broker-dealers, retirement platforms and registered investment advisers through a team of external and internal wholesalers, as well as a team dedicated to home office relationship coverage.

 

We manage assets in a variety of investment styles for a variety of types of institutions. The largest percentage client type is other asset managers that hire us to act as subadviser for their branded products; they are typically domestic and foreign distributors of investment products who lack scale or the track record to manage internally, or choose to market multi-manager styles. Our diverse client list also includes pension funds, Taft Hartley plans and endowments.

 

In our broker-dealer channel, 1,074 independent financial advisors associated with W&R and 351 licensed advisor associates, who operate out of offices located throughout the United States, provide financial advice for retirement, education funding, estate planning and other financial needs for clients.

 

Operating Results

 

·

Net income attributable to Waddell & Reed Financial, Inc. for the third quarter 2018 was $46.3 million, or $0.58 per diluted share, compared to $53.6 million, or $0.64 per diluted share, during the third quarter of 2017.

 

·

Revenues of $295.1 million during the third quarter of 2018 increased 2% compared to the third quarter of 2017.  Operating expenses of $235.6 million during the third quarter of 2018 were unchanged compared to the same quarter in 2017. The operating margin was 20.2% during the third quarter of 2018, compared to 18.6% during the third quarter of 2017.

 

·

Funds showed continued improvement across the 1, 3 and 5-year Lipper and Morningstar rankings.

 

·

Effective July 31, 2018, the Company implemented fee reductions in selected mutual funds.  This was a result of a comprehensive analysis of industry pricing and a commitment to remain competitive.

 

·

Average trailing 12-month productivity per advisor increased to $350 thousand in the third quarter of 2018 compared to $240 thousand in the third quarter of 2017, as we continue to focus our advisory programs on high performing financial advisors.

 

·

During the third quarter of 2018, we returned $48.4 million of capital to stockholders through dividends and share repurchases, compared to $42.1 million in the same period in 2017.  We repurchased 1,424,612 shares during the third quarter of 2018 at a weighted average share price of $19.91.

 

·

Our balance sheet remains solid and we ended the third quarter of 2018 with cash and investments of $843.3

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million, excluding redeemable noncontrolling interests in consolidated sponsored funds.

 

Assets Under Management

 

During the third quarter of 2018, assets under management increased 1% to $79.5 billion from $78.7 billion at June 30, 2018 due to market appreciation of $2.9 billion, partially offset by net outflows of $2.0 billion.  

 

Change in Assets Under Management (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

Unaffiliated (2)

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

30,782

 

5,250

 

42,619

 

78,651

 

 

 

 

 

 

 

 

 

 

 

 

Sales (3)

 

 

1,589

 

83

 

874

 

2,546

 

Redemptions

 

 

(2,425)

 

(535)

 

(1,612)

 

(4,572)

 

Net Exchanges

 

 

360

 

 —

 

(360)

 

 —

 

Net Flows

 

 

(476)

 

(452)

 

(1,098)

 

(2,026)

 

 

 

 

 

 

 

 

 

 

 

 

Market Action

 

 

866

 

389

 

1,662

 

2,917

 

Ending Assets

 

$

31,172

 

5,187

 

43,183

 

79,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

Unaffiliated (2)

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

30,307

 

7,036

 

43,084

 

80,427

 

 

 

 

 

 

 

 

 

 

 

 

Sales (3)

 

 

1,790

 

68

 

1,024

 

2,882

 

Redemptions

 

 

(2,486)

 

(1,139)

 

(2,049)

 

(5,674)

 

Net Exchanges

 

 

213

 

 —

 

(213)

 

 —

 

Net Flows

 

 

(483)

 

(1,071)

 

(1,238)

 

(2,792)

 

 

 

 

 

 

 

 

 

 

 

 

Market Action

 

 

1,238

 

400

 

1,626

 

3,264

 

Ending Assets

 

$

31,062

 

6,365

 

43,472

 

80,899

 

 

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During the first nine months of 2018, assets under management decreased 2% to $79.5 billion from $81.1 billion at December 31, 2017 due to net outflows of $6.6 billion, partially offset by market appreciation of $5.1 billion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

Unaffiliated (2)

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

31,133

 

6,289

 

43,660

 

81,082

 

 

 

 

 

 

 

 

 

 

 

 

Sales (3)

 

 

5,613

 

788

 

2,877

 

9,278

 

Redemptions

 

 

(7,762)

 

(2,792)

 

(5,341)

 

(15,895)

 

Net Exchanges

 

 

890

 

 —

 

(890)

 

 —

 

Net Flows

 

 

(1,259)

 

(2,004)

 

(3,354)

 

(6,617)

 

 

 

 

 

 

 

 

 

 

 

 

Market Action

 

 

1,298

 

902

 

2,877

 

5,077

 

Ending Assets

 

$

31,172

 

5,187

 

43,183

 

79,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

Unaffiliated (2)

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

30,295

 

7,904

 

42,322

 

80,521

 

 

 

 

 

 

 

 

 

 

 

 

Sales (3)

 

 

5,667

 

290

 

3,143

 

9,100

 

Redemptions

 

 

(9,078)

 

(2,925)

 

(5,727)

 

(17,730)

 

Net Exchanges

 

 

684

 

 6

 

(690)

 

 —

 

Net Flows

 

 

(2,727)

 

(2,629)

 

(3,274)

 

(8,630)

 

 

 

 

 

 

 

 

 

 

 

 

Market Action

 

 

3,494

 

1,090

 

4,424

 

9,008

 

Ending Assets

 

$

31,062

 

6,365

 

43,472

 

80,899

 

 


(1)

Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

 

(2)

Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only, Registered Investment Advisor and Variable Annuity.

 

(3)

Sales is primarily gross sales (net of sales commissions). This amount also includes net reinvested dividends and capital gains and investment income.

 

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Average Assets Under Management

 

Average assets under management, which are generally more indicative of trends in revenue from investment management services than the change in ending assets under management, are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

 

Unaffiliated

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

24,946

 

5,176

 

32,121

 

$

62,243

 

Fixed Income

 

 

5,595

 

27

 

9,856

 

 

15,478

 

Money Market

 

 

89

 

 —

 

1,652

 

 

1,741

 

Total

 

$

30,630

 

5,203

 

43,629

 

$

79,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

 

Unaffiliated

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

23,477

 

6,385

 

31,268

 

$

61,130

 

Fixed Income

 

 

6,659

 

331

 

10,432

 

 

17,422

 

Money Market

 

 

102

 

 —

 

1,834

 

 

1,936

 

Total

 

$

30,238

 

6,716

 

43,534

 

$

80,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

 

Unaffiliated

 

Institutional

 

Dealer

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

24,970

 

5,740

 

32,319

 

$

63,029

 

Fixed Income

 

 

5,701

 

66

 

9,996

 

 

15,763

 

Money Market

 

 

92

 

 —

 

1,728

 

 

1,820

 

Total

 

$

30,763

 

5,806

 

44,043

 

$

80,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

Broker-

 

 

 

 

 

 

Unaffiliated

 

Institutional

 

Dealer

 

 

Total

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

23,256

 

6,924

 

31,311

 

$

61,491

 

Fixed Income

 

 

6,801

 

365

 

10,201

 

 

17,367

 

Money Market

 

 

107

 

 —

 

1,887

 

 

1,994

 

Total

 

$

30,164

 

7,289

 

43,399

 

$

80,852

 

 

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Assets Under Administration

 

Assets  under  administration (“AUA”) include assets for which our broker-dealer provides administrative services, such as client assets invested in other companies’ products that we offer outside of our fee-based asset allocation programs. These assets include those held in clients’ brokerage accounts. AUA are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

September 30, 2018

 

 

September 30, 2017

 

AUA

 

 

 

 

 

 

 

Advisory assets

 

$

23,653

 

 

20,734

 

Non-advisory assets

 

 

34,468

 

 

34,856

 

Total assets under administration

 

$

58,121

 

 

55,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Three months ended

 

(in millions)

 

 

September 30, 2018

 

 

September 30, 2017

 

Net new advisory assets (1)

 

$

(87)

 

 

420

 

Net new non-advisory assets (1), (2)

 

 

(931)

 

 

(965)

 

Total net new assets (1), (2)

 

$

(1,018)

 

 

(545)

 

 

 

 

 

 

 

 

 

Annualized  advisory AUA growth (3)

 

 

(1.5)

%

 

8.6

%

Annualized AUA growth (3)

 

 

(7.1)

%

 

(4.0)

%

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

Nine months ended

 

(in millions)

 

 

September 30, 2018

 

 

September 30, 2017

 

Net new advisory assets (1)

 

$

620

 

 

342

 

Net new non-advisory assets (1), (2)

 

 

(2,831)

 

 

(2,526)

 

Total net new assets (1), (2)

 

$

(2,210)

 

 

(2,184)

 

 

 

 

 

 

 

 

 

Annualized  advisory AUA growth (3)

 

 

3.8

%

 

2.5

%

Annualized AUA growth (3)

 

 

(5.2)

%

 

(5.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Advisor count

 

 

1,074

 

 

1,481

 

Average trailing 12-month production per advisor (4) (in thousands)

 

$

350

 

 

240

 

Advisor associate count

 

 

351

 

 

262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Net new assets is calculated as total client deposits and net transfers less client withdrawals.

 

(2)

Excludes activity related to products held outside of our broker-dealer platform. These assets represent less than 10% of total AUA.

 

(3)

Annualized growth is calculated as annualized net new assets divided by beginning assets under administration.

 

(4)

Production per advisor is calculated as trailing 12-month Total Underwriting and distributions fees less “other” underwriting and distribution fees divided by the average number of advisors.  “Other” underwriting and distribution fees predominantly include fees paid by independent advisors for programs and services. 

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Results of Operations — Three and Nine Months Ended September 30, 2018 as Compared with Three and Nine Months Ended September 30, 2017

 

 

Total Revenues

 

Total revenues increased 2% to $295.1 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, total revenues increased $25.4 million, or 3%, compared to the same period in the prior year.

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2018

    

2017

    

Variance

 

 

 

(in thousands, except percentage data)

 

Investment management fees

 

$

129,302

 

134,149

 

(4)

%

Underwriting and distribution fees

 

 

140,308

 

128,892

 

 9

%

Shareholder service fees

 

 

25,508

 

26,406

 

(3)

%

Total revenues

 

$

295,118

 

289,447

 

 2

%

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2018

    

2017

    

Variance

 

 

 

(in thousands, except percentage data)

 

Investment management fees

 

$

393,385

 

395,463

 

(1)

%

Underwriting and distribution fees

 

 

416,222

 

386,499

 

 8

%

Shareholder service fees

 

 

78,464

 

80,706

 

(3)

%

Total revenues

 

$

888,071

 

862,668

 

 3

%

 

 

 

Investment Management Fee Revenues

 

Investment management fee revenues for the third quarter of 2018 decreased $4.8 million, or 4%, from the third quarter of 2017. For the nine month period ended September 30, 2018, investment management fee revenues decreased $2.1 million, or 1%, compared to the same period in 2017. Decreases in investment management fees for both comparative periods were due to an increase in fees waivers related to fee reductions in selected mutual funds implemented as of July 31, 2018, as well as the impact of fund mergers in previous periods.  In the fourth quarter of 2017, nine Advisors Funds were merged into Ivy Funds with substantially similar objectives and strategies. The remaining 11 Advisor Funds were merged into Ivy Funds on February 26, 2018.

 

The following table summarizes investment management fee revenues, related average assets under management, fee waivers and investment management fee rates for the three and nine months ended September 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

 

 

    

2018

    

2017

    

 

Variance

 

 

 

(in thousands, except for management fee rate and average assets)

 

 

 

 

Funds investment management fees (net)

 

$

123,764

 

 

128,078

 

 

(3)

%

Funds average assets (in millions)

 

 

74,259

 

 

73,772

 

 

 1

%

Funds management fee rate (net)

 

 

0.6612

%  

 

0.6888

%  

 

 

 

Total fee waivers

 

$

5,641

 

 

1,826

 

 

209

%

Institutional investment management fees (net)

 

$

5,538

 

 

6,071

 

 

(9)

%

Institutional average assets (in millions)

 

 

5,203

 

 

6,716

 

 

(23)

%

Institutional management fee rate (net)

 

 

0.4071

%  

 

0.3871

%  

 

 

 

 

 

 

 

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Table of contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

    

2018

    

2017

    

 

Variance

 

 

 

(in thousands, except for management fee rate and average assets)

 

 

 

 

Funds investment management fees (net)

 

$

376,193

 

 

376,563

 

 

 —

 

Funds average assets (in millions)

 

 

74,806

 

 

73,563

 

 

 2

%

Funds management fee rate (net)

 

 

0.6724

%  

 

0.6844

%  

 

 

 

Total fee waivers

 

$

11,087

 

 

6,015

 

 

84

%

Institutional investment management fees (net)

 

$

17,192

 

 

18,900

 

 

(9)

%

Institutional average assets (in millions)

 

 

5,806

 

 

7,289

 

 

(20)

%

Institutional management fee rate (net)

 

 

0.4055

%  

 

0.3722

%  

 

 

 

 

Revenues from investment management services provided to our affiliated mutual funds, which are distributed through the unaffiliated and broker-dealer channels, decreased 3% in the third quarter of 2018 compared to the third quarter of 2017 primarily due to an increase in fee waivers related to fee reductions in selected mutual funds that were implemented as of July 31, 2018. Fee waivers are recorded as an offset to investment management fees up to the amount of fees earned. Fee waivers increased during the nine months ended September 30, 2018 compared to the same period in 2017 due to the Advisors Funds mergers, the inclusion of common fund expenses that were previously not reimbursed and fee reductions in selected mutual funds.  The change in fee waivers was partially offset by increased investment management fees due to slightly higher average assets.

 

Institutional account revenues in the third quarter of 2018 decreased $0.5 million compared to the third quarter of 2017 due to a 23% decrease in average assets under management, partially offset by an increase in the average management fee rate. For the nine month period ended September 30, 2018, institutional account revenues decreased $1.7 million, compared to the same period in 2017 primarily due to a 20% decrease in average assets under management, partially offset by an increase in the average management fee rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annualized long-term redemption rates

 

 

 

(excludes money market redemptions)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 

 

 

September 30, 

 

 

    

2018

    

2017

    

 

2018

    

2017

    

Unaffiliated channel

 

31.8

%  

33.0

%  

 

34.1

%  

40.8

%  

Institutional channel

 

40.8

%  

67.3

%  

 

64.3

%  

53.7

%  

Broker-Dealer channel

 

12.9

%  

16.4

%  

 

14.1

%  

15.4

%  

Total

 

22.1

%  

27.1

%  

 

25.5

%  

28.5

%  

 

The decreased long-term redemption rate for the nine months ended September 30, 2018 in the unaffiliated channel was driven primarily by improved redemption rates in the Ivy Asset Strategy Fund and the Ivy VIP Asset Strategy Fund (the “Asset Strategy funds”). Redemptions in the Asset Strategy funds represented approximately 9% of the unaffiliated channel’s redemptions for the nine months ended September 30, 2018, reduced from 21% in the nine months ended September 30, 2017. The decreased long-term redemption rate for the third quarter of 2018 as compared to the same period in 2017 in the institutional channel was due to larger client redemptions in the third quarter of 2017, primarily in our Core Equity strategy. The increased long-term redemption rate for the nine months ended September 30, 2018 in the institutional channel was due to larger client redemptions than the comparative period primarily from our Core Equity and Large Cap Growth strategies. Additionally, we have been notified of approximately $1.0 billion of redemptions in our institutional channel for the fourth quarter of 2018, of which $0.6 billion has been redeemed in October 2018.  The redemptions are a result of a variety of factors including performance, a move to passive and personnel turnover.  The decreased redemption rate in the broker-dealer channel for the three months ended September 30, 2018 reflects a reduction in redemption rates in this channel after the 2017 launch of the MAP Navigator product. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods. 

 

Our overall current year-to-date annualized redemption rate of 25.5% is slightly higher than the current year-to-date industry average of approximately 23.0%, based on data from the Investment Company Institute.

 

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Table of contents

Underwriting and Distribution Fee Revenues

 

The following tables summarize the significant components of underwriting and distribution fee revenues by distribution channel:

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

 

 

 

Broker-

 

 

 

 

Unaffiliated

 

Dealer

 

Total

 

 

(in thousands)

 

 

 

 

 

 

 

 

Underwriting and distribution fee revenues

 

 

 

 

 

 

 

Fee-based asset allocation product revenues

 

$

 

69,468

 

69,468

Rule 12b-1 service and distribution fees

 

 

19,707

 

18,106

 

37,813

Sales commissions on front-end load mutual fund and variable annuity products

 

 

441

 

13,651

 

14,092

Sales commissions on other products

 

 

 

9,111

 

9,111

Other revenues

 

 

126

 

9,698

 

9,824

Total

 

$

20,274

 

120,034

 

140,308

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2017

 

 

 

 

Broker-

 

 

 

 

Unaffiliated

 

Dealer

 

Total

 

 

(in thousands)

 

 

 

 

 

 

 

 

Underwriting and distribution fee revenues

 

 

 

 

 

 

 

Fee-based asset allocation product revenues

 

$

 —

 

61,115

 

61,115

Rule 12b-1 service and distribution fees

 

 

22,322

 

19,026

 

41,348

Sales commissions on front-end load mutual fund and variable annuity products

 

 

353

 

12,941

 

13,294

Sales commissions on other products

 

 

 

7,974

 

7,974

Other revenues

 

 

217

 

4,944

 

5,161

Total

 

$

22,892

 

106,000

 

128,892

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

 

Broker-

 

 

 

 

Unaffiliated

 

Dealer

 

Total

 

 

(in thousands)

 

 

 

 

 

 

 

 

Underwriting and distribution fee revenues

 

 

 

 

 

 

 

Fee-based asset allocation product revenues

 

$

 —

 

201,565

 

201,565

Rule 12b-1 service and distribution fees

 

 

60,734

 

54,591

 

115,325

Sales commissions on front-end load mutual fund and variable annuity products

 

 

1,418

 

41,900

 

43,318

Sales commissions on other products

 

 

 

26,632

 

26,632

Other revenues

 

 

459

 

28,923

 

29,382

Total

 

$

62,611

 

353,611

 

416,222

34


 

 

 

Table of contents

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

 

Broker-

 

 

 

 

Unaffiliated

 

Dealer

 

Total

 

 

(in thousands)

 

 

 

 

 

 

 

 

Underwriting and distribution fee revenues

 

 

 

 

 

 

 

Fee-based asset allocation product revenues

 

$

 —

 

176,184

 

176,184

Rule 12b-1 service and distribution fees

 

 

69,191

 

56,544

 

125,735

Sales commissions on front-end load mutual fund and variable annuity products

 

 

1,118

 

41,796

 

42,914

Sales commissions on other products

 

 

 —

 

23,671

 

23,671

Other revenues

 

 

996

 

16,999

 

17,995

Total

 

$

71,305

 

315,194

 

386,499

 

Underwriting and distribution revenues earned in the third quarter of 2018 increased by $11.4 million, or 9%, compared to the third quarter of 2017, primarily driven by an increase in fee-based asset allocation product revenues of $8.4 million in the broker-dealer channel, partially offset by a decrease in Rule 12b-1 asset-based service and distribution fees across both channels.  Fee-based asset allocation product revenues increased primarily due to an increase in fee-based asset allocation assets of $3.2 billion, or 16%, while Rule 12b-1 asset-based service and distribution fees decreased due to a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues. Additionally, other revenues increased $4.7 million in the third quarter of 2018 compared to the third quarter of 2017 primarily due to an increase in payments received from independent financial advisors for services.

 

For the nine months ended September 30, 2018, underwriting and distribution revenues increased by $29.7 million, or 8%, compared to the nine months ended September 30, 2017, primarily driven by an increase in fee-based asset allocation product revenues of $25.4 million in the broker-dealer channel, partially offset by a decrease in Rule 12b-1 asset-based service and distribution fees across both channels.  Fee-based asset allocation product revenues increased primarily due to an increase in fee-based asset allocation assets of $3.2 billion, or 17%, while Rule 12b-1 asset-based service and distribution fees decreased due to a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues. Additionally, other revenues increased $11.4 million in the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to an increase in payments received from independent financial advisors for services.

 

Shareholder Service Fee Revenue

 

During the third quarter of 2018, shareholder service fee revenue decreased slightly compared to the third quarter of 2017 primarily due to a decrease in the number of accounts and decreased Fund administrative and accounting service fees due to the fund mergers in October 2017 and February 2018.  These decreases were partially offset by increases in asset based services fees, due to an increase in assets, and custodian fees due to a change in fees that now includes broker-dealer advisory accounts.

 

During the nine months ended September 30, 2018, shareholder service fee revenue decreased $2.2 million, or 3%, compared to the nine months ended September 30, 2017. Fund service fees decreased $3.7 million, or 14%, primarily due to a decrease in the number of accounts as a result of the share class conversion. Fund administrative and accounting service fees decreased $1.2 million, or 12%, due to the fund mergers in October 2017 and February 2018.  Partially offsetting the decreases, custodian fees increased $1.2 million, or 26%, primarily due to a change in custodian fees that now includes broker-dealer advisory accounts.  Service fees based on assets also increased $1.1 million, or 4%, due an increase in assets under management.

 

Total Operating Expenses

 

Operating expenses for the third quarter of 2018 were relatively unchanged compared to the third quarter of 2017. For the nine months ended September 30, 2018, operating expenses increased $5.7 million, or 1%, compared to the first nine months of 2017, primarily due to increased distribution and depreciation expenses, partially offset by decreases in compensation and benefits and general and administrative costs.  In August 2017, we announced a cost reduction plan which we plan to complete by 2019.

 

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Table of contents

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2018

    

2017

    

Variance

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Distribution

 

$

116,591

 

106,878

 

 9

%  

Compensation and benefits

 

 

64,561

 

69,636

 

(7)

%  

General and administrative

 

 

17,559

 

23,400

 

(25)

%  

Technology

 

 

15,414

 

16,039

 

(4)

%  

Occupancy

 

 

7,148

 

7,645

 

(7)

%  

Marketing and advertising

 

 

2,461

 

3,197

 

(23)

%  

Depreciation

 

 

8,141

 

5,230

 

56

%  

Subadvisory fees

 

 

3,767

 

3,566

 

 6

%  

Intangible asset impairment

 

 

 —

 

 —

 

 —

 

Total operating expenses

 

$

235,642

 

235,591

 

 0

%  

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

    

September 30, 

 

 

 

 

    

2018

    

2017

    

Variance

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Distribution

 

$

345,376

 

324,375

 

 6

%  

Compensation and benefits

 

 

199,174

 

202,003

 

(1)

%  

General and administrative

 

 

56,240

 

68,882

 

(18)

%  

Technology

 

 

49,293

 

50,796

 

(3)

%  

Occupancy

 

 

21,081

 

22,978

 

(8)

%  

Marketing and advertising

 

 

7,638

 

9,072

 

(16)

%  

Depreciation

 

 

19,262

 

15,626

 

23

%  

Subadvisory fees

 

 

11,158

 

9,457

 

18

%  

Intangible asset impairment

 

 

1,200

 

1,500

 

(20)

%  

Total operating expenses

 

$

710,422

 

704,689

 

 1

%  

 

 

Distribution expenses for the third quarter of 2018 increased by $9.7 million, or 9%, compared to the third quarter of 2017.  Expenses in the broker-dealer channel increased $13.4 million, or 18%, primarily due to higher commissions paid to independent financial advisors under the new commission structure that became effective on January 1, 2018 and higher commissions on our asset-based advisory products due to advisory asset growth.  Distribution expenses in the unaffiliated channel decreased by $3.7 million due to a decrease in average mutual fund assets under management for which we pay Rule 12b-1 commissions to third party distributors. 

 

For the nine months ended September 30, 3018, distribution expenses increased by $21.0 million, or 6%, compared to the first nine months of 2017.  Expenses in the broker-dealer channel increased $32.5 million, or 14%, primarily due to higher commissions paid to independent financial advisors under the new commission structure that became effective on January 1, 2018 and higher commissions on our asset-based advisory products due to advisory asset growth. Distribution expenses in the unaffiliated channel decreased by $11.5 million due to a decrease in average mutual fund assets under management for which we pay Rule 12b-1 commissions to third party distributors.

 

Compensation and benefits during the third quarter of 2018 decreased $5.1 million, or 7%, compared to the third quarter of 2017. The decrease is primarily due to a a $3.0 million decrease in pension expense as a result of the Pension Plan freeze as of September 30, 2017, a $2.1 million decrease due to a discretionary 401(k) contribution in 2017 and a $1.3 million decrease related to share-based compensation primarily driven by changes in the Company’s share price.  Partially offsetting these decreases was a $1.3 million increase in base compensation from merit increases.

 

For the nine months ended September 30, 2018, compensation and benefits decreased $2.8 million, or 1%, compared to the nine months ended September 30, 2017. The decrease is primarily due to a $8.4 million decrease in pension expense as a result of the Pension Plan freeze and a $2.1 million decrease due to a discretionary 401(k) contribution in 2017.  Partially offsetting these decreases was a combined $8.3 million increase in base compensation from merit increases and the 2017 change in field leader compensation structure, resulting in that compensation being recorded in the compensation

36


 

 

 

Table of contents

and benefits line as opposed to distribution expense.

 

General and administrative expenses in the third quarter of 2018 decreased $5.8 million, compared to the third quarter of 2017. The decrease was mainly due to a decrease in legal and consulting costs due to the completion of certain projects, a decrease in temporary staff expense and a decrease in fund expenses related to prior year fund launches and fund mergers. For the nine months ended September 30, 2018, general and administrative expenses decreased $12.6 million, compared to the same period in 2017. The decrease was mainly due to a decrease in legal and consulting costs due to the completion of certain projects, a decrease in temporary staff expense and a decrease in fund expenses due to fund launches and fund mergers in the prior year.

 

Occupancy and Marketing and advertising costs decreased a combined $1.2 million in the third quarter of 2018 compared to the third quarter of 2017 and decreased a combined $3.3 million in the nine months ended September 30, 2018 compared to the same period in 2017.  For both comparative periods, costs decreased primarily due to lower office space rent as a result of fewer field office leased locations and less advertising spend as we continue to evolve our broker-dealer market structure.

 

Depreciation increased for both comparative periods primarily due to a charge of $2.4 million in the third quarter of 2018 to adjust the useful life on certain internally developed software assets.

 

Subadvisory fees are paid to other asset managers for providing advisory services for certain mutual fund portfolios, and subadvised products generally have a lower operating margin.

 

Subadvisory expenses increased $0.2 million in the third quarter of 2018 compared to the third quarter of 2017 due to an increase in subadvised average assets of 8%.  Quarterly subadvised average assets under management at September 30, 2018   were $5.8 billion compared to $5.3 billion at September 30, 2017. Subadvisory expenses increased $1.7 million for the nine months ended September 30, 2018 compared to the same period in 2017, due to an increase in subadvised average assets of 12%. Year-to-date subadvised average assets under management at September 30, 2018 were $5.8 billion compared to $5.1 billion at September 30, 2017. The increase in subadvised average assets for both comparative periods is primarily due to the launch of Ivy Proshares in April of 2017 and the introduction of the Wilshire Global Allocation Fund in May of 2017.

 

Investment and Other Income 

 

Investment and other income was $1.7 million for the three months ended September 30, 2018 compared to $33.3 million for the same period in 2017. In the third quarter of 2018, we recognized $3.8 million in dividend, capital gain distributions and interest income. The third quarter of 2018 also included $3.1 million of net losses related to our seed capital investments and associated hedges, $0.6 million in mark-to-market pension gains and $0.4 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership.  During the third quarter of 2017, we recognized $3.3 million in dividend and interest income and gains on the sales of sponsored funds held as available for sale, $1.9 million of net gains related to our seed capital investments and associated hedges and $2.0 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. The third quarter of 2017 also included net gains of $25.1 million related to the freeze of our Pension Plan on September 30, 2017.

 

Investment and other income was $5.4 million for the nine months ended September 30, 2018 compared to $39.3 million for the same period in 2017. For the nine months ended September 30, 2018, we recognized $11.3 million in dividend, capital gain distributions and interest income. The first nine months of 2018 also included $8.6 million of net losses related to our seed capital investments and associated hedges, $1.7 million in mark-to-market pension gains and $0.7 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership.  During the nine months ended September 30, 2017, we recognized $6.1 million in dividend and interest income and gains on the sales of sponsored funds held as available for sale, $0.6 million of net gains related to our seed capital investments and associated hedges and $4.2 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership.  The first nine months of 2017 also included net gains of $25.1 million related to the freeze of our Pension Plan on September 30, 2017.

 

As a result of the change of accounting method for the Pension Plan enacted in the fourth quarter of 2017, the Company’s pension liability will be marked-to-market in the fourth quarter of 2018.

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Table of contents

 

 

Interest Expense

 

Interest expense was $1.6 million and $2.8 million in the third quarter of 2018 and 2017, respectively. Interest expense was $4.9 million and $8.4 million for the nine months ended September 30, 2018, and September 30, 2017, respectively.  The majority of our interest expense is fixed based on our Series A and Series B senior unsecured notes. The $95.0 million Series A senior unsecured notes were repaid upon maturity in January 2018. As a result, interest expense declined in both comparative periods, and we anticipate $4.8 million in annualized interest expense savings.

 

Taxes

 

The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the three and nine months ended September 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended

 

 

Nine months ended

 

    

 

 

September 30,

 

 

September 30,

 

 

 

 

2018

    

2017

 

 

2018

    

2017

 

 

Statutory federal income tax rate

 

21.0

%  

35.0

%  

 

21.0

%  

35.0

%  

 

State income taxes, net of federal tax benefit

 

2.7

 

2.4

 

 

2.8

 

2.3

 

 

Effects of U.S. tax rate decrease

 

(1.7)

 

 —

 

 

(0.6)

 

 —

 

 

Share-based compensation

 

(0.4)

 

(1.0)

 

 

2.3

 

3.9

 

 

Uncertain tax positions

 

0.4

 

(1.0)

 

 

(2.9)

 

(0.2)

 

 

Other items

 

 —

 

(0.4)

 

 

0.6

 

(1.3)

 

 

Effective income tax rate

 

22.0

%  

35.0

%  

 

23.2

%  

39.7

%  

 

 

Our effective income tax rate was 22.0% and 23.2% for the three and nine months ended September 30, 2018, as compared to 35.0% and 39.7% for the same periods in 2017.  The effective tax rate in 2018 was lower primarily due to the federal statutory tax rate decrease from 35% to 21% effective January 1, 2018.

 

The enactment of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017 significantly revised the U.S. Corporate income tax system.  As a result of the Tax Reform Act, the Company recorded a one-time charge of $5.4 million in the fourth quarter of 2017 to measure our net deferred tax assets at the reduced federal statutory rate.  According to guidance from Staff Accounting Bulletin 118, the Company recognized a provisional tax impact related to the revaluation of deferred tax assets and liabilities and included those amounts in its consolidated financial statements for the year ended December 31, 2017.   In the third quarter of 2018, we finalized our 2017 U.S. corporate income tax return and revised provisional adjustments made to our net deferred tax asset.  Accordingly, we recorded a discrete tax benefit of $1.0 million in the three months ended September 30, 2018, which decreased the three and nine month effective tax rate by 1.7% and 0.6%, respectively. The Company now considers its accounting for the income tax effects of the Tax Reform Act to be complete.

 

Other factors affecting the rate for the nine month comparison period included the reversal of previously recorded uncertain tax expense upon the completion of a voluntary disclosure agreement with a state tax jurisdiction during 2018, which decreased the rate by 3.6%.  The tax impact of share-based compensation created a tax shortfall in both years, but the impact was greater in 2017 mostly due to a larger differential between grant date and vest date prices on restricted stock awards at vesting, which decreased the rate 2.7% and was partially offset by a lesser benefit on unvested restricted stock dividend payments in 2018.

 

The Company expects continued volatility in its effective tax rate in 2019 as the tax effects of share-based compensation will be impacted by market fluctuations in our stock price.  Based on current estimates, the Company expects a tax shortfall from share-based payments of $1.5 to $2.0 million in 2019, primarily in the second quarter.  The Company expects its future effective tax rate, exclusive of the effects of share-based payments, federal and state tax incentives, unanticipated state tax legislative changes, and unanticipated fluctuations in earnings to range from 23% to 25%.

 

 

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Table of contents

Liquidity and Capital Resources

 

Our operations provide much of the cash necessary to fund our priorities, as follows:

 

·

Repurchase our stock

·

Pay dividends

·

Finance internal growth

 

As part of our regular assessment of the return of capital to stockholders, we implemented a revised capital return policy in the fourth quarter of 2017 that is designed to provide greater financial flexibility to invest in our business, support ongoing operations and maintain a strong balance sheet, while continuing to provide a very competitive return to stockholders.  The components of the capital return policy are described below.

 

Repurchase Our Stock

 

We repurchased 4,519,546 shares and 904,410 shares of our Class A common stock in the open market or privately during the nine months ended September 30, 2018 and 2017, respectively, resulting in share repurchases of $89.0 million and $15.6 million, respectively.

 

In connection with our existing capital return policy, we intend to complete the repurchase of $250 million of our Class A common stock through late 2019, which is inclusive of buybacks to offset dilution of our equity grants.  We continue to engage in an opportunistic share repurchase plan to fulfill the targeted buybacks. We have repurchased $109.1 million of our Class A common stock since the announcement of this program in the fourth quarter of 2017 at a weighted average share price of $20.00.

 

Pay Dividends

 

We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of $61.5 million and $115.7 million for the first nine months of 2018 and 2017, respectively. 

 

The Board of Directors approved a dividend on our Class A common stock of $0.25 per share that was paid on November 1, 2018 to stockholders of record on October 11, 2018.

 

Finance Internal Growth

 

We continue to invest in our broker-dealer by offering home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our brokerage and product platform.  We use cash to fund growth in our distribution channels.  Our unaffiliated channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales.  We also provide seed money for new products to further enhance our product offerings and distribution efforts.

 

Operating Cash Flows

 

Cash from operations increased $275.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  The increase is primarily due to an increase in cash generated from investment activity of $239.3 million and an increase in net income of $22.8 million.

 

The payable to investment companies for securities, payable to customers and other receivables accounts can fluctuate significantly based on trading activity at the end of a reporting period.  Changes in these accounts resulted in variances within cash from operations on the statement of cash flows; however, there is no impact to the Company’s liquidity and operations for the variances in these accounts.

 

Investing Cash Flows

 

Cash from investing activities increased $241.6 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to a decrease of $234.7 million in the purchases of available for sale and equity method securities.

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Table of contents

 

Financing Cash Flows

 

The repayment of our $95.0 million Series A senior unsecured notes in January of 2018, stock repurchases of $88.2 million and dividends of $61.5 million accounted for the majority of our financing cash outflows in the first nine months of 2018. Dividends of $115.7 million and stock repurchases of $15.6 million accounted for the majority of our financing cash outflows in the first nine months of 2017. Future financing cash outflows will be affected by the new capital return policy.

 

Future Capital Requirements

 

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements during 2018. Expected short term uses of cash include dividend payments, repurchases of our Class A common stock, interest on indebtedness, income tax payments, seed money for new products, ongoing technology enhancements, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.

 

Expected long term capital requirements include interest on indebtedness and maturities of outstanding debt, operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchases of our Class A common stock.    

 

Critical Accounting Policies and Estimates

 

There have been no material changes in the critical accounting policies and estimates disclosed in the “Critical Accounting Policies and Estimates” section of our 2017 Form 10-K, except for the removal of the Pension and Other Postretirement Benefits critical accounting policy due to an amendment to freeze the Pension Plan effective September 30, 2017, which reduced the number of significant accounting estimates related to the Pension Plan in 2018 and future years.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices.  The Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, 2017.  As further described in Note 5 to the unaudited consolidated financial statements, the Company has an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in sponsored funds.

 

Item 4. Controls and Procedures

 

The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2018, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.

 

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial

40


 

 

 

Table of contents

reporting.  However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

See Part I, Item 1, Notes to the Unaudited Consolidated Financial Statements, Note 11 – Contingencies, of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

 

Except as noted below, there have been no material changes to the Company’s Risk Factors from those previously reported in the Company’s 2017 Form 10-K.

 

In March 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the DOL Fiduciary Rule.  Although the DOL Fiduciary Rule has been vacated, other regulators have enacted or proposed other fiduciary standards that could require modifications to our distribution activities and may impact our ability to service clients or engage in certain types of distribution or other business activities.

 

In April 2018, the SEC proposed its own fiduciary rule that would impose a new standard of care on broker-dealers when making recommendations to both retirement and non-retirement accounts.  In addition, various states have also implemented or proposed new fiduciary requirements. 

 

Specific references in the Risk Factors reported in the Company’s 2017 Form 10-K regarding the impact the DOL Fiduciary Rule may have on the Company should be read to refer generally to “new fiduciary standards”, which would include any fiduciary standards imposed by the DOL, the SEC or any states.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth certain information about the shares of Class A common stock we repurchased during the third quarter of 2018.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of

    

Maximum Number (or

 

 

 

 

 

 

 

 

Shares

 

Approximate Dollar

 

 

 

 

 

 

 

 

Purchased as

 

Value) of Shares That

 

 

 

Total Number

 

Average

 

Part of Publicly

 

May Yet Be

 

 

 

of Shares

 

Price Paid

 

Announced

 

Purchased Under The

 

Period

 

Purchased (1)

 

per Share

 

Program

 

Program

 

July 1 - July 31

 

597,487

 

$

18.97

 

597,487

 

n/a

(1)

Aug 1 - Aug 31

 

360,225

 

 

20.51

 

360,000

 

n/a

(1)

Sep 1 - Sep 30

 

466,900

 

 

20.66

 

466,900

 

n/a

(1)

Total

 

1,424,612

 

$

19.91

 

1,424,387

 

 

 


(1)

On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our Class A common stock on the open market.  Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding Class A common stock or (ii) $50 million of our Class A common stock.  We may repurchase our Class A common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems.  Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased.  Our Board of Directors reviewed and ratified the stock repurchase program in October 2012.  During the third quarter of 2018, 225 shares were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.

 

In connection with our existing capital return policy, we intend to complete the repurchase of $250 million of our Class A common stock through late 2019, which is inclusive of buybacks to offset dilution of our equity grants.  We continue to engage in an opportunistic share repurchase plan to fulfill the targeted buybacks.

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Table of contents

Item 6. Exhibits

 

10.1*

 

Waddell & Reed Financial, Inc. Cash Settled RSU Plan.

 

10.2*

 

Form of Restricted Stock Unit Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. Cash Settled RSU Plan.

 

31.1*

 

Section 302 Certification of Chief Executive Officer

 

 

 

31.2*

 

Section 302 Certification of Chief Financial Officer

 

 

 

32.1**

 

Section 906 Certification of Chief Executive Officer

 

 

 

32.2**

 

Section 906 Certification of Chief Financial Officer

 

 

 

101*

 

Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in Extensible Business Reporting Language (XBRL):  (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Consolidated Financial Statements, tagged in detail.


*     Filed herewith

**   Furnished herewith

 

42


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 2nd day of November 2018.

 

 

WADDELL & REED FINANCIAL, INC.

 

 

 

 

By:

/s/ Philip J. Sanders

 

 

Chief Executive Officer, Chief Investment Officer and Director

 

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ Benjamin R. Clouse

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

43


Exhibit 10.1

WADDELL & REED FINANCIAL, INC.

CASH SETTLED RSU PLAN

Waddell & Reed Financial, Inc., hereby establishes the Waddell & Reed Financial, Inc. Cash Settled RSU Plan  (the "Plan").

SECTION 1.   Purposes of the Plan; Definitions.

The purposes of the Plan are to enable the Company, its Subsidiaries and Affiliates to attract and retain employees and consultants who contribute to the Company's success by their ability, ingenuity and industry, and to enable such employees and consultants to participate in the long-term success and growth of the Company through the grant of cash settled RSUs.

For purposes of the Plan, the following terms shall be defined as set forth below:

"Affiliate" means (a) any corporation (other than a Subsidiary), partnership, joint venture or any other entity in which the Company owns, directly or indirectly, at least a 10% beneficial ownership interest, and (b) the Company's parent company, if any.

"Award Agreement" means a written agreement by and between the Company and an awardee evidencing an award of RSUs under the Plan.

"Board" means the Board of Directors of the Company.

"Business Day" means a day on which the New York Stock Exchange or other national securities exchange or over-the-counter market on which the Stock is then traded is open for business.

"Cause" means a participant's willful misconduct or dishonesty, either of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate; provided, however, that in the case where there is an employment or consulting agreement between a participant and the Company or any Subsidiary or Affiliate at the time of grant which defines "cause" (or words of like import), it shall have the meaning ascribed to such term (or words of like import) under such agreement.

"Change of Control" has the meaning assigned to such term in Section 7(c) .

"Change of Control Price" has the meaning assigned to such term in Section 7(d) .

"Code" means the Internal Revenue Code of 1986, as amended, and any successor thereto.

"Committee" means the Compensation Committee of the Board.

"Commission" means the United States Securities and Exchange Commission.


 

"Company" means Waddell & Reed Financial, Inc., a Delaware corporation, and its successors.

"Disability" means total and permanent disability as determined under the Company's long-term disability program, whether or not the participant is covered under such program.  If no such program is in effect, the Disability of a director shall be determined in good faith by the Board (excluding such director).

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor thereto.

"Fair Market Value" means, unless otherwise determined in good faith by the Committee or required by applicable law, as of any given date, the closing sale price of a share of Stock on such date on the New York Stock Exchange or other principal national securities exchange or over-the-counter market on which the Stock is then traded or, if there is no sale on that day, then on the last previous Business Day on which a sale was reported.

"Plan" means the Waddell & Reed Financial, Inc. Cash Settled RSU Plan as set forth herein and as may be amended, modified or supplemented from time to time.

"RSU" or "RSUs" means an award granted under Section 5 pursuant to which a participant may be entitled to a cash payment equal to the Fair Market Value of a specified number of shares of Stock, subject to certain restrictions and/or a risk of forfeiture and other terms and conditions of an Award Agreement.

"Stock" means the Company's Class A common stock, par value $.01.

"Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

SECTION 2.   Administration.

The Plan shall be administered by the Committee which shall at all times comply with any applicable requirements of Rule 16b-3 of the Exchange Act. All members of the Committee shall also be "outside directors" within the meaning of Section 162(m) of the Code.  If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board.

The Committee shall have the power and authority to grant RSUs to eligible persons, pursuant to the terms of the Plan.  In particular, the Committee shall have the authority:

(a)        to select the consultants, officers and other key employees of the Company, its Subsidiaries, and its Affiliates to whom RSUs will, from time to time, be granted hereunder;

2


 

(b)        to determine the number of RSUs subject to each award granted hereunder; and

(c)        to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder, including, but not limited to, any restriction on any award based on performance and/or such other factors as the Committee may determine, in its sole discretion, and any vesting acceleration features based on performance and/or such other factors as the Committee may determine, in its sole discretion.

The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan, any award issued thereunder, and any Award Agreements relating thereto; and to otherwise supervise the administration of the Plan.

All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants.

Each award granted under the Plan shall be evidenced by, and subject to terms of, an Award Agreement, in such form as the Committee shall from time to time approve, which shall be executed by an authorized officer of the Company and the awardee.  The Award Agreement shall contain provisions regarding (i) the number of RSUs subject to the award and (ii) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee.  A prospective awardee shall not have any rights with respect to any such award, unless and until such awardee has executed an Award Agreement evidencing the award, has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions.

SECTION 3.   RSUs Subject to Plan.

The number of RSUs that may be granted pursuant to the Plan will be determined in the sole discretion of the Board or the Committee, as applicable.  No shares of Stock are issuable pursuant to the Plan.

In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, an equitable substitution or adjustment shall be made in the number of RSUs, as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of RSUs subject to any award shall always be a whole number.

SECTION 4.   Eligibility.

Consultants, officers and other key employees of the Company, its Subsidiaries or its Affiliates who are responsible for or contribute to the management, growth and/or profitability of the business of the Company, its Subsidiaries, or its Affiliates are eligible to be granted RSUs.  Plan participants shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine the number of RSUs subject to each award.

3


 

SECTION 5.   RSUs.

(a)         Administration .    Any RSUs granted under the Plan shall be in such form as the Committee may from time to time approve, and the provisions thereof need not be the same with respect to each awardee.  The Committee shall determine the consultants, officers and key employees of the Company, its Subsidiaries or Affiliates to whom, and the time or times at which, RSUs shall be awarded; the number of RSUs to be awarded to any awardee; the restrictions, vesting period and vesting conditions to which such award will be subject; and all other terms and conditions of the award (subject to this Section 5 and Section 7 ).  The Committee may also condition the grant and/or vesting of RSUs upon the attainment of specified performance goals, or such other criteria as the Committee shall determine, in its sole discretion.

(b)         Terms and Conditions .    RSUs awarded pursuant to this Section 5 shall be subject to the following terms and conditions:

(i)        Subject to the provisions of the Plan and the applicable Award Agreement, during the vesting period,  RSUs awarded pursuant to the Plan may not be sold, assigned, transferred, pledged or otherwise encumbered.

(ii)       At the time of the award, the Committee may, in its sole discretion, determine that amounts equal to any dividends declared during the vesting period with respect to the number of RSUs will be paid to the awardee currently, deferred and deemed to be reinvested, or that such awardee has no rights with respect thereto.

(iii)      Subject to the provisions of the applicable Award Agreement and this Section 5 , upon termination of employment for any reason during the vesting period, the RSUs held by such awardee shall be forfeited by the awardee.

(iv)       Based on performance and/or such other criteria as the Committee may determine, the Committee may, at or after grant (including after the awardee's termination of employment), accelerate the vesting of all or any part of any RSUs and/or waive the deferral limitations for all or any part of such award.

SECTION 6.   Amendments and Termination.

The Board may amend, alter, or discontinue the Plan, but no such amendment, alteration, or discontinuation shall be made which would impair the right of an awardee under any RSUs granted prior thereto without the awardee's consent.

Amendments may be made without stockholder approval except as required to satisfy stock exchange listing requirements, or other applicable law or regulatory requirements.

The Committee may amend the terms of any RSU award, prospectively or retroactively, but no such amendment shall be made which would impair the rights of an awardee without the awardee's consent.

4


 

SECTION 7.   Change of Control.

The following provisions shall apply in the event of a Change of Control:

(a)        The Committee may, in its discretion, at the time an award is made hereunder or at any time prior to, coincident with or after the time of a Change of Control:

(i)        cause the awards then outstanding to be assumed, or new rights substituted therefore, by the surviving corporation in such Change of Control;

(ii)       make such adjustment to the awards then outstanding as the Committee deems appropriate to reflect such transaction or change (including the acceleration of vesting of such awards); and/or

(iii)      provide for the purchase or cancellation of such awards, for an amount of cash, if any, equal to the Change of Control Price as of the date the Change of Control occurs, or such other date as the Committee may determine prior to the Change of Control. Such settlements will be made in cash or other property (other than Stock), or any combination thereof.

(b)        The Committee may, in its discretion, include such further provisions and limitations in any Award Agreement as it may deem equitable and in the best interests of the Company.

(c)        A  "Change of Control" means the occurrence of any of the following:

(i)        when any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or a Subsidiary or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities;

(ii)       the effective date of any transaction or event relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of the Exchange Act;

(iii)      when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board cease, for any reason other than death, to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or

(iv)      the effective date of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise.

5


 

(d)        "Change of Control Price" means the highest price per share of Stock paid in any transaction reported on the New York Stock Exchange or other national securities exchange or over-the-counter market on which the Stock is then traded, or paid or offered in any transaction related to a Change of Control at any time during the preceding 60-day period as determined by the Committee.

SECTION 8.   General Provisions.

(a)         Transferability of Awards .  RSUs are not transferrable; provided, however, that, except as otherwise set forth in an Award Agreement, settlement of a vested RSU may be paid to the heirs or estate of a deceased awardee.

(b)         Other General Provisions .

(i)        Nothing set forth in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required.  The adoption of the Plan shall not confer upon any employee of the Company, any Subsidiary or any Affiliate, any right to continued employment with the Company, a Subsidiary or an Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company, a Subsidiary or an Affiliate to terminate the employment of any of its employees at any time.

(ii)       Each participant shall, no later than the date as of which the value of an award first becomes includible in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, FICA, state, or local taxes of any kind required by law to be withheld with respect to such award.  The obligations of the Company under the Plan shall be conditional on such payment or arrangements. The Company and, where applicable, its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes owed hereunder by a participant from any payment of any kind otherwise due to such participant.

(iii)      No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation.

(iv)      This Plan is subject to any written clawback policies that the Company, with the approval of the Board, may adopt including, but not limited to, any policy adopted to conform to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules promulgated thereunder by the Securities and Exchange Commission and that the Company determines should apply to this Plan.  Any such policy may subject awards granted pursuant to the

6


 

Plan and amounts paid or realized with respect to awards under this Plan to reduction, cancelation, forfeiture or recoupment if certain specified events or wrongful conduct occur, including but not limited to an accounting restatement due to the Company’s material noncompliance with financial reporting regulations or other events or wrongful conduct specified in any such clawback policy.

(v)       The Plan is not intended to be a "non-qualified deferred compensation plan" under Section 409A of the Code and shall not be construed or administered accordingly.  If any term or provision contained herein would otherwise cause the Plan to be characterized as a "nonqualified deferred compensation plan" under Section 409A of the Code, then, without further action by the Company, such term or provision shall automatically be modified to the extent necessary to avoid such characterization.

SECTION 9.   Effective Date of Plan.

The Plan became effective on December 6, 2016.

7


Exhibit 10.2

 

WADDELL & REED FINANCIAL, INC.

 

RESTRICTED STOCK UNIT AWARD AGREEMENT

 

WADDELL & REED FINANCIAL, INC., a corporation organized and existing under the laws of the state of Delaware (or any successor corporation) (the "Company"), does hereby grant and give unto «Name» (the "Awardee"), an award of Restricted Stock Units (the "RSUs")  upon the terms and conditions hereinafter set forth (the "Award").

 

AUTHORITY FOR GRANT

 

1.          Cash Settled RSU Plan .  The RSUs are granted under the provisions of the Waddell & Reed Financial, Inc. Cash Settled RSU Plan (the "Plan"), and are subject to the terms and conditions set forth in this Restricted Stock Unit Award Agreement (this "Agreement") and not inconsistent with the Plan.  Capitalized terms used but not defined herein shall have the meaning given them in the Plan, which is incorporated by reference herein.

 

TERMS OF AWARD

 

2.          Number of RSUs .  In consideration of future services to the Company, the Awardee is hereby granted «Shares» RSUs on _____________, 20___ (the "Grant Date").

 

3.          Restrictions; Forfeiture .  The RSUs may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until their restrictions are removed or expire.  The RSUs may be forfeited to the Company pursuant to Sections 5(b).

 

4.          Expiration of Restrictions and Risk of Forfeiture; Settlement .

 

(a)        The restrictions and risk of forfeiture for the RSUs will expire and the RSUs will vest and become settleable pursuant to Section 4(b) as of the vesting dates set forth in this Section 4, provided that the restrictions and risk of forfeiture have not previously expired and the RSUs have not been forfeited pursuant to this Agreement.

 

Percentage of RSUs Vesting

    

Vest Date

 

25%

 

___________, 20___

 

25%

 

___________, 20___

 

25%

 

___________, 20___

 

25%

 

___________, 20___

 

 

(b)        After the RSUs vest pursuant to Section 4(a), Section 5(a) or Section 6, the Company will, within 30 days of such vesting date, subject to Section 9, cause to be paid to Awardee a lump sum cash payment (the "Cash Payment")  equal to the Fair Market Value of one share of the Company’s Class A Common Stock, par value $0.01 (the "Stock"), on the applicable date of vesting multiplied by the number of RSUs vesting


 

on such date.  The Cash Payment will not bear any interest owing to the passage of time from the vesting date to the payment date.  Neither this Section 4(b) nor any action taken pursuant to or in accordance with this Section 4(b) will be construed to create a trust or a funded or secured obligation of any kind.

 

TERMINATION OF AWARD

 

For purposes of the following Sections, all references to termination of employment shall be construed to mean termination of all service relationships with the Company and its Subsidiaries and Affiliates, including employees, independent contractors and consultants; however, nothing in this Agreement or the Plan shall be construed to create or continue a common law employment relationship with any individual characterized by the Company, a Subsidiary or an Affiliate as an independent contractor or consultant.

 

5.          Termination of Employment .

 

(a)         Termination of Employment Due to Death or Disability .  If an Awardee's employment with the Company or any of its Subsidiaries or Affiliates terminates by reason of death or Disability, the restrictions and risk of forfeiture with respect to the RSUs which have not expired shall immediately lapse and all of the RSUs shall be deemed fully vested and nonforfeitable.

 

(b)         Termination of Employment Other Than Due to Death or Disability .  If an Awardee's employment with the Company or any of its Subsidiaries or Affiliates terminates for a reason other than death or Disability, the RSUs for which the restrictions and risk of forfeiture have not expired as of the date of termination shall be immediately forfeited without further action by the Company; provided, however, that the portion, if any, of the RSUs that have not been settled (the "Outstanding RSUs") but for which the restrictions and risk of forfeiture have expired as of the date of termination shall not be forfeited.

 

6.          Change of Control of the Company .  In the event of a Change of Control, unless otherwise determined by the Committee in writing at or after the Grant Date, but prior to the occurrence of such Change of Control, the restrictions with respect to the RSUs shall lapse and such RSUs shall be deemed fully vested and nonforfeitable.

 

7.          Dividend Equivalents .  In the event that the Company declares and pays a cash dividend or distribution in respect of its outstanding shares of Stock and, on the record date for such dividend or distribution, Awardee holds  Outstanding RSUs, the amount of such dividend or distribution that would have been payable to Awardee if Awardee were the holder of record, on the record date for such dividend or distribution, of a number of shares of Stock equal to the number of Outstanding RSUs at such time (the "Dividend Equivalent Payment") will be paid to Awardee within 30 days following the date the dividend or distribution is paid to stockholders generally.

 

2


 

GENERAL TERMS AND PROVISIONS

 

8.          No Shareholder Rights .  The RSUs granted pursuant to this Agreement do not and will not entitle Awardee to any rights of a holder of Stock.  Awardee's rights with respect to the RSUs will remain forfeitable at all times prior to the date on which Awardee's rights become vested pursuant to this Agreement.

 

9.          Payment of Taxes .  The delivery of the Cash Payment pursuant to this Award is conditioned upon satisfaction of any withholding obligation described in this Section 9.  With respect to any required tax withholding obligation, the Company will withhold from the amount payable pursuant to this Award the amount of such obligation.  In the event that the Company subsequently determines that the amount withheld by the Company or submitted by the Awardee as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then the Awardee shall pay to the Company, immediately upon the Company's request, the amount of that deficiency in cash.

 

10.        Company Records .  Records of the Company or its Subsidiaries or Affiliates regarding any period(s) of employment, termination of employment and the reason therefor, leaves of absence, re-employment, and other matters shall be conclusive for all purposes hereunder, unless determined by the Company to be incorrect.

 

11.        Right of the Company and Subsidiaries to Terminate Employment .  Nothing contained in this Agreement shall confer upon the Awardee the right to continue in the employ of the Company or any Subsidiary or Affiliate, or interfere in any way with the rights of the Company or any Subsidiary or Affiliate to terminate the Awardee's employment at any time.

 

12.        No Liability for Good Faith Determinations .  The members of the Board and the Committee shall not be liable for any act, omission, interpretation or determination taken or made in good faith with respect to this Agreement or the RSUs granted hereunder and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation.

 

13.        Severability .  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

 

14.        Successors .  This Agreement shall be binding upon the Awardee, their legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.

 

15.        Notices .  Any notices required by or permitted to be given to the Company under this Agreement shall be made in writing and addressed to the Secretary of the Company in care of the Company's Legal Department, 6300 Lamar Avenue, Overland Park, Kansas 66202.  Any such notice shall be deemed to have been given when received by the Company.

 

3


 

16.        Headings .  The titles and headings herein are included for convenience of reference only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

 

17.        Rules of Construction .  This Agreement has been executed and delivered by the Company in Kansas and shall be construed and enforced in accordance with the laws of said State, other than any choice of law rules calling for the application of laws of another jurisdiction.  Should there be any inconsistency or discrepancy between the provisions of this Agreement and the terms and conditions of the Plan under which this Award is granted, the provisions in the Plan shall govern and prevail.

 

18.        Amendment .  This Agreement may be amended by the Committee; provided, however, that no amendment may decrease rights inherent in this Award prior to such amendment without the express written consent of the parties hereto.  Notwithstanding the provisions of this Section 18, this Agreement may be amended by the Committee to the extent necessary to comply with applicable laws and regulations and to conform the provisions of this Agreement to any changes thereto.

 

19.        Clawback .       This Agreement is subject to any written clawback policies that the Company, with the approval of the Board or the Committee, may adopt.  Any such policy may subject the Award and amounts paid or realized with respect to the Award to reduction, cancelation, forfeiture or recoupment if certain specified events or wrongful conduct occur, including but not limited to an accounting restatement due to the Company’s material noncompliance with financial reporting regulations or other events or wrongful conduct specified in any such clawback policy adopted to conform to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules promulgated thereunder by the Securities and Exchange Commission and that the Company determines should apply to this Agreement.

 

20.        Section 409A .  Amounts payable pursuant to this Agreement are intended to constitute a “short term deferral” within the meaning of Treasury Regulation § 1.409A-1(b)(4).

 

21.        Effective Date .  This Agreement is effective as of _____________, 20___.

 

4


 

 

WADDELL & REED FINANCIAL, INC.

 

 

 

By:

 

 

 

"Company"

 

 

 

 

 

 

 

 

 

«Name»

 

 

"Awardee"

 

5


Exhibit 31.1

 

I, Philip J. Sanders, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Waddell & Reed Financial, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date:  November 2, 2018

 

/s/ Philip J. Sanders

Philip J. Sanders

Chief Executive Officer and Chief

Investment Officer

 


Exhibit 31.2

 

I, Benjamin R. Clouse, certify that: 

 

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Waddell & Reed Financial, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date:  November 2, 2018

 

/s/ Benjamin R. Clouse

Benjamin R. Clouse

Senior Vice President and

Chief Financial Officer

 


Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

 

I, Philip J. Sanders, Chief Executive Officer and Chief Investment Officer of Waddell & Reed Financial, Inc. (the "Company") hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the "Act"), that:

 

1.

The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (the "Report") dated November 2, 2018 and filed with the United States Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Dated:  November 2, 2018

 

/s/ Philip J. Sanders

Philip J. Sanders

Chief Executive Officer and

Chief Investment Officer

 

 

 

 

 


Exhibit 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

 

I, Benjamin R. Clouse, Senior Vice President and Chief Financial Officer of Waddell & Reed Financial, Inc. (the "Company") hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the "Act"), that:

 

1.

The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (the "Report") dated November 2, 2018 and filed with the United States Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Dated:  November 2, 2018

 

/s/ Benjamin R. Clouse    

Benjamin R. Clouse

Senior Vice President and

Chief Financial Officer