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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 September 30, 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)

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

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 25, 2019

Class A common stock, $.01 par value

70,323,231

Table of Contents

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2019

    

Page No.

Part I.

Financial Information

Item 1.

Financial Statements (unaudited)

Consolidated Balance Sheets at September 30, 2019 and December 31, 2018

3

Consolidated Statements of Income for the three and nine months ended September 30, 2019 and September 30, 2018

4

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and September 30, 2018

5

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests for the three and nine months ended September 30, 2019 and September 30, 2018

6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and September 30, 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

37

Item 4.

Controls and Procedures

37

Part II.

Other Information

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 6.

Exhibits

39

Signatures

40

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,

2019

December 31, 

(Unaudited)

2018

Assets:

    

    

    

Cash and cash equivalents

$

162,567

 

231,997

Cash and cash equivalents - restricted

 

23,350

 

 

59,558

Investment securities

 

691,616

 

 

617,135

Receivables:

Funds and separate accounts

 

14,752

 

 

18,112

Customers and other

 

98,667

 

 

151,515

Prepaid expenses and other current assets

 

20,464

 

 

27,164

Total current assets

 

1,011,416

 

 

1,105,481

Property and equipment, net

 

49,785

 

 

63,429

Goodwill and identifiable intangible assets

 

145,869

 

 

145,869

Deferred income taxes

 

6,775

 

 

12,321

Other non-current assets

 

41,261

 

 

16,979

Total assets

$

1,255,106

 

1,344,079

Liabilities:

Accounts payable

$

17,095

 

26,253

Payable to investment companies for securities

 

31,022

 

 

100,085

Payable to third party brokers

 

18,036

 

 

19,891

Payable to customers

 

49,294

 

 

86,184

Accrued compensation

 

67,432

 

 

54,129

Other current liabilities

 

87,946

 

 

51,580

Total current liabilities

 

270,825

 

 

338,122

Long-term debt

 

94,908

 

 

94,854

Accrued pension and postretirement costs

 

822

 

 

798

Other non-current liabilities

 

32,108

 

 

15,392

Total liabilities

 

398,663

 

 

449,166

Redeemable noncontrolling interests

16,913

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; 71,211 shares outstanding (76,790 at December 31, 2018)

 

997

 

 

997

Additional paid-in capital

 

303,138

 

 

311,264

Retained earnings

 

1,242,677

 

 

1,198,445

Cost of 28,490 common shares in treasury (22,911 at December 31, 2018)

 

(710,565)

 

 

(627,587)

Accumulated other comprehensive income

 

3,283

 

 

331

Total stockholders’ equity

 

839,530

 

 

883,450

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$

1,255,106

 

1,344,079

See accompanying notes to the unaudited consolidated financial statements.

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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, 

2019

2018

2019

2018

Revenues:

    

    

    

    

    

    

    

Investment management fees

$

111,806

 

129,302

$

334,438

 

393,385

Underwriting and distribution fees

 

135,787

 

140,308

395,527

 

416,222

Shareholder service fees

 

23,087

 

25,508

70,279

 

78,464

Total

 

270,680

 

295,118

800,244

 

888,071

Operating expenses:

Distribution

 

117,425

 

116,591

343,696

 

345,376

Compensation and benefits (including share-based compensation of $11,580, $12,856, $35,471, and $42,526, respectively)

 

64,999

 

64,561

191,718

 

199,174

General and administrative

 

16,680

 

17,559

47,421

 

56,240

Technology

15,019

15,414

47,769

49,293

Occupancy

5,684

7,148

19,100

21,081

Marketing and advertising

2,134

2,461

6,497

7,638

Depreciation

 

4,833

 

8,141

16,062

 

19,262

Subadvisory fees

 

3,882

 

3,767

11,154

 

11,158

Intangible asset impairment

1,200

Total

 

230,656

 

235,642

683,417

 

710,422

Operating income

 

40,024

 

59,476

116,827

 

177,649

Investment and other income

 

5,212

 

1,697

23,690

 

5,354

Interest expense

 

(1,562)

 

(1,555)

(4,662)

 

(4,908)

Income before provision for income taxes

 

43,674

 

59,618

135,855

 

178,095

Provision for income taxes

 

10,175

 

13,105

35,036

 

41,355

Net income

33,499

 

46,513

100,819

 

136,740

Net income (loss) attributable to redeemable noncontrolling interests

445

208

1,763

(380)

Net income attributable to Waddell & Reed Financial, Inc.

$

33,054

46,305

$

99,056

137,120

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

$

0.46

0.58

$

1.33

1.69

Weighted average shares outstanding, basic and diluted:

 

72,387

79,595

74,446

81,372

See accompanying notes to the unaudited consolidated financial statements.

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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, 

2019

    

2018

    

2019

    

2018

    

Net income

$

33,499

 

46,513

$

100,819

 

136,740

Other comprehensive income:

Unrealized gain (loss) on available for sale investment securities during the period, net of income tax expense (benefit) of $92, $80, $1,011 and $(218), respectively

 

296

 

 

262

 

3,235

 

 

(700)

Postretirement benefit, net of income tax benefit of $(30), $(7), $(88) and $(22), respectively

 

(94)

 

 

(24)

 

(283)

 

 

(70)

Comprehensive income

33,701

 

46,751

103,771

 

135,970

Comprehensive income (loss) attributable to redeemable noncontrolling interests

445

208

1,763

(380)

Comprehensive income attributable to Waddell & Reed Financial, Inc.

$

33,256

46,543

$

102,008

136,350

See accompanying notes to the unaudited consolidated financial statements.

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests

(Unaudited, in thousands)

For the three months ended September 30,

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 June 30, 2018

 

99,701

$

997

 

302,144

 

1,144,090

 

(560,181)

 

(1,332)

 

885,718

 

17,052

Net income

 

 

 

 

46,305

 

 

 

46,305

 

208

Net redemption of redeemable noncontrolling interests in sponsored funds

(1,127)

Recognition of equity compensation

 

 

 

9,228

 

78

 

 

 

9,306

 

Net issuance/forfeiture of nonvested shares

 

 

 

841

 

 

(841)

 

 

 

Dividends accrued, $0.25 per share

 

 

 

 

(19,688)

 

 

(19,688)

Repurchase of common stock

 

(28,369)

 

(28,369)

 

Other comprehensive income

 

 

 

 

 

 

238

 

238

 

Balance at September 30, 2018

99,701

$

997

 

312,213

 

1,170,785

 

(589,391)

 

(1,094)

 

893,510

 

16,133

    

Balance at June 30, 2019

 

99,701

$

997

 

294,487

 

1,227,314

 

(669,223)

 

3,081

 

856,656

 

15,115

Net income

 

 

 

 

33,054

 

 

 

33,054

 

445

Net subscription of redeemable noncontrolling interests in sponsored funds

1,353

Recognition of equity compensation

 

 

 

8,024

 

57

 

 

 

8,081

 

Net issuance/forfeiture of nonvested shares

 

 

 

627

 

 

(627)

 

 

 

Dividends accrued, $0.25 per share

 

 

 

 

(17,748)

 

 

(17,748)

Repurchase of common stock

 

(40,715)

 

(40,715)

 

Other comprehensive income

 

 

 

 

 

 

202

 

202

 

Balance at September 30, 2019

99,701

$

997

 

303,138

 

1,242,677

 

(710,565)

 

3,283

 

839,530

 

16,913

For the nine months ended September 30,

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

    

Balance at December 31, 2018

 

99,701

$

997

 

311,264

 

1,198,445

 

(627,587)

 

331

 

883,450

 

11,463

Net income

 

 

 

99,056

 

 

 

99,056

 

1,763

Net subscription of redeemable noncontrolling interests in sponsored funds

3,687

Recognition of equity compensation

 

 

25,573

 

297

 

 

 

25,870

 

Net issuance/forfeiture of nonvested shares

(33,699)

33,699

Dividends accrued, $0.75 per share

 

 

 

(55,121)

 

 

 

(55,121)

 

Repurchase of common stock

 

 

 

 

(116,677)

 

 

(116,677)

 

Other comprehensive income

 

 

 

 

 

2,952

 

2,952

 

Balance at September 30, 2019

99,701

$

997

 

303,138

 

1,242,677

 

(710,565)

 

3,283

 

839,530

 

16,913

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 nine months ended September 30, 

2019

    

2018

    

Cash flows from operating activities:

Net income

$

100,819

 

136,740

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

Depreciation and amortization

 

16,057

 

 

19,262

Write-down of impaired assets

 

 

 

1,200

Amortization of deferred sales commissions

 

1,492

 

 

2,682

Share-based compensation

 

35,471

 

 

42,526

Investments (gain) loss, net

 

(25,916)

 

 

2,521

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

 

(47,641)

 

 

(4,387)

Deferred income taxes

 

4,622

 

 

5,307

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

16,697

71,452

Other

1,273

2,973

Changes in assets and liabilities:

Customer and other receivables

 

74,807

 

 

9,286

Payable to investment companies for securities and payable to customers

 

(105,953)

 

 

(14,394)

Receivables from funds and separate accounts

 

3,360

 

 

3,345

Other assets

 

19,599

 

 

7,650

Accounts payable and payable to third party brokers

 

(11,013)

 

 

(1,388)

Other liabilities

 

557

 

 

(21,042)

Net cash provided by operating activities

$

84,231

 

 

263,733

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(149,835)

(56,840)

Proceeds from sales of available for sale and equity method securities

 

19,667

 

 

1,157

Proceeds from maturities of available for sale securities

116,197

100,085

Additions to property and equipment

 

(4,189)

 

 

(1,831)

Net cash (used in) provided by investing activities

$

(18,160)

 

 

42,571

Cash flows from financing activities:

Dividends paid

 

(56,560)

 

 

(61,531)

Repurchase of common stock

 

(118,668)

 

 

(88,166)

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

3,687

2,004

Other

(168)

Net cash used in financing activities

$

(171,709)

 

 

(242,636)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(105,638)

 

 

63,668

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

 

291,555

 

 

235,985

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

$

185,917

 

299,653

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”), which were liquidated in the third quarter of 2019 (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 managed accounts.  As of September 30, 2019, we had $68.8 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 wealth management 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 Rule 12b-1 of the Investment Company Act of 1940 (“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 (our “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”) 2016-02, “Leases” and ASU 2018-07, “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting,” both of which became effective January 1, 2019, and ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which was early adopted during the second quarter of 2019. 

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, 2019 and the results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018 in conformity with accounting principles generally accepted in the United States.

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2.

New Accounting Guidance

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. The Company will adopt the provisions of this guidance on January 1, 2020 and expects to elect the prospective adoption approach, which does not require the restatement of prior years. While we continue to assess all of the effects of adoption, we currently believe the adoption of this ASU will not have a material impact on our operating income or net income as requirements under the standard are generally consistent with our current accounting for cloud computing arrangements, with the primary difference being the classification of certain information in our consolidated financial statements and related disclosures.

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
September 30, 2019

Three months ended
September 30, 2018

Nine months ended
September 30, 2019

Nine months ended
September 30, 2018

(in thousands)

(in thousands)

Investment management fees:

    

    

    

    

    

    

    

Funds

$

107,926

 

123,764

 

322,678

 

376,193

Institutional

 

3,880

 

5,538

 

11,760

 

17,192

Total investment management fees

$

111,806

 

129,302

 

334,438

 

393,385

Underwriting and distribution fees:

Unaffiliated

Rule 12b-1 service and distribution fees

$

16,003

19,707

48,514

60,734

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

361

441

1,287

1,418

Other revenues

67

126

242

459

Total unaffiliated distribution fees

$

16,431

20,274

50,043

62,611

Wealth Management

Fee-based asset allocation product revenues

$

73,356

69,468

208,806

201,565

Rule 12b-1 service and distribution fees

16,426

18,106

48,441

54,591

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

12,523

13,651

36,845

41,900

Sales commissions on other products

8,024

9,111

24,127

26,632

Other revenues

9,027

9,698

27,265

28,923

Total wealth management distribution fees

119,356

120,034

345,484

353,611

Total distribution fees

$

135,787

140,308

395,527

416,222

Shareholder service fees:

Total shareholder service fees

$

23,087

 

25,508

 

70,279

 

78,464

 

 

 

 

Total revenues

$

270,680

 

295,118

 

800,244

 

888,071

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4.

Investment Securities

Investment securities at September 30, 2019 and December 31, 2018 were as follows:

September 30, 

December 31, 

    

2019

 

2018

(in thousands)

Available for sale securities:

Certificates of deposit

$

5,001

Commercial paper

1,975

7,970

Corporate bonds

267,064

218,121

U.S. Treasury bills