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Section 1: 10-Q (10-Q)

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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 March 31, 2019

 

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 ☒.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $.01 par value

WDR

New York Stock Exchange

 

Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:

 

 

 

Class

 

Outstanding as of April 26, 2019

Class A common stock, $.01 par value

 

75,103,723

 

 

 

 

 


 

 

 

Table of contents

 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2019

 

 

 

 

    

Page No.

 

 

 

 

 

Part I. 

Financial Information

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2019 and March 31, 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and March 31, 2018

 

5

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests for the three months ended March 31, 2019 and March 31, 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2. 

 

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

 

23

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

32

 

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

33

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

 

Item 6. 

 

Exhibits

 

34

 

 

 

 

 

 

 

Signatures

 

35

 

 

 

 

2


 

 

 

Table of contents

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

 

 

 

 

2019

 

 

December 31, 

 

 

 

(Unaudited)

 

 

2018

 

Assets:

    

 

 

    

 

 

    

Cash and cash equivalents

 

$

177,611

 

 

231,997

 

Cash and cash equivalents - restricted

 

 

23,001

 

 

59,558

 

Investment securities

 

 

649,052

 

 

617,135

 

Receivables:

 

 

 

 

 

 

 

Funds and separate accounts

 

 

19,130

 

 

18,112

 

Customers and other

 

 

78,608

 

 

151,515

 

Prepaid expenses and other current assets

 

 

22,446

 

 

27,164

 

Total current assets

 

 

969,848

 

 

1,105,481

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

58,773

 

 

63,429

 

Goodwill and identifiable intangible assets

 

 

145,869

 

 

145,869

 

Deferred income taxes

 

 

5,920

 

 

12,321

 

Other non-current assets

 

 

48,053

 

 

16,979

 

Total assets

 

$

1,228,463

 

 

1,344,079

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

24,984

 

 

26,253

 

Payable to investment companies for securities

 

 

30,168

 

 

100,085

 

Payable to third party brokers

 

 

18,134

 

 

19,891

 

Payable to customers

 

 

40,426

 

 

86,184

 

Accrued compensation

 

 

41,999

 

 

54,129

 

Other current liabilities

 

 

63,990

 

 

51,580

 

Total current liabilities

 

 

219,701

 

 

338,122

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

94,872

 

 

94,854

 

Accrued pension and postretirement costs

 

 

806

 

 

798

 

Other non-current liabilities

 

 

31,544

 

 

15,392

 

Total liabilities

 

 

346,923

 

 

449,166

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

12,936

 

 

11,463

 

 

 

 

 

 

 

 

 

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; 75,679 shares outstanding (76,790 at December 31, 2018)

 

 

997

 

 

997

 

Additional paid-in capital

 

 

290,872

 

 

311,264

 

Retained earnings

 

 

1,211,566

 

 

1,198,445

 

Cost of 24,022 common shares in treasury (22,911 at December 31, 2018)

 

 

(636,726)

 

 

(627,587)

 

Accumulated other comprehensive income

 

 

1,895

 

 

331

 

Total stockholders’ equity

 

 

868,604

 

 

883,450

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

1,228,463

 

 

1,344,079

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

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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 March 31, 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

Revenues:

    

 

 

    

 

 

    

Investment management fees

 

$

109,762

 

 

133,692

 

Underwriting and distribution fees

 

 

126,245

 

 

138,041

 

Shareholder service fees

 

 

23,403

 

 

25,882

 

Total

 

 

259,410

 

 

297,615

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Distribution

 

 

109,794

 

 

114,470

 

Compensation and benefits (including share-based compensation of $12,693 and $14,768, respectively)

 

 

64,843

 

 

68,785

 

General and administrative

 

 

14,704

 

 

19,538

 

Technology

 

 

16,308

 

 

16,644

 

Occupancy

 

 

6,715

 

 

6,964

 

Marketing and advertising

 

 

1,964

 

 

2,281

 

Depreciation

 

 

6,001

 

 

5,302

 

Subadvisory fees

 

 

3,557

 

 

3,708

 

Total

 

 

223,886

 

 

237,692

 

 

 

 

 

 

 

 

 

Operating income

 

 

35,524

 

 

59,923

 

Investment and other income

 

 

9,453

 

 

2,816

 

Interest expense

 

 

(1,548)

 

 

(1,802)

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

43,429

 

 

60,937

 

Provision for income taxes

 

 

10,671

 

 

14,966

 

Net income

 

 

32,758

 

 

45,971

 

Net income (loss) attributable to redeemable noncontrolling interests

 

 

705

 

 

(366)

 

Net income attributable to Waddell & Reed Financial, Inc.

 

$

32,053

 

 

46,337

 

 

 

 

 

 

 

 

 

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

 

$

0.42

 

 

0.56

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted:

 

 

76,299

 

 

83,111

 

 

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 March 31, 

 

 

    

2019

    

2018

    

 

 

 

 

 

 

 

 

Net income

 

$

32,758

 

 

45,971

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available for sale investment securities during the period, net of income tax expense (benefit) of $517 and $(351), respectively

 

 

1,658

 

 

(1,131)

 

 

 

 

 

 

 

 

 

Postretirement benefit, net of income tax benefit of $(30) and $(7), respectively

 

 

(94)

 

 

(23)

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

34,322

 

 

44,817

 

Comprehensive income (loss) attributable to redeemable noncontrolling interests

 

 

705

 

 

(366)

 

Comprehensive income attributable to Waddell & Reed Financial, Inc.

 

$

33,617

 

 

45,183

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


 

 

 

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total 

 

Non

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

Controlling

 

For the three months ended March 31, 2018

    

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)

 

 —

 

 

 —

 

 —

 

46,337

 

 —

 

 —

 

46,337

 

(366)

 

Net subscription of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

4,427

 

Recognition of equity compensation

 

 —

 

 

 —

 

12,065

 

209

 

 —

 

 —

 

12,274

 

 —

 

Net issuance/forfeiture of nonvested shares

 

 —

 

 

 —

 

(29,707)

 

 —

 

29,707

 

 —

 

 —

 

 —

 

Dividends accrued, $0.25 per share

 

 —

 

 

 —

 

 —

 

(20,866)

 

 —

 

 —

 

(20,866)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(20,507)

 

 —

 

(20,507)

 

 —

 

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

(1,154)

 

(1,154)

 

 —

 

Balance at March 31, 2018

 

99,701

 

$

997

 

283,768

 

1,118,922

 

(513,241)

 

(1,478)

 

888,968

 

18,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total 

 

Non

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

Controlling

 

For the three months ended March 31, 2019

    

Shares

    

Amount

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

interest

 

Balance at December 31, 2018

 

99,701

 

$

997

 

311,264

 

1,198,445

 

(627,587)

 

331

 

883,450

 

11,463

 

Net income

 

 —

 

 

 —

 

 —

 

32,053

 

 —

 

 —

 

32,053

 

705

 

Net subscription of redeemable noncontrolling interests in sponsored funds

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

768

 

Recognition of equity compensation

 

 —

 

 

 —

 

9,608

 

93

 

 —

 

 —

 

9,701

 

 —

 

Net issuance/forfeiture of nonvested shares

 

 —

 

 

 —

 

(30,000)

 

 

 

30,000

 

 —

 

 —

 

 —

 

Dividends accrued, $0.25 per share

 

 —

 

 

 —

 

 —

 

(19,025)

 

 —

 

 —

 

(19,025)

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 —

 

 —

 

(39,139)

 

 —

 

(39,139)

 

 —

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

1,564

 

1,564

 

 —

 

Balance at March 31, 2019

 

99,701

 

$

997

 

290,872

 

1,211,566

 

(636,726)

 

1,895

 

868,604

 

12,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

    

For the three months ended March 31, 

 

 

 

2019

    

2018

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

32,758

 

 

45,971

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,208

 

 

5,302

 

Amortization of deferred sales commissions

 

 

551

 

 

996

 

Share-based compensation

 

 

12,693

 

 

14,768

 

Investments (gain) loss, net

 

 

(19,930)

 

 

3,070

 

Net purchases, maturities, and sales of trading and equity securities

 

 

(2,233)

 

 

(1,386)

 

Deferred income taxes

 

 

5,914

 

 

1,555

 

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

 

 

(5,081)

 

 

(2,415)

 

Other

 

 

(56)

 

 

1,079

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Customer and other receivables

 

 

72,892

 

 

25,026

 

Payable to investment companies for securities and payable to customers

 

 

(115,675)

 

 

(22,761)

 

Receivables from funds and separate accounts

 

 

(1,018)

 

 

979

 

Other assets

 

 

9,161

 

 

(12,162)

 

Accounts payable and payable to third party brokers

 

 

(3,026)

 

 

(3,324)

 

Other liabilities

 

 

(10,655)

 

 

(6,433)

 

Net cash (used in) provided by operating activities

 

$

(17,497)

 

 

50,265

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available for sale and equity method securities

 

 

(70,501)

 

 

 —

 

Proceeds from sales of available for sale and equity method securities

 

 

19,667

 

 

 —

 

Proceeds from maturities of available for sale securities

 

 

38,375

 

 

56,686

 

Additions to property and equipment

 

 

(1,474)

 

 

(414)

 

Net cash (used in) provided by investing activities

 

$

(13,933)

 

 

56,272

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

 

(19,348)

 

 

(20,890)

 

Repurchase of common stock

 

 

(40,871)

 

 

(20,507)

 

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

 

 

 —

 

 

(94,978)

 

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

 

 

768

 

 

4,427

 

Other

 

 

(62)

 

 

 —

 

Net cash used in financing activities

 

$

(59,513)

 

 

(131,948)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(90,943)

 

 

(25,411)

 

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

 

 

291,555

 

 

235,985

 

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

 

$

200,612

 

 

210,574

 

 

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 former 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”).  In addition to the Funds, our assets under management (“AUM”) include institutional accounts managed by the Company.  As of March 31, 2019, we had $71.7 billion in AUM.

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 accounts. We also provide brokerage services, primarily to retail clients through Waddell & Reed, Inc. (“W&R”), and independent financial advisors associated with W&R (“Advisors”), who provide financial planning and advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues are based on the level of AUM and assets under administration (“AUA”) 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 client AUM or number of client accounts.  Our major expenses are for distribution of our products, compensation related costs, occupancy, general and administrative, and information technology.

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, 2018 (the “2018 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 2018 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) ASU 2016-02, “Leases” and ASU 2018-07, “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting,” which both became effective January 1, 2019.  Refer to Note 2 – New Accounting Guidance for the impact these ASU’s had on our consolidated financial statements.

 

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at March 31, 2019 and the results of operations and cash flows for the three months ended March 31, 2019 and 2018 in conformity with accounting principles generally accepted in the United States.

 

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2.New Accounting Guidance

 

Accounting Guidance Adopted During the First Quarter of 2019

 

On January 1, 2019, the Company adopted ASU 2016-02, Leases, and related ASUs, which increases transparency and comparability among organizations by establishing a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet with additional disclosures of key information about leasing arrangements.  A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.  An entity may choose to use either (1) the effective date of the ASU or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company chose the effective date of the ASU as the date of initial application, and as a result, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.  The new standard provides a number of optional practical expedients for transition and practical expedients for an entity’s ongoing accounting, which the Company has elected. In addition, we have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.  The effect of adoption was the recognition of new ROU assets and lease liabilities of $36.8 million on our balance sheet for our real estate and equipment leases as of January 1, 2019. See Note 11 – Leases, for additional accounting policy information and the additional disclosures required by this ASU.

 

On January 1, 2019, the Company adopted 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. Upon adoption of this ASU, the Company no longer revalues certain outstanding share-based awards for nonemployees, which are immaterial to our consolidated financial statements and related disclosures. 

 

Accounting Guidance Not Yet Adopted

 

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. Upon adoption of this ASU, disclosure changes will be reflected in 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.

 

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3.Revenue Recognition

 

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
March 31, 2019

 

Three months ended
March 31, 2018

 

 

 

 

(in thousands)

 

Investment management fees:

 

 

    

    

    

    

Funds

 

$

105,745

 

127,663

 

Institutional

 

 

4,017

 

6,029

 

Total investment management fees

 

$

109,762

 

133,692

 

Underwriting and distribution fees:

 

 

 

 

 

 

Unaffiliated

 

 

 

 

 

 

Rule 12b-1 service and distribution fees

 

$

16,182

 

20,976

 

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

 

 

438

 

470

 

Other revenues

 

 

92

 

185

 

Total unaffiliated distribution fees

 

$

16,712

 

21,631

 

Broker-Dealer

 

 

 

 

 

 

Fee-based asset allocation product revenues

 

$

65,230

 

65,516

 

Rule 12b-1 service and distribution fees

 

 

15,688

 

18,377

 

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

 

 

12,020

 

14,427

 

Sales commissions on other products

 

 

7,606

 

8,422

 

Other revenues

 

 

8,989

 

9,668

 

Total broker-dealer distribution fees

 

 

109,533

 

116,410

 

Total distribution fees

 

$

126,245

 

138,041

 

Shareholder service fees:

 

 

 

 

 

 

Total shareholder service fees

 

$

23,403

 

25,882

 

 

 

 

 

 

 

 

Total revenues

 

$

259,410

 

297,615

 

 

 

 

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4.Investment Securities

 

Investment securities at March 31, 2019 and December 31, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

 

2018

 

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

Certificates of deposit

 

$

 —

 

5,001

 

Commercial paper

 

 

8,305

 

7,970

 

Corporate bonds

 

 

257,083

 

218,121

 

U.S. Treasury bills

 

 

 —

 

19,672

 

Total available for sale securities

 

 

265,388

 

250,764

 

Trading debt securities:

 

 

 

 

 

 

Commercial paper

 

 

1,175

 

1,993

 

Corporate bonds

 

 

77,739

 

77,250

 

U.S. Treasury bills

 

 

5,913

 

5,884

 

Mortgage-backed securities

 

 

 7

 

 7

 

Consolidated sponsored funds

 

 

35,165

 

33,088

 

Total trading securities 

 

 

119,999

 

118,222

 

Equity securities:

 

 

 

 

 

 

Common stock

 

 

30,680

 

21,204

 

Sponsored funds

 

 

152,481

 

153,548

 

Sponsored privately offered funds

 

 

797

 

678

 

Consolidated sponsored funds

 

 

27,883

 

24,879

 

Total equity securities

 

 

211,841

 

200,309

 

Equity method securities:

 

 

 

 

 

 

Sponsored funds

 

 

51,824

 

47,840

 

Total securities

 

$

649,052

 

617,135

 

 

Commercial paper and corporate bonds accounted for as available for sale and held as of March 31, 2019 mature as follows:

 

 

 

 

 

 

 

 

Amortized

 

 

 

 

cost

 

Fair value

  

 

(in thousands)

Within one year

$

105,490

 

105,322

After one year but within five years

 

158,769

 

160,066

 

$

264,259

 

265,388

 

Commercial paper, corporate bonds, U.S. Treasury bills and mortgage-backed securities accounted for as trading and held as of March 31, 2019 mature as follows:

 

 

 

 

 

 

 

 

 

 

Fair value

  

 

 

 

(in thousands)

Within one year

 

 

$

29,141

After one year but within five years

 

 

 

51,261

After five years but within 10 years

 

 

 

4,432

 

 

 

$

84,834

 

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The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

  

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

8,304

 

 1

 

 —

 

8,305

 

Corporate bonds

 

 

255,955

 

1,668

 

(540)

 

257,083

 

 

 

$

264,259

 

1,669

 

(540)

 

265,388

 

 

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

5,000

 

 1

 

 —

 

5,001

 

Commercial paper

 

 

7,902

 

68

 

 —

 

7,970

 

Corporate bonds

 

 

219,236

 

254

 

(1,369)

 

218,121

 

U.S. Treasury bills

 

 

19,672

 

 —

 

 —

 

19,672

 

 

 

$

251,810

 

323

 

(1,369)

 

250,764

 

 

A summary of available for sale investment securities with fair values below carrying values at March 31, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

March 31, 2019

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

(in thousands)

Corporate bonds

 

$

4,959

 

(41)

 

104,926

 

(499)

 

109,885

 

(540)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

December 31, 2018

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

 

 

(in thousands)

Corporate bonds

 

$

36,302

 

(160)

 

119,480

 

(1,209)

 

155,782

 

(1,369)

 

 

The Company’s investment portfolio included 29 available for sale securities in an unrealized loss position at March 31, 2019.

 

The Company evaluated available for sale securities in an unrealized loss position at March 31, 2019 and concluded no other-than-temporary impairment existed at March 31, 2019.  The unrealized losses in the Company’s investment portfolio at March 31, 2019 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.

 

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 measured at fair value through net income (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. 

 

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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 March 31, 2019 and December 31, 2018, as well as the Company’s net interest in these funds:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

2019

    

 

2018

 

    

(in thousands)

Cash

 

$

6,086

 

 

4,285

Investments

 

 

63,048

 

 

57,967

Other assets

 

 

762

 

 

872

Other liabilities

 

 

(1,093)

 

 

(79)

Redeemable noncontrolling interests

 

 

(12,936)