Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

us-gaap:OtherAssetsNoncurrentus-gaap:OtherLiabilitiesCurrentus-gaap:OtherLiabilitiesNoncurrentus-gaap:PropertyPlantAndEquipmentNetus-gaap:OtherLiabilitiesCurrentus-gaap:OtherLiabilitiesNoncurrentP1YP6YP20YP1YWADDELL & REED FINANCIAL INC0001052100false--12-312020Q1us-gaap:OtherComprehensiveIncomeLossAvailableForSaleSecuritiesAdjustmentNetOfTax0001052100srt:MaximumMember2020-01-012020-03-310001052100us-gaap:FairValueInputsLevel3Memberwdr:TermLoansMember2020-03-310001052100us-gaap:FairValueInputsLevel2Memberwdr:TermLoansMember2020-03-310001052100us-gaap:FairValueInputsLevel2Memberwdr:ConsolidatedSponsoredFundsMember2020-03-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:USTreasuryBillSecuritiesMember2020-03-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:MortgageBackedSecuritiesMember2020-03-310001052100wdr:TermLoansMember2020-03-310001052100us-gaap:USTreasuryBillSecuritiesMember2020-03-310001052100us-gaap:MortgageBackedSecuritiesMember2020-03-310001052100us-gaap:FairValueInputsLevel3Memberwdr:TermLoansMember2019-12-310001052100us-gaap:FairValueInputsLevel2Memberwdr:TermLoansMember2019-12-310001052100us-gaap:FairValueInputsLevel2Memberwdr:ConsolidatedSponsoredFundsMember2019-12-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:USTreasuryBillSecuritiesMember2019-12-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:MortgageBackedSecuritiesMember2019-12-310001052100wdr:TermLoansMember2019-12-310001052100us-gaap:USTreasuryBillSecuritiesMember2019-12-310001052100us-gaap:MortgageBackedSecuritiesMember2019-12-310001052100us-gaap:TreasuryStockCommonMember2020-03-310001052100us-gaap:RetainedEarningsMember2020-03-310001052100us-gaap:AdditionalPaidInCapitalMember2020-03-310001052100us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001052100us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2020-03-310001052100us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-03-310001052100us-gaap:TreasuryStockCommonMember2019-12-310001052100us-gaap:RetainedEarningsMember2019-12-310001052100us-gaap:AdditionalPaidInCapitalMember2019-12-310001052100us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001052100us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2019-12-310001052100us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2019-12-310001052100us-gaap:TreasuryStockCommonMember2019-03-310001052100us-gaap:RetainedEarningsMember2019-03-310001052100us-gaap:AdditionalPaidInCapitalMember2019-03-310001052100us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-310001052100us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2019-03-310001052100us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2019-03-310001052100us-gaap:TreasuryStockCommonMember2018-12-310001052100us-gaap:RetainedEarningsMember2018-12-310001052100us-gaap:AdditionalPaidInCapitalMember2018-12-310001052100us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001052100us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2018-12-310001052100us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2018-12-310001052100us-gaap:TreasuryStockCommonMember2020-01-012020-03-310001052100us-gaap:TreasuryStockCommonMember2019-01-012019-03-310001052100us-gaap:CommonStockMember2020-03-310001052100us-gaap:CommonStockMember2019-12-310001052100us-gaap:CommonStockMember2019-03-310001052100us-gaap:CommonStockMember2018-12-310001052100wdr:WealthManagerUnderwritingAndDistributionFeesMember2020-01-012020-03-310001052100wdr:WealthManagerSalesCommissionsOnOtherProductsMember2020-01-012020-03-310001052100wdr:WealthManagerSalesCommissionsOnFrontEndLoadMutualFundAndVariableAnnuitySalesMember2020-01-012020-03-310001052100wdr:WealthManagerRule12b1ServiceAndDistributionFeesMember2020-01-012020-03-310001052100wdr:WealthManagerOtherRevenuesMember2020-01-012020-03-310001052100wdr:WealthManagerFeeBasedAssetAllocationProductRevenuesMember2020-01-012020-03-310001052100wdr:UnaffiliatedSalesCommissionsOnFrontEndLoadMutualFundAndVariableAnnuitySalesMember2020-01-012020-03-310001052100wdr:UnaffiliatedRule12b1ServiceAndDistributionFeesMember2020-01-012020-03-310001052100wdr:UnaffiliatedOtherRevenuesMember2020-01-012020-03-310001052100wdr:UnaffiliatedDistributionFeesMember2020-01-012020-03-310001052100wdr:UnaffiliatedAndBrokerDealerMember2020-01-012020-03-310001052100wdr:AssetManagementInstitutionalMember2020-01-012020-03-310001052100us-gaap:ShareholderServiceMember2020-01-012020-03-310001052100us-gaap:FinancialServiceMember2020-01-012020-03-310001052100us-gaap:AssetManagement1Member2020-01-012020-03-310001052100wdr:WealthManagerUnderwritingAndDistributionFeesMember2019-01-012019-03-310001052100wdr:WealthManagerSalesCommissionsOnOtherProductsMember2019-01-012019-03-310001052100wdr:WealthManagerSalesCommissionsOnFrontEndLoadMutualFundAndVariableAnnuitySalesMember2019-01-012019-03-310001052100wdr:WealthManagerRule12b1ServiceAndDistributionFeesMember2019-01-012019-03-310001052100wdr:WealthManagerOtherRevenuesMember2019-01-012019-03-310001052100wdr:WealthManagerFeeBasedAssetAllocationProductRevenuesMember2019-01-012019-03-310001052100wdr:UnaffiliatedSalesCommissionsOnFrontEndLoadMutualFundAndVariableAnnuitySalesMember2019-01-012019-03-310001052100wdr:UnaffiliatedRule12b1ServiceAndDistributionFeesMember2019-01-012019-03-310001052100wdr:UnaffiliatedOtherRevenuesMember2019-01-012019-03-310001052100wdr:UnaffiliatedDistributionFeesMember2019-01-012019-03-310001052100wdr:UnaffiliatedAndBrokerDealerMember2019-01-012019-03-310001052100wdr:AssetManagementInstitutionalMember2019-01-012019-03-310001052100us-gaap:ShareholderServiceMember2019-01-012019-03-310001052100us-gaap:FinancialServiceMember2019-01-012019-03-310001052100us-gaap:AssetManagement1Member2019-01-012019-03-310001052100us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-01-012020-03-310001052100us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2019-01-012019-03-310001052100wdr:UnderwritingAndDistributionExpenseAndCompensationAndRelatedCostsMemberus-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMemberus-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-01-012020-03-310001052100us-gaap:InvestmentIncomeMemberus-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMemberus-gaap:AccumulatedOtherThanTemporaryImpairmentMember2020-01-012020-03-310001052100us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001052100wdr:UnderwritingAndDistributionExpenseAndCompensationAndRelatedCostsMemberus-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMemberus-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2019-01-012019-03-310001052100us-gaap:InvestmentIncomeMemberus-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMemberus-gaap:AccumulatedOtherThanTemporaryImpairmentMember2019-01-012019-03-310001052100us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310001052100us-gaap:MachineryAndEquipmentMember2020-03-310001052100us-gaap:LandMember2020-03-310001052100us-gaap:BuildingMember2020-03-310001052100us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001052100us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2020-01-012020-03-310001052100us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310001052100us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2019-01-012019-03-310001052100us-gaap:FairValueMeasuredAtNetAssetValuePerShareMember2020-03-310001052100us-gaap:FairValueInputsLevel3Member2020-03-310001052100us-gaap:FairValueMeasuredAtNetAssetValuePerShareMember2019-12-310001052100us-gaap:FairValueInputsLevel3Member2019-12-310001052100srt:MinimumMember2020-03-310001052100srt:MaximumMember2020-03-310001052100us-gaap:FairValueMeasuredAtNetAssetValuePerShareMemberwdr:SponsoredPrivatelyOfferedFundsMember2020-03-310001052100us-gaap:FairValueInputsLevel1Memberus-gaap:EquitySecuritiesMember2020-03-310001052100wdr:SponsoredPrivatelyOfferedFundsMember2020-03-310001052100us-gaap:EquitySecuritiesMember2020-03-310001052100us-gaap:FairValueMeasuredAtNetAssetValuePerShareMemberwdr:SponsoredPrivatelyOfferedFundsMember2019-12-310001052100us-gaap:FairValueInputsLevel3Memberus-gaap:EquitySecuritiesMember2019-12-310001052100us-gaap:FairValueInputsLevel1Memberus-gaap:EquitySecuritiesMember2019-12-310001052100wdr:SponsoredPrivatelyOfferedFundsMember2019-12-310001052100us-gaap:EquitySecuritiesMember2019-12-310001052100us-gaap:FairValueInputsLevel1Memberwdr:SponsoredFundsMember2020-03-310001052100wdr:SponsoredFundsMember2020-03-310001052100us-gaap:FairValueInputsLevel1Memberwdr:SponsoredFundsMember2019-12-310001052100wdr:SponsoredFundsMember2019-12-310001052100us-gaap:OtherCurrentLiabilitiesMemberus-gaap:TotalReturnSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:NondesignatedMember2019-12-310001052100us-gaap:TotalReturnSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:NondesignatedMemberwdr:InvestmentAndOtherIncomeLossMember2020-01-012020-03-310001052100us-gaap:TotalReturnSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:NondesignatedMemberwdr:InvestmentAndOtherIncomeLossMember2019-01-012019-03-310001052100us-gaap:PrepaidExpensesAndOtherCurrentAssetsMemberus-gaap:TotalReturnSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:NondesignatedMember2020-03-310001052100us-gaap:TotalReturnSwapMemberus-gaap:NondesignatedMember2019-12-310001052100us-gaap:TotalReturnSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:NondesignatedMember2020-03-310001052100us-gaap:TotalReturnSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:NondesignatedMember2019-12-310001052100us-gaap:TotalReturnSwapMemberus-gaap:NondesignatedMember2020-03-310001052100us-gaap:PensionPlansDefinedBenefitMember2020-01-012020-03-310001052100us-gaap:PensionPlansDefinedBenefitMember2019-01-012019-03-310001052100us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember2020-01-012020-03-310001052100us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember2019-01-012019-03-310001052100wdr:Senior5.75PercentUnsecuredNotesDue2021Member2020-03-310001052100wdr:AccountingStandardsUpdate201912Member2020-03-310001052100us-gaap:AccountingStandardsUpdate201815Member2020-03-310001052100us-gaap:AccountingStandardsUpdate201704Member2020-03-310001052100us-gaap:AccountingStandardsUpdate201613Member2020-03-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:CommercialPaperMember2020-03-310001052100us-gaap:FairValueInputsLevel1Memberus-gaap:MoneyMarketFundsMember2020-03-310001052100us-gaap:MoneyMarketFundsMember2020-03-310001052100us-gaap:FairValueInputsLevel2Member2020-03-310001052100us-gaap:FairValueInputsLevel1Member2020-03-310001052100us-gaap:CommercialPaperMember2020-03-310001052100us-gaap:FairValueInputsLevel1Memberus-gaap:MoneyMarketFundsMember2019-12-310001052100us-gaap:MoneyMarketFundsMember2019-12-310001052100us-gaap:FairValueInputsLevel2Member2019-12-310001052100us-gaap:FairValueInputsLevel1Member2019-12-3100010521002019-03-3100010521002018-12-310001052100wdr:ConsolidatedSponsoredFundsMember2020-03-310001052100wdr:ConsolidatedSponsoredFundsMember2019-12-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:CorporateBondSecuritiesMember2020-03-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:CorporateBondSecuritiesMember2019-12-310001052100us-gaap:FairValueInputsLevel2Memberus-gaap:CommercialPaperMember2019-12-310001052100us-gaap:CorporateBondSecuritiesMember2020-03-310001052100us-gaap:CorporateBondSecuritiesMember2019-12-310001052100us-gaap:CommercialPaperMember2019-12-310001052100wdr:CorporateHeadquartersMember2020-01-310001052100us-gaap:RetainedEarningsMember2020-01-012020-03-310001052100us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001052100us-gaap:RetainedEarningsMember2019-01-012019-03-310001052100us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-3100010521002019-01-012019-03-310001052100wdr:FinanceLeasedAssetsMember2020-03-310001052100wdr:FinanceLeasedAssetsMember2019-12-3100010521002020-03-3100010521002019-12-3100010521002020-04-2400010521002020-01-012020-03-31xbrli:sharesiso4217:USDutr:sqftiso4217:USDxbrli:shareswdr:securitywdr:contractxbrli:pure

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, 2020

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 April 24, 2020

Class A common stock, $.01 par value

65,622,663

Table of Contents

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2020

    

Page No.

Part I.

Financial Information

Item 1.

Financial Statements (unaudited)

Consolidated Balance Sheets at March 31, 2020 and December 31, 2019

3

Consolidated Statements of Income for the three months ended March 31, 2020 and March 31, 2019

4

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and March 31, 2019

5

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests for the three months ended March 31, 2020 and March 31, 2019

6

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and March 31, 2019

7

Notes to the Unaudited Consolidated Financial Statements

8

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

Part II.

Other Information

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 6.

Exhibits

37

Signatures

38

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, 

2020

December 31, 

(Unaudited)

2019

Assets:

    

    

    

Cash and cash equivalents

$

160,316

 

151,815

Cash and cash equivalents - restricted

 

53,423

 

 

74,325

Investment securities

 

605,780

 

 

688,346

Receivables:

Funds and separate accounts

 

12,144

 

 

15,167

Customers and other

 

59,487

 

 

80,089

Prepaid expenses and other current assets

 

43,129

 

 

31,655

Total current assets

 

934,279

 

 

1,041,397

Property and equipment, net

 

33,017

 

 

34,726

Goodwill and identifiable intangible assets

 

145,869

 

 

145,869

Deferred income taxes

 

27,267

 

 

14,418

Other non-current assets

 

27,321

 

 

29,918

Total assets

$

1,167,753

 

1,266,328

Liabilities:

Accounts payable

$

38,414

 

20,123

Payable to investment companies for securities

 

19,669

 

 

36,883

Payable to third party brokers

 

15,991

 

 

17,123

Payable to customers

 

72,009

 

 

84,558

Short-term notes payable

94,944

Accrued compensation

 

41,738

 

 

79,507

Other current liabilities

 

70,982

 

 

71,001

Total current liabilities

 

353,747

 

 

309,195

Long-term debt

 

 

 

94,926

Accrued pension and postretirement costs

 

3,343

 

 

3,145

Other non-current liabilities

 

25,935

 

 

30,960

Total liabilities

 

383,025

 

 

438,226

Redeemable noncontrolling interests

19,070

19,205

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; 66,655 shares outstanding (68,847 at December 31, 2019)

 

997

 

 

997

Additional paid-in capital

 

282,401

 

 

312,693

Retained earnings

 

1,247,084

 

 

1,241,598

Cost of 33,046 common shares in treasury (30,854 at December 31, 2019)

 

(765,579)

 

 

(749,625)

Accumulated other comprehensive income

 

755

 

 

3,234

Total stockholders’ equity

 

765,658

 

 

808,897

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$

1,167,753

 

1,266,328

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 March 31, 

2020

2019

Revenues:

    

    

    

Investment management fees

$

105,219

 

109,762

Underwriting and distribution fees

136,943

 

126,245

Shareholder service fees

21,571

 

23,403

Total

263,733

 

259,410

Operating expenses:

Distribution

120,033

 

109,794

Compensation and benefits (including share-based compensation of $9,983 and $12,693, respectively)

58,425

 

64,843

General and administrative

18,598

 

14,704

Technology

13,502

16,308

Occupancy

4,709

6,715

Marketing and advertising

1,896

1,964

Depreciation

3,513

 

6,001

Subadvisory fees

3,666

 

3,557

Total

224,342

 

223,886

Operating income

39,391

 

35,524

Investment and other (loss) income

(7,745)

 

9,453

Interest expense

(1,549)

 

(1,548)

Income before provision for income taxes

30,097

 

43,429

Provision for income taxes

9,633

 

10,671

Net income

20,464

 

32,758

Net (loss) income attributable to redeemable noncontrolling interests

(1,522)

705

Net income attributable to Waddell & Reed Financial, Inc.

$

21,986

32,053

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

$

0.32

0.42

Weighted average shares outstanding, basic and diluted:

67,675

76,299

See accompanying notes to the unaudited consolidated financial statements.

4

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

For the three months ended March 31, 

    

2020

    

2019

    

Net income

$

20,464

 

32,758

Other comprehensive income:

Unrealized (loss) gain on available for sale investment securities during the period, net of income tax (benefit) expense of $(760) and $517, respectively

 

(2,430)

 

 

1,658

Postretirement benefit, net of income tax benefit of $(18) and $(30), respectively

 

(49)

 

 

(94)

Comprehensive income

17,985

 

34,322

Comprehensive (loss) income attributable to redeemable noncontrolling interests

(1,522)

705

Comprehensive income attributable to Waddell & Reed Financial, Inc.

$

19,507

33,617

See accompanying notes to the unaudited consolidated financial statements.

5

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests

(Unaudited, in thousands)

For the three months ended March 31,

Accumulated

Redeemable

Additional

Other

Total 

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling

    

Shares

    

Amount

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

Interests

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

    

Balance at December 31, 2019

 

99,701

$

997

 

312,693

 

1,241,598

 

(749,625)

 

3,234

 

808,897

 

19,205

Net income (loss)

 

 

 

 

21,986

 

 

 

21,986

 

(1,522)

Net subscription of redeemable noncontrolling interests in sponsored funds

1,387

Recognition of equity compensation

 

 

 

7,693

 

71

 

 

 

7,764

 

Net issuance/forfeiture of nonvested shares

 

 

 

(37,985)

 

 

37,985

 

 

 

Dividends accrued, $0.25 per share

 

 

 

 

(16,571)

 

 

(16,571)

Repurchase of common stock

 

(53,939)

 

(53,939)

 

Other comprehensive loss

 

 

 

 

 

 

(2,479)

 

(2,479)

 

Balance at March 31, 2020

99,701

$

997

 

282,401

 

1,247,084

 

(765,579)

 

755

 

765,658

 

19,070

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 three months ended March 31, 

2020

    

2019

    

Cash flows from operating activities:

Net income

$

20,464

 

32,758

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

Depreciation and amortization

 

3,168

 

 

6,208

Amortization of deferred sales commissions

 

395

 

 

551

Share-based compensation

 

9,983

 

 

12,693

Investments and derivatives loss (gain), net of collateral

 

50,012

 

 

(16,481)

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

 

(2,144)

 

 

(2,233)

Deferred income taxes

 

(12,071)

 

 

5,914

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

1,326

(5,081)

Other

212

(56)

Changes in assets and liabilities:

Customer and other receivables

 

6,804

 

 

77,039

Payable to investment companies for securities and payable to customers

 

(29,763)

 

 

(115,675)

Receivables from funds and separate accounts

 

3,023

 

 

(1,018)

Other assets

 

3,214

 

 

4,193

Accounts payable and payable to third party brokers

 

(3,219)

 

 

(3,466)

Other liabilities

 

(22,128)

 

 

(12,843)

Net cash provided by (used in) operating activities

$

29,276

 

 

(17,497)

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(2,999)

(70,501)

Proceeds from sales of available for sale and equity method securities

 

 

 

19,667

Proceeds from maturities of available for sale securities

33,875

38,375

Additions to property and equipment

 

(3,182)

 

 

(1,474)

Net cash provided by (used in) investing activities

$

27,694

 

 

(13,933)

Cash flows from financing activities:

Dividends paid

 

(17,119)

 

 

(19,348)

Repurchase of common stock

 

(53,599)

 

 

(40,871)

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

1,387

768

Other

(40)

(62)

Net cash used in financing activities

$

(69,371)

 

 

(59,513)

Net decrease in cash, cash equivalents and restricted cash

 

(12,401)

 

 

(90,943)

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

 

226,140

 

 

291,555

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

$

213,739

 

200,612

See accompanying notes to the unaudited consolidated financial statements.

7

Table of Contents

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”) (collectively, Ivy Funds, Ivy VIP, InvestEd and IVH are referred to as the “Funds”).  In addition to the Funds, our assets under management (“AUM”) include institutional managed accounts.  As of March 31, 2020, we had $56.0 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.

The Company is proactively managing business continuity and safety considerations as circumstances of the coronavirus disease 2019 (“COVID-19’) evolve. Our leadership team’s priority is on ensuring the health and safety of all employees, clients, Advisors and communities, while also ensuring full continuity of service and access.  The Company started transitioning to a work from home environment early in March 2020 and has been following the Centers for Disease Control and Prevention and local authorities’ recommendations on safe practices throughout this process.  We have undertaken a number of steps to facilitate safety, security and full continuity of service, including:

We activated an Enterprise Preparedness Team and COVID-19 steering committee that meets regularly to assess developments and determine the best action to ensure business continuity and the safety of our employees and partners.
We have adopted interim business practices, including restricting business travel, requiring all meetings to take place via remote access tools, adopting safety protocols to limit the potential for exposure, adopting social distancing practices, implementing a clearly-defined approval process for reentry to any worksite, advising personnel on preventive measures and offering remote collaboration and productivity tools and training resources to our employees.
We enhanced monitoring and capabilities of our systems to allow our remote workforce to function efficiently and have continued our educational and monitoring practices to ensure there are no compromises to confidentiality, privacy and cybersecurity requirements.
The Ivy investment management and distribution teams transitioned seamlessly to remote working. Our teams have a strong heritage of active collaboration which has migrated to a virtual environment without compromise.

8

Table of Contents

Within our wealth management business, the majority of independent advisors are working from temporary locations. We are demonstrating our differentiated service and support model by continuing regular communications with Advisors as well as delivering additional advisor and client focused resources.

We have not initiated any layoffs, furloughs or reduced hours. As we implemented our business continuity plans, we have intentionally maintained the same pay practices for all of our employees based upon their regular work schedule, paid spot bonuses to certain employees, implemented a temporary hourly wage increase to designated client services personnel, increased certain benefit coverages for specific COVID-19 related treatments through May, and are increasing our philanthropic contributions to local organizations to help support the COVID-19 responses in our community.

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, 2019 (our “2019 Form 10-K”).  Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation. Derivative activity was reclassified within operating activities on our consolidated statements of cash flows to provide a comprehensive view of the impact of the economic hedge program for our seed investment portfolio.

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 2019 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment and 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, all of which became effective January 1, 2020. 

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, 2020 and the results of operations and cash flows for the three months ended March 31, 2020 and 2019 in conformity with accounting principles generally accepted in the United States.

Assets Held for Sale

Assets held for sale included real property related to our corporate headquarters move and aviation equipment.  As of March 31, 2020 and December 31, 2019, $3.1 million of equipment, $3.8 million of buildings and $1.9 million of land were included in Property and equipment, net on our consolidated balance sheets.  The Company intends to actively pursue sale of these assets at market prices as soon as reasonably possible.

2.

New Accounting Guidance

Accounting Guidance Adopted During the First Quarter of 2020

On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The ASU changes the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this ASU had an immaterial impact on our consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment.  This ASU eliminates the second step from the goodwill impairment test. An entity should perform

9

Table of Contents

its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. The adoption of this ASU had an immaterial impact on our consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted 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). The Company adopted the provisions of this guidance using the prospective adoption approach, which does not require the restatement of prior years. The adoption of this ASU did 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.  As of March 31, 2020, the Company had $2.6 million of capitalized implementation costs for hosting arrangements with $23 thousand of accumulated amortization in prepaid and other current assets on the consolidated balance sheet. Our hosting arrangements that are service contracts include internal and external costs related to various technology additions in support of both our asset management and wealth management business. Amortization costs are recorded on a straight-line basis over the term of the hosting arrangement agreement.

Accounting Guidance Not Yet Adopted

In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies and improves the consistent application of the accounting for income taxes by removing certain exceptions to general principles and by clarifying and amending existing guidance.  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.

10

Table of Contents

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, 2020

Three months ended
March 31, 2019

(in thousands)

Investment management fees:

    

    

    

    

Funds

$

102,293

 

105,745

 

Institutional

 

2,926

 

4,017

 

Total investment management fees

$

105,219

 

109,762

 

Underwriting and distribution fees:

Unaffiliated

Rule 12b-1 service and distribution fees

$

15,276

16,465

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

451

443

Other revenues

135

92

Total unaffiliated distribution fees

$

15,862

17,000

Wealth Management

Fee-based asset allocation product revenues

$

77,118

65,230

Rule 12b-1 service and distribution fees

14,589

15,405

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

11,958

12,015

Sales commissions on other products

8,699

7,606

Other revenues

8,717

8,989

Total wealth management distribution fees

121,081

109,245

Total distribution fees

$

136,943

126,245

Shareholder service fees:

Total shareholder service fees

$

21,571

 

23,403

 

 

 

 

Total revenues

$

263,733

 

259,410

 

11

Table of Contents

4.

Investment Securities

Investment securities at March 31, 2020 and December 31, 2019 were as follows:

March 31, 

December 31, 

    

2020

 

2019

(in thousands)

Available for sale securities:

Commercial paper

$

1,977

Corporate bonds

222,478

254,291

Total available for sale securities

 

222,478

256,268

Trading debt securities:

Commercial paper

9,573

1,977

Corporate bonds

 

77,325

84,920

U.S. Treasury bills

6,022

5,979

Mortgage-backed securities

 

3

4

Term loans

37,220

44,268

Consolidated sponsored funds

 

42,241

43,567

Total trading securities 

 

172,384

180,715

Equity securities:

Common stock

 

30,528

34,945

Sponsored funds

148,683

178,386

Sponsored privately offered funds

 

668

845

Total equity securities

179,879

214,176

Equity method securities:

Sponsored funds

 

31,039

37,187

Total securities

$

605,780

688,346

Corporate bonds accounted for as available for sale and held as of March 31, 2020 mature as follows:

Amortized

cost

 

Fair value

  

(in thousands)

Within one year

$

63,347

63,292

After one year but within five years

159,011

159,186

$

222,358

222,478

Commercial paper, corporate bonds, U.S. Treasury bills, mortgage-backed securities and term loans accounted for as trading and held as of March 31, 2020 mature as follows:

Fair value

  

(in thousands)

Within one year

$

35,102

After one year but within five years

70,350

After five years but within 10 years

24,691

$

130,143

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at March 31, 2020:

    

Amortized

    

Unrealized

    

Unrealized

    

 

cost

gains

losses

Fair value

 

  

 

(in thousands)

Available for sale securities:

Corporate bonds

$

222,358

 

1,505

(1,385)

 

222,478

12

Table of Contents

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

    

Amortized

    

Unrealized

    

Unrealized

    

 

cost

gains

losses

Fair value

 

(in thousands)

Available for sale securities:

Commercial paper

$

1,976

1

1,977

Corporate bonds

250,982

 

3,314

(5)

 

254,291

$

252,958

 

3,315

 

(5)

 

256,268

A summary of available for sale investment securities with fair values below carrying values at March 31, 2020 is as follows:

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

(in thousands)

Corporate bonds

$

93,046

(1,385)

93,046

(1,385)

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

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized

    

Fair value 

    

losses

    

Fair value 

    

losses

    

Fair value 

    

losses

(in thousands)

Corporate bonds

$

4,538

8,056

(5)

12,594

(5)

The Company’s investment portfolio included 24 available for sale securities in an unrealized loss position at March 31, 2020.

The Company evaluated available for sale securities in an unrealized loss position at March 31, 2020, including reviewing credit ratings, assessing the extent of losses, and considering the impact of market conditions for each individual security. The Company concluded no allowance for credit losses was necessary as it expects to recover the entire amortized cost basis of each security. The unrealized losses in the Company’s investment portfolio 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.

For equity securities held at the end of the period, net unrealized losses of $35.9 million and net unrealized gains of $13.1 million were recognized for the three months ended March 31, 2020 and March 31, 2019, respectively.

Sponsored Funds

The Company has classified its equity investments in the 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 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.

13

Table of Contents

Consolidated Sponsored Funds

The following table details the balances related to consolidated sponsored funds at March 31, 2020 and December 31, 2019, as well as the Company’s net interest in these funds:

March 31, 

December 31, 

2020

    

2019

    

(in thousands)

Cash

 

$

765

1,530

Investments

 

42,241

 

43,567

Other assets

 

1,107

 

483

Other liabilities

 

(793)

 

Redeemable noncontrolling interests

 

(19,070)

 

(19,205)

Net interest in consolidated sponsored funds

 

$

24,250

26,375

During the three months ended March 31, 2020, we consolidated one Ivy Fund in which we provided initial seed capital at the time of the fund’s formation. 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.

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. Term loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.

14

Table of Contents

The following tables summarize our investment securities as of March 31, 2020 and December 31, 2019 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

March 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Held at Net Asset Value

Total

 

(in thousands)

 

Cash equivalents: (1)

Money market funds

$

7,759

7,759

Commercial paper

19,159

19,159

Total cash equivalents

$

7,759

19,159

26,918

Available for sale securities:

Corporate bonds

$

222,478

222,478

Trading debt securities:

Commercial paper

9,573

9,573

Corporate bonds

77,325

77,325

U.S. Treasury bills

6,022

6,022

Mortgage-backed securities

    

    

3

    

    

3

Term loans

 

 

29,090

 

8,130

 

37,220

Consolidated sponsored funds

 

 

42,241

 

 

42,241

Equity securities:

Common stock

30,528

30,528

Sponsored funds

148,683

148,683

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

668

668

Equity method securities: (3)

Sponsored funds

31,039

31,039

Total investment securities

$

210,250

386,732

8,130

668

605,780

15

Table of Contents

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Other Assets Held at Net Asset Value

Total

 

(in thousands)

 

Cash equivalents: (1)

Money market funds

$

4,203

4,203

Commercial paper

38,143

38,143

Total cash equivalents

$

4,203

38,143

42,346

Available for sale securities: