Form 10-Q WADDELL & REED FINANCIAL For: Sep 30
�
�
�
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
�
FORM�10-Q
�
(Mark One)
�
x |
QUARTERLY REPORT PURSUANT TO SECTION�13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
�
For the quarterly period ended September�30, 2014
�
OR
�
o |
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�x No�o.
�
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule�405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).� Yes�x No�o.
�
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule�12b-2 of the Exchange Act).
�
Large accelerated filer�����x |
Accelerated filer ������������������������o |
Non-accelerated filer�������o |
Smaller reporting company���������o |
(Do not check if a smaller reporting company) |
� |
�
Indicate by check mark whether the registrant is a shell company (as defined by Rule�12b-2 of the Exchange Act). Yes�o No�x.
�
Shares outstanding of each of the registrant�s classes of common stock as of the latest practicable date:
�
Class |
� |
Outstanding�as�of�October�24,�2014 |
� |
Class�A common stock, $.01 par value |
� |
83,614,054 |
� |
�
�
�
�
WADDELL�& REED FINANCIAL,�INC.
INDEX TO QUARTERLY REPORT ON FORM�10-Q
Quarter Ended September�30, 2014
�
� |
� |
Page�No. | |
� | |||
� |
� |
� | |
� | |||
� |
� |
� | |
� |
Consolidated Balance Sheets at September�30, 2014 and December�31, 2013 |
3 | |
� |
� |
� | |
� |
4 | ||
� |
� |
� | |
� |
5 | ||
� |
� |
� | |
� |
Consolidated Statement of Stockholders� Equity for the nine months ended September�30, 2014 |
6 | |
� |
� |
� | |
� |
7 | ||
� |
� |
� | |
� |
8 | ||
� |
� |
� | |
Management�s Discussion and Analysis of Financial Condition and Results of Operations |
18 | ||
� |
� |
� | |
35 | |||
� |
� |
� | |
35 | |||
� |
� |
� | |
� | |||
� |
� |
� | |
36 | |||
� |
� |
� | |
36 | |||
� |
� |
� | |
36 | |||
� |
� |
� | |
37 | |||
� |
� |
� | |
� |
38 | ||
�
�
PART�I.� FINANCIAL INFORMATION
�
WADDELL�& REED FINANCIAL,�INC. AND SUBSIDIARIES
(in thousands)
�
� |
� |
September�30, |
� |
� |
� | |
� |
� |
2014 |
� |
December�31, |
� | |
� |
� |
(unaudited) |
� |
2013 |
� | |
Assets: |
� |
� |
� |
� |
� | |
Cash and cash equivalents |
� |
$ |
528,967 |
� |
487,845 |
� |
Cash and cash equivalents - restricted |
� |
61,219 |
� |
121,419 |
� | |
Investment securities |
� |
243,921 |
� |
201,348 |
� | |
Receivables: |
� |
� |
� |
� |
� | |
Funds and separate accounts |
� |
35,760 |
� |
36,467 |
� | |
Customers and other |
� |
165,678 |
� |
141,763 |
� | |
Deferred income taxes |
� |
7,595 |
� |
7,654 |
� | |
Income taxes receivable |
� |
� |
� |
419 |
� | |
Prepaid expenses and other current assets |
� |
12,887 |
� |
9,410 |
� | |
Total current assets |
� |
1,056,027 |
� |
1,006,325 |
� | |
� |
� |
� |
� |
� |
� | |
Property and equipment, net |
� |
86,610 |
� |
72,638 |
� | |
Deferred sales commissions, net |
� |
68,074 |
� |
79,894 |
� | |
Goodwill and identifiable intangible assets |
� |
158,123 |
� |
161,969 |
� | |
Deferred income taxes |
� |
5,620 |
� |
3,839 |
� | |
Other non-current assets |
� |
24,575 |
� |
12,300 |
� | |
Total assets |
� |
$ |
1,399,029 |
� |
1,336,965 |
� |
� |
� |
� |
� |
� |
� | |
Liabilities: |
� |
� |
� |
� |
� | |
Accounts payable |
� |
$ |
19,585 |
� |
18,821 |
� |
Payable to investment companies for securities |
� |
106,695 |
� |
214,085 |
� | |
Payable to third party brokers |
� |
61,347 |
� |
59,756 |
� | |
Payable to customers |
� |
63,205 |
� |
8,664 |
� | |
Accrued compensation |
� |
74,007 |
� |
58,677 |
� | |
Other current liabilities |
� |
48,602 |
� |
59,726 |
� | |
Current income taxes |
� |
3,441 |
� |
� |
� | |
Total current liabilities |
� |
376,882 |
� |
419,729 |
� | |
� |
� |
� |
� |
� |
� | |
Long-term debt |
� |
190,000 |
� |
190,000 |
� | |
Accrued pension and postretirement costs |
� |
12,516 |
� |
13,333 |
� | |
Other non-current liabilities |
� |
27,810 |
� |
26,561 |
� | |
Total liabilities |
� |
607,208 |
� |
649,623 |
� | |
� |
� |
� |
� |
� |
� | |
Commitments and contingencies |
� |
� |
� |
� |
� | |
� |
� |
� |
� |
� |
� | |
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; 84,064 shares outstanding (85,236 at December�31, 2013) |
� |
997 |
� |
997 |
� | |
Additional paid-in capital |
� |
313,086 |
� |
267,406 |
� | |
Retained earnings |
� |
996,683 |
� |
850,600 |
� | |
Cost of 15,637 common shares in treasury (14,465 at December�31, 2013) |
� |
(500,542 |
) |
(415,802 |
) | |
Accumulated other comprehensive loss |
� |
(18,403 |
) |
(15,859 |
) | |
Total stockholders� equity |
� |
791,821 |
� |
687,342 |
� | |
Total liabilities and stockholders� equity |
� |
$ |
1,399,029 |
� |
1,336,965 |
� |
�
See accompanying notes to the unaudited consolidated financial statements.
�
�
WADDELL�& REED FINANCIAL,�INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited, in thousands, except for per share data)
�
� |
� |
For�the�three�months |
� |
For�the�nine�months |
� | |||||
� |
� |
ended�September�30, |
� |
ended�September�30, |
� | |||||
� |
� |
2014 |
� |
2013 |
� |
2014 |
� |
2013 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Revenues: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Investment management fees |
� |
$ |
197,783 |
� |
165,559 |
� |
579,444 |
� |
470,223 |
� |
Underwriting and distribution fees |
� |
173,047 |
� |
146,863 |
� |
507,315 |
� |
423,879 |
� | |
Shareholder service fees |
� |
38,728 |
� |
34,667 |
� |
113,849 |
� |
101,248 |
� | |
Total |
� |
409,558 |
� |
347,089 |
� |
1,200,608 |
� |
995,350 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Operating expenses: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Underwriting and distribution |
� |
197,246 |
� |
169,046 |
� |
587,805 |
� |
495,461 |
� | |
Compensation and related costs (including share-based compensation of $12,941, $14,186, $40,620 and $39,192, respectively) |
� |
48,375 |
� |
49,472 |
� |
146,973 |
� |
145,003 |
� | |
General and administrative |
� |
24,924 |
� |
20,462 |
� |
75,863 |
� |
63,608 |
� | |
Subadvisory fees |
� |
2,203 |
� |
1,667 |
� |
6,149 |
� |
10,442 |
� | |
Depreciation |
� |
3,786 |
� |
3,172 |
� |
10,576 |
� |
9,621 |
� | |
Intangible asset impairment |
� |
7,900 |
� |
� |
� |
7,900 |
� |
� |
� | |
Total |
� |
284,434 |
� |
243,819 |
� |
835,266 |
� |
724,135 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Operating income |
� |
125,124 |
� |
103,270 |
� |
365,342 |
� |
271,215 |
� | |
Investment and other income (loss) |
� |
(1,205 |
) |
5,212 |
� |
8,795 |
� |
10,591 |
� | |
Interest expense |
� |
(2,769 |
) |
(2,832 |
) |
(8,279 |
) |
(8,544 |
) | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Income before provision for income taxes |
� |
121,150 |
� |
105,650 |
� |
365,858 |
� |
273,262 |
� | |
Provision for income taxes |
� |
46,564 |
� |
37,231 |
� |
133,420 |
� |
99,023 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Net income |
� |
$ |
74,586 |
� |
68,419 |
� |
232,438 |
� |
174,239 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Net income per share, basic and diluted: |
� |
$ |
0.89 |
� |
0.80 |
� |
2.74 |
� |
2.03 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Weighted average shares outstanding: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Basic |
� |
84,242 |
� |
85,603 |
� |
84,775 |
� |
85,688 |
� | |
Diluted |
� |
84,242 |
� |
85,603 |
� |
84,775 |
� |
85,689 |
� |
�
See accompanying notes to the unaudited consolidated financial statements.
�
�
WADDELL�& REED FINANCIAL,�INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
�
� |
� |
For�the�three�months |
� |
For�the�nine�months |
� | |||||
� |
� |
ended�September�30, |
� |
ended�September�30, |
� | |||||
� |
� |
2014 |
� |
2013 |
� |
2014 |
� |
2013 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Net income |
� |
$ |
74,586 |
� |
68,419 |
� |
232,438 |
� |
174,239 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Other comprehensive income: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $(11), $12, $(9)�and $3, respectively |
� |
(4,962 |
) |
4,633 |
� |
(3,491 |
) |
4,008 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Pension and postretirement benefits, net of income tax expense of $186, $480, $558 and $1,633, respectively |
� |
315 |
� |
816 |
� |
947 |
� |
2,254 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Comprehensive income |
� |
$ |
69,939 |
� |
73,868 |
� |
229,894 |
� |
180,501 |
� |
�
See accompanying notes to the unaudited consolidated financial statements.
�
�
WADDELL�& REED FINANCIAL,�INC. AND SUBSIDIARIES
�
Consolidated Statement of Stockholders� Equity
For the Nine Months Ended September�30, 2014
(Unaudited, in thousands)
�
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
Accumulated |
� |
� |
� | |
� |
� |
� |
� |
� |
� |
Additional |
� |
� |
� |
� |
� |
Other |
� |
Total |
� | |
� |
� |
Common�Stock |
� |
Paid-in |
� |
Retained |
� |
Treasury |
� |
Comprehensive |
� |
Stockholders� |
� | |||
� |
� |
Shares |
� |
Amount |
� |
Capital |
� |
Earnings |
� |
Stock |
� |
Income�(Loss) |
� |
Equity |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Balance at December�31, 2013 |
� |
99,701 |
� |
$ |
997 |
� |
267,406 |
� |
850,600 |
� |
(415,802 |
) |
(15,859 |
) |
687,342 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Net income |
� |
� |
� |
� |
� |
� |
� |
232,438 |
� |
� |
� |
� |
� |
232,438 |
� | |
Recognition of equity compensation |
� |
� |
� |
� |
� |
40,620 |
� |
� |
� |
� |
� |
� |
� |
40,620 |
� | |
Net issuance/forfeiture of nonvested shares |
� |
� |
� |
� |
� |
(11,405 |
) |
� |
� |
11,405 |
� |
� |
� |
� |
� | |
Dividends accrued, $1.02 per share |
� |
� |
� |
� |
� |
� |
� |
(86,355 |
) |
� |
� |
� |
� |
(86,355 |
) | |
Excess tax benefits from share-based payment arrangements |
� |
� |
� |
� |
� |
16,465 |
� |
� |
� |
� |
� |
� |
� |
16,465 |
� | |
Repurchase of common stock |
� |
� |
� |
� |
� |
� |
� |
� |
� |
(96,145 |
) |
� |
� |
(96,145 |
) | |
Other comprehensive income |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
(2,544 |
) |
(2,544 |
) | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Balance at September�30, 2014 |
� |
99,701 |
� |
$ |
997 |
� |
313,086 |
� |
996,683 |
� |
(500,542 |
) |
(18,403 |
) |
791,821 |
� |
�
See accompanying notes to the unaudited consolidated financial statements.
�
�
WADDELL�& REED FINANCIAL,�INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
�
� |
� |
For�the�nine�months |
� | |||
� |
� |
ended�September�30, |
� | |||
� |
� |
2014 |
� |
2013 |
� | |
Cash flows from operating activities: |
� |
� |
� |
� |
� | |
Net income |
� |
$ |
232,438 |
� |
174,239 |
� |
Adjustments to reconcile net income to net cash provided by operating activities: |
� |
� |
� |
� |
� | |
Intangible asset impairment |
� |
7,900 |
� |
� |
� | |
Depreciation and amortization |
� |
10,695 |
� |
10,351 |
� | |
Amortization of deferred sales commissions |
� |
49,373 |
� |
41,569 |
� | |
Share-based compensation |
� |
40,620 |
� |
39,192 |
� | |
Excess tax benefits from share-based payment arrangements |
� |
(16,465 |
) |
(6,860 |
) | |
Gain on sale of available for sale investment securities |
� |
(3,875 |
) |
(7,887 |
) | |
Net purchases and sales or maturities of trading securities |
� |
(14,298 |
) |
(27,394 |
) | |
Gain on trading securities |
� |
(1,985 |
) |
(2,862 |
) | |
Loss on sale and retirement of property and equipment |
� |
1,131 |
� |
302 |
� | |
Capital gains and dividends reinvested |
� |
(14 |
) |
(50 |
) | |
Deferred income taxes |
� |
(2,273 |
) |
(7,335 |
) | |
Changes in assets and liabilities: |
� |
� |
� |
� |
� | |
Cash and cash equivalents - restricted |
� |
60,200 |
� |
(8,939 |
) | |
Other receivables |
� |
(24,263 |
) |
25,501 |
� | |
Payable to investment companies for securities and payable to customers |
� |
(52,849 |
) |
(28,096 |
) | |
Receivables from funds and separate accounts |
� |
707 |
� |
53 |
� | |
Other assets |
� |
(7,934 |
) |
(2,429 |
) | |
Deferred sales commissions |
� |
(37,553 |
) |
(48,464 |
) | |
Accounts payable and payable to third party brokers |
� |
2,355 |
� |
3,734 |
� | |
Other liabilities |
� |
16,322 |
� |
26,769 |
� | |
� |
� |
� |
� |
� |
� | |
Net cash provided by operating activities |
� |
$ |
260,232 |
� |
181,394 |
� |
� |
� |
� |
� |
� |
� | |
Cash flows from investing activities: |
� |
� |
� |
� |
� | |
Purchases of available for sale investment securities |
� |
(131,844 |
) |
(137,828 |
) | |
Proceeds from sales and maturities of available for sale investment securities |
� |
105,826 |
� |
159,343 |
� | |
Additions to property and equipment |
� |
(25,211 |
) |
(10,944 |
) | |
Fund adoption transaction |
� |
(1,447 |
) |
� |
� | |
Disposition of companies |
� |
� |
� |
22,000 |
� | |
� |
� |
� |
� |
� |
� | |
Net cash provided by (used in) investing activities |
� |
$ |
(52,676 |
) |
32,571 |
� |
� |
� |
� |
� |
� |
� | |
Cash flows from financing activities: |
� |
� |
� |
� |
� | |
Dividends paid |
� |
(86,754 |
) |
(72,101 |
) | |
Repurchase of common stock |
� |
(96,145 |
) |
(52,546 |
) | |
Exercise of stock options |
� |
� |
� |
135 |
� | |
Excess tax benefits from share-based payment arrangements |
� |
16,465 |
� |
6,860 |
� | |
� |
� |
� |
� |
� |
� | |
Net cash used in financing activities |
� |
$ |
(166,434 |
) |
(117,652 |
) |
Net increase in cash and cash equivalents |
� |
41,122 |
� |
96,313 |
� | |
Cash and cash equivalents at beginning of period |
� |
487,845 |
� |
330,330 |
� | |
Cash and cash equivalents at end of period |
� |
$ |
528,967 |
� |
426,643 |
� |
�
See accompanying notes to the unaudited consolidated financial statements.
�
�
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. and subsidiaries (hereinafter referred to as the �Company,� �we,� �our� and �us�) derive revenues from investment management services, investment product underwriting and distribution, and shareholder services administration provided to the Waddell�& Reed Advisors Group of Mutual Funds (the �Advisors Funds�),�Ivy Funds (the �Ivy Funds�),�Ivy Funds Variable Insurance Portfolios (the �Ivy Funds VIP�) and InvestEd Portfolios (�InvestEd�) (collectively, the Advisors Funds,�Ivy Funds,�Ivy Funds VIP and InvestEd are referred to as the �Funds�), and institutional and separately managed accounts.� The Funds and the institutional and separately managed accounts operate under various rules�and regulations set forth by the United States Securities and Exchange Commission (the �SEC�).� Services to the Funds are provided under investment management agreements, underwriting agreements and shareholder servicing and accounting service agreements that set forth the fees to be charged for these services.� The majority of these agreements are subject to annual review and approval by each Fund�s board of trustees.� Our revenues are largely dependent on the total value and composition of assets under management.� Accordingly, fluctuations in financial markets and composition of assets under management can significantly impact our revenues and results of operations.
�
Basis of Presentation
�
We have prepared the accompanying unaudited consolidated financial statements included herein 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, 2013 (the �2013 Form�10-K�).
�
The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2013 Form�10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in affiliated mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation and accounting for income taxes.
�
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, 2014, the results of operations for the three and nine months ended September�30, 2014 and 2013, and cash flows for the nine months ended September�30, 2014 and 2013 in conformity with accounting principles generally accepted in the United States.
�
2.������������� Cash and Cash Equivalents
�
Cash and cash equivalents include cash on hand and short-term investments.� We consider all highly liquid investments with maturities upon acquisition of 90�days or less to be cash equivalents.� Cash and cash equivalents � restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations.
�
�
3.������������� Accounting Pronouncements Not Yet Adopted
�
In May�2014, the Financial Accounting Standards Board (�FASB�) issued Accounting Standards Update (�ASU�) 2014-09, �Revenue from Contracts with Customers�.� ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.� ASU 2014-09 will supersede much of the existing revenue recognition guidance in accounting principles generally accepted in the United States.� ASU 2014-09 is effective for annual reporting periods beginning after December�15, 2016, including interim periods within that reporting period, and early application is not permitted.� ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method.� The Company is evaluating which transition method to apply and the estimated impact the adoption of ASU 2014-09 will have on our consolidated financial statements.
�
4.������������� Investment Securities
�
Investment securities at September�30, 2014 and December�31, 2013 were as follows:
�
� |
� |
Amortized |
� |
Unrealized |
� |
Unrealized |
� |
� |
� | ||
September�30,�2014 |
� |
cost |
� |
gains |
� |
losses |
� |
Fair�value |
� | ||
� |
� |
(in�thousands) |
� | ||||||||
Available for sale securities: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Affiliated mutual funds |
� |
$ |
158,779 |
� |
3,547 |
� |
(2,043 |
) |
160,283 |
� | |
� |
� |
$ |
158,779 |
� |
3,547 |
� |
(2,043 |
) |
160,283 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Trading securities: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Mortgage-backed securities |
� |
� |
� |
� |
� |
� |
� |
33 |
� | ||
Common stock |
� |
� |
� |
� |
� |
� |
� |
64 |
� | ||
Affiliated mutual funds |
� |
� |
� |
� |
� |
� |
� |
83,541 |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
83,638 |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Total investment securities |
� |
� |
� |
� |
� |
� |
� |
$ |
243,921 |
� | |
�
� |
� |
Amortized |
� |
Unrealized |
� |
Unrealized |
� |
� |
� | ||
December�31,�2013 |
� |
cost |
� |
gains |
� |
losses |
� |
Fair�value |
� | ||
� |
� |
(in�thousands) |
� | ||||||||
Available for sale securities: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Mortgage-backed securities |
� |
$ |
8 |
� |
1 |
� |
� |
� |
9 |
� | |
Corporate bonds |
� |
14,568 |
� |
61 |
� |
� |
� |
14,629 |
� | ||
Affiliated mutual funds |
� |
87,710 |
� |
5,899 |
� |
(957 |
) |
92,652 |
� | ||
� |
� |
$ |
102,286 |
� |
5,961 |
� |
(957 |
) |
107,290 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Trading securities: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Mortgage-backed securities |
� |
� |
� |
� |
� |
� |
� |
37 |
� | ||
Municipal bonds |
� |
� |
� |
� |
� |
� |
� |
501 |
� | ||
Corporate bonds |
� |
� |
� |
� |
� |
� |
� |
9,412 |
� | ||
Common stock |
� |
� |
� |
� |
� |
� |
� |
60 |
� | ||
Affiliated mutual funds |
� |
� |
� |
� |
� |
� |
� |
84,048 |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
94,058 |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Total investment securities |
� |
� |
� |
� |
� |
� |
� |
$ |
201,348 |
� | |
�
Purchases of trading securities during the nine months ended September�30, 2014 were $129.5 million. Sales and maturities of trading securities were $115.2 million for the same period.
�
�
A summary of available for sale affiliated mutual funds with fair values below carrying values at September�30, 2014 and December�31, 2013 was as follows:
�
� |
� |
Less�than�12�months |
� |
12�months�or�longer |
� |
Total |
� | |||||||
� |
� |
� |
� |
Unrealized |
� |
Fair |
� |
Unrealized |
� |
Fair |
� |
Unrealized |
� | |
September�30,�2014 |
� |
Fair�value |
� |
losses |
� |
value |
� |
losses |
� |
value |
� |
losses |
� | |
� |
� |
(in�thousands) |
� | |||||||||||
Affiliated mutual funds |
� |
$ |
97,124 |
� |
(2,016 |
) |
1,189 |
� |
(27 |
) |
98,313 |
� |
(2,043 |
) |
Total temporarily impaired securities |
� |
$ |
97,124 |
� |
(2,016 |
) |
1,189 |
� |
(27 |
) |
98,313 |
� |
(2,043 |
) |
�
� |
� |
Less�than�12�months |
� |
12�months�or�longer |
� |
Total |
� | |||||||
� |
� |
� |
� |
Unrealized |
� |
Fair |
� |
Unrealized |
� |
Fair |
� |
Unrealized |
� | |
December�31,�2013 |
� |
Fair�value |
� |
losses |
� |
value |
� |
losses |
� |
value |
� |
losses |
� | |
� |
� |
(in�thousands) |
� | |||||||||||
Affiliated mutual funds |
� |
$ |
29,598 |
� |
(939 |
) |
213 |
� |
(18 |
) |
29,811 |
� |
(957 |
) |
Total temporarily impaired securities |
� |
$ |
29,598 |
� |
(939 |
) |
213 |
� |
(18 |
) |
29,811 |
� |
(957 |
) |
�
Based upon our assessment of these affiliated mutual funds, the time frame the funds have been in a loss position, and our intent to hold affiliated mutual funds until they have recovered, we determined that a write-down was not necessary at September�30, 2014.
�
Mortgage-backed securities accounted for as trading and held as of September�30, 2014 mature in 2022.
�
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 fair value of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers and broker/dealers, current trades, bid-wants lists, offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer.
�
The value of securities classified as Level 3 is primarily determined through the use of a single quote (or multiple quotes) from dealers in the securities using proprietary valuation models.� These quotes involve significant unobservable inputs, and thus, the related securities are classified as Level 3 securities.
�
�
The following tables summarize our investment securities as of September�30, 2014 and December�31, 2013 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.
�
September�30,�2014 |
� |
Level�1 |
� |
Level�2 |
� |
Level�3 |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||||
Mortgage-backed securities |
� |
$ |
� |
� |
33 |
� |
� |
� |
33 |
� |
Common stock |
� |
64 |
� |
� |
� |
� |
� |
64 |
� | |
Affiliated mutual funds |
� |
243,824 |
� |
� |
� |
� |
� |
243,824 |
� | |
Total |
� |
$ |
243,888 |
� |
33 |
� |
� |
� |
243,921 |
� |
�
December�31,�2013 |
� |
Level�1 |
� |
Level�2 |
� |
Level�3 |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||||
Mortgage-backed securities |
� |
$ |
� |
� |
46 |
� |
� |
� |
46 |
� |
Municipal bonds |
� |
� |
� |
501 |
� |
� |
� |
501 |
� | |
Corporate bonds |
� |
� |
� |
24,041 |
� |
� |
� |
24,041 |
� | |
Common stock |
� |
60 |
� |
� |
� |
� |
� |
60 |
� | |
Affiliated mutual funds |
� |
176,700 |
� |
� |
� |
� |
� |
176,700 |
� | |
Total |
� |
$ |
176,760 |
� |
24,588 |
� |
� |
� |
201,348 |
� |
�
5.������������� Goodwill and Identifiable Intangible Assets
�
Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business.� Our goodwill is not deductible for tax purposes.� Goodwill and identifiable intangible assets (all considered indefinite lived) were as follows:
�
� |
� |
September�30, |
� |
December�31, |
� | |
� |
� |
2014 |
� |
2013 |
� | |
� |
� |
(in�thousands) |
� | |||
� |
� |
� |
� |
� |
� | |
Goodwill |
� |
$ |
106,970 |
� |
106,970 |
� |
� |
� |
� |
� |
� |
� | |
Mutual fund management advisory contracts |
� |
42,753 |
� |
38,699 |
� | |
Mutual fund management subadvisory contracts |
� |
8,400 |
� |
16,300 |
� | |
Total identifiable intangible assets |
� |
51,153 |
� |
54,999 |
� | |
� |
� |
� |
� |
� |
� | |
Total |
� |
$ |
158,123 |
� |
161,969 |
� |
�
The mutual fund management subadvisory contracts in the table above represents our indefinite life intangible asset balance related to our subadvisory agreement to manage certain mutual fund products for Mackenzie Financial Corporation (�MFC�).� This intangible asset was recorded in connection with our purchase of Mackenzie Investment Management,�Inc. in 2002.� As part of purchase accounting, a deferred tax liability was established related to this intangible asset, and prior to a third quarter 2014 adjustment, the associated deferred tax liability was $6.0 million.
�
We performed a review of the intangible asset associated with the MFC subadvisory agreement during the third quarter of 2014 due to a recent decline in the related assets under management.� The decline can be attributed to a realignment of MFC�s fund offerings and additional asset reductions.� We recorded an impairment charge of $7.9 million in the third quarter of 2014 to this intangible asset as a result of the reduction in assets and associated cash flows, and reduced the associated deferred tax liability by $2.9 million.
�
�
During the third quarter of 2014, we recorded a $4.1 million intangible asset related to the fund adoption transaction agreement with Emerging Managers Group, L.P., which became effective in August�2014, through which Ivy Investment Management Company assumed responsibility as investment adviser and Ivy Funds Distributor,�Inc. serves as distributor of the Selector Management Fund SICAV.
�
6.������������� Indebtedness
�
Debt is reported at its carrying amount in the consolidated balance sheets.� The fair value (calculated based on Level 2 inputs) of the Company�s outstanding indebtedness is approximately $208.8 million at September�30, 2014 compared to the carrying value of $190.0 million.
�
7.������������� Income Tax Uncertainties
�
As of January�1, 2014 and September�30, 2014, the Company had unrecognized tax benefits, including penalties and interest, of $12.0 million ($8.4 million net of federal benefit) and $13.7 million ($9.7 million net of federal benefit), respectively, that if recognized, would impact the Company�s effective tax rate.� The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets.� Unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.
�
The Company�s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.� As of January�1, 2014, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.0 million ($2.5 million net of federal benefit).� The total amount of interest and penalties, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the nine month period ended September�30, 2014 was $0.5 million.� The total amount of accrued interest and penalties related to uncertain tax positions at September�30, 2014 of $3.6 million ($3.0 million net of federal benefit) is included in the total unrecognized tax benefits described above.
�
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain.� In addition, respective tax authorities periodically audit our income tax returns.� These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.� The 2011, 2012 and 2013 federal income tax returns are open tax years that remain subject to potential future audit.� State income tax returns for all years after 2010 and, in certain states, income tax returns prior to 2011, are subject to potential future audit by tax authorities in the Company�s major state tax jurisdictions.
�
The Company is currently being audited in various state jurisdictions.� It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period.� It is estimated that the Company�s liability for unrecognized tax benefits, including penalties and interest, could decrease by up to $0.3 million (up to $0.2 million net of federal benefit) upon settlement of these audits.� Such settlements are not anticipated to have a significant impact on our results of operations.
�
�
8.������������� Pension Plan and Postretirement Benefits Other Than Pension
�
We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the �Pension Plan�).� Benefits payable under the Pension Plan are based on employees� years of service and compensation during the final 10 years of employment.� We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, as well as Waddell�& Reed advisors who are independent contractors, through the age of 65.� The medical plan is contributory with participant contributions adjusted annually.� The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.
�
The components of net periodic pension and other postretirement costs related to these plans were as follows:
�
� |
� |
Pension�Benefits |
� |
Other |
� |
Pension�Benefits |
� |
Other |
� | |||||||||
� |
� |
Three�months |
� |
Three�months |
� |
Nine�months |
� |
Nine�months |
� | |||||||||
� |
� |
2014 |
� |
2013 |
� |
2014 |
� |
2013 |
� |
2014 |
� |
2013 |
� |
2014 |
� |
2013 |
� | |
� |
� |
(in�thousands) |
� |
(in�thousands) |
� | |||||||||||||
Components of net periodic benefit cost: |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Service cost |
� |
$ |
2,521 |
� |
2,753 |
� |
180 |
� |
197 |
� |
7,563 |
� |
8,259 |
� |
540 |
� |
591 |
� |
Interest cost |
� |
2,099 |
� |
1,928 |
� |
99 |
� |
90 |
� |
6,297 |
� |
5,783 |
� |
297 |
� |
270 |
� | |
Expected return on plan assets |
� |
(3,504 |
) |
(2,796 |
) |
� |
� |
� |
� |
(10,512 |
) |
(8,389 |
) |
� |
� |
� |
� | |
Actuarial (gain) loss amortization |
� |
373 |
� |
1,142 |
� |
(4 |
) |
� |
� |
1,121 |
� |
3,426 |
� |
(12 |
) |
� |
� | |
Prior service cost amortization |
� |
117 |
� |
138 |
� |
14 |
� |
14 |
� |
351 |
� |
416 |
� |
42 |
� |
42 |
� | |
Transition obligation amortization |
� |
1 |
� |
1 |
� |
� |
� |
� |
� |
3 |
� |
3 |
� |
� |
� |
� |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Total(1) |
� |
$ |
1,607 |
� |
3,166 |
� |
289 |
� |
301 |
� |
4,823 |
� |
9,498 |
� |
867 |
� |
903 |
� |
�
(1)�Approximately 60% of net periodic pension and other postretirement benefit costs are included in compensation and related costs on the consolidated statements of income, while the remainder is included in underwriting and distribution expense.
�
During the first nine months of 2014, we contributed $20.0 million to the Pension Plan.
�
�
9.������������� Stockholders� Equity
�
Earnings per Share
�
The components of basic and diluted earnings per share were as follows:
�
� |
� |
Three�months�ended |
� |
Nine�months�ended |
� | |||||
� |
� |
September�30, |
� |
September�30, |
� | |||||
� |
� |
2014 |
� |
2013 |
� |
2014 |
� |
2013 |
� | |
� |
� |
(in�thousands,�except�per�share�amounts) |
� | |||||||
Net income |
� |
$ |
74,586 |
� |
68,419 |
� |
232,438 |
� |
174,239 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Weighted average shares outstanding - basic |
� |
84,242 |
� |
85,603 |
� |
84,775 |
� |
85,688 |
� | |
Dilutive potential shares from stock options |
� |
� |
� |
� |
� |
� |
� |
1 |
� | |
Weighted average shares outstanding - diluted |
� |
84,242 |
� |
85,603 |
� |
84,775 |
� |
85,689 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Earnings per share basic and diluted |
� |
$ |
0.89 |
� |
0.80 |
� |
2.74 |
� |
2.03 |
� |
�
Dividends
�
On July�16, 2014, the Board of Directors (the �Board�) approved a dividend on our Class�A common stock in the amount of $0.34 per share to stockholders of record as of October�13, 2014 to be paid on November�3, 2014.� The total dividend to be paid is approximately $28.6 million and is included in other current liabilities in the consolidated balance sheet at September�30, 2014.
�
Common Stock Repurchases
�
The Board has authorized the repurchase of our Class�A common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock-based compensation programs.
�
There were 614,062 shares and 316,961 shares repurchased in the open market or privately during the three months ended September�30, 2014 and 2013, respectively, which included 1,962 shares and 1,961 shares, respectively, repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during these same reporting periods.� There were 1,522,270 shares and 1,187,839 shares repurchased in the open market or privately during the nine months ended September�30, 2014 and 2013, respectively, which included 428,081 shares and 468,739 shares, respectively, repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during each of these reporting periods.
�
�
Accumulated Other Comprehensive Income (Loss)
�
The following tables summarize other comprehensive income (loss) activity for the three and nine months ended September�30, 2014 and September�30, 2013.
�
Three�months�ended�September�30,�2014 |
� |
Unrealized�gains |
� |
Change�in |
� |
Pension�and |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||||
Balance at June�30, 2014 |
� |
$ |
4,078 |
� |
1,353 |
� |
(19,187 |
) |
(13,756 |
) |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Other comprehensive income before reclassification |
� |
(2,317 |
) |
(1,357 |
) |
� |
� |
(3,674 |
) | |
Amount reclassified from accumulated other comprehensive income |
� |
(813 |
) |
(475 |
) |
315 |
� |
(973 |
) | |
Net current period other comprehensive income (loss) |
� |
(3,130 |
) |
(1,832 |
) |
315 |
� |
(4,647 |
) | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Balance at September�30, 2014 |
� |
$ |
948 |
� |
(479 |
) |
(18,872 |
) |
(18,403 |
) |
�
Three�months�ended�September�30,�2013 |
� |
Unrealized�gains |
� |
Change�in |
� |
Pension�and |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||||
Balance at June�30, 2013 |
� |
$ |
1,431 |
� |
(201 |
) |
(47,214 |
) |
(45,984 |
) |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Other comprehensive income before reclassification |
� |
4,330 |
� |
2,530 |
� |
� |
� |
6,860 |
� | |
Amount reclassified from accumulated other comprehensive income |
� |
(1,408 |
) |
(819 |
) |
816 |
� |
(1,411 |
) | |
Net current period other comprehensive income |
� |
2,922 |
� |
1,711 |
� |
816 |
� |
5,449 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Balance at September�30, 2013 |
� |
$ |
4,353 |
� |
1,510 |
� |
(46,398 |
) |
(40,535 |
) |
�
Nine�months�ended�September�30,�2014 |
� |
Unrealized�gains |
� |
Change�in |
� |
Pension�and |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||||
Balance at December�31, 2013 |
� |
$ |
3,150 |
� |
810 |
� |
(19,819 |
) |
(15,859 |
) |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Other comprehensive income before reclassification |
� |
239 |
� |
138 |
� |
� |
� |
377 |
� | |
Amount reclassified from accumulated other comprehensive income |
� |
(2,441 |
) |
(1,427 |
) |
947 |
� |
(2,921 |
) | |
Net current period other comprehensive income (loss) |
� |
(2,202 |
) |
(1,289 |
) |
947 |
� |
(2,544 |
) | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Balance at September�30, 2014 |
� |
$ |
948 |
� |
(479 |
) |
(18,872 |
) |
(18,403 |
) |
�
�
Nine�months�ended�September�30,�2013 |
� |
Unrealized�gains |
� |
Change�in |
� |
Pension�and |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||||
Balance at December�31, 2012 |
� |
$ |
1,823 |
� |
32 |
� |
(48,652 |
) |
(46,797 |
) |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Other comprehensive income before reclassification |
� |
7,519 |
� |
4,396 |
� |
� |
� |
11,915 |
� | |
Amount reclassified from accumulated other comprehensive income |
� |
(4,989 |
) |
(2,918 |
) |
2,254 |
� |
(5,653 |
) | |
Net current period other comprehensive income |
� |
2,530 |
� |
1,478 |
� |
2,254 |
� |
6,262 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Balance at September�30, 2013 |
� |
$ |
4,353 |
� |
1,510 |
� |
(46,398 |
) |
(40,535 |
) |
�
Reclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.
�
� |
� |
For�the�three�months�ended�September�30,�2014 |
� |
� |
� | |||||
� |
� |
Pre-tax |
� |
Tax |
� |
Net�of�tax |
� |
Statement�of�income�line�item |
� | |
� |
� |
(in�thousands) |
� |
� |
� | |||||
Reclassifications included in net income: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Realized gain on sale of available for sale investment securities |
� |
$ |
1,290 |
� |
(477 |
) |
813 |
� |
Investment and other income |
� |
Valuation allowance |
� |
� |
� |
475 |
� |
475 |
� |
Provision for income taxes |
� | |
Amortization of pension and postretirement benefits |
� |
(501 |
) |
186 |
� |
(315 |
) |
Underwriting and distribution expense and Compensation and related costs |
� | |
Total |
� |
$ |
789 |
� |
184 |
� |
973 |
� |
� |
� |
�
� |
� |
For�the�three�months�ended�September�30,�2013 |
� |
� |
� | |||||
� |
� |
Pre-tax |
� |
Tax |
� |
Net�of�tax |
� |
Statement�of�income�line�item |
� | |
� |
� |
(in�thousands) |
� |
� |
� | |||||
Reclassifications included in net income: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Realized gain on sale of available for sale investment securities |
� |
$ |
2,225 |
� |
(817 |
) |
1,408 |
� |
Investment and other income |
� |
Valuation allowance |
� |
� |
� |
819 |
� |
819 |
� |
Provision for income taxes |
� | |
Amortization of pension and postretirement benefits |
� |
(1,296 |
) |
480 |
� |
(816 |
) |
Underwriting and distribution expense and Compensation and related costs |
� | |
Total |
� |
$ |
929 |
� |
482 |
� |
1,411 |
� |
� |
� |
�
�
� |
� |
For�the�nine�months�ended�September�30,�2014 |
� |
� |
� | |||||
� |
� |
Pre-tax |
� |
Tax |
� |
Net�of�tax |
� |
Statement�of�income�line�item |
� | |
� |
� |
(in�thousands) |
� |
� |
� | |||||
Reclassifications included in net income: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Realized gain on sale of available for sale investment securities |
� |
$ |
3,875 |
� |
(1,434 |
) |
2,441 |
� |
Investment and other income |
� |
Valuation allowance |
� |
� |
� |
1,427 |
� |
1,427 |
� |
Provision for income taxes |
� | |
Amortization of pension and postretirement benefits |
� |
(1,505 |
) |
558 |
� |
(947 |
) |
Underwriting and distribution expense and Compensation and related costs |
� | |
Total |
� |
$ |
2,370 |
� |
551 |
� |
2,921 |
� |
� |
� |
�
� |
� |
For�the�nine�months�ended�September�30,�2013 |
� |
� |
� | |||||
� |
� |
Pre-tax |
� |
Tax |
� |
Net�of�tax |
� |
Statement�of�income�line�item |
� | |
� |
� |
(in�thousands) |
� |
� |
� | |||||
Reclassifications included in net income: |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Realized gain on sale of available for sale investment securities |
� |
$ |
7,887 |
� |
(2,898 |
) |
4,989 |
� |
Investment and other income |
� |
Valuation allowance |
� |
� |
� |
2,918 |
� |
2,918 |
� |
Provision for income taxes |
� | |
Amortization of pension and postretirement benefits |
� |
(3,887 |
) |
1,633 |
� |
(2,254 |
) |
Underwriting and distribution expense and Compensation and related costs |
� | |
Total |
� |
$ |
4,000 |
� |
1,653 |
� |
5,653 |
� |
� |
� |
�
10.������ Contingencies
�
The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate.� A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations in a particular quarter or year.
�
The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated.� These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information.� For contingencies where an unfavorable outcome is reasonably possible and that are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss.� For purposes of our litigation contingency disclosures, �significant� includes material matters as well as other items that management believes should be disclosed.� Management�s judgment is required related to contingent liabilities because the outcomes are difficult to predict.� In our opinion, the likelihood that any pending legal proceeding, regulatory investigation, claim, or other contingency will have a material adverse effect on our business, financial condition or results of operations is remote.
�
�
Item 2.� Management�s Discussion and Analysis of Financial Condition and Results of Operations
�
Management�s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements included elsewhere in this report.� Unless otherwise indicated or the context otherwise requires all references to the �Company,� �we,� �our� or �is� refer to Waddell�& Reed Financial,�Inc. and its consolidated subsidiaries.
�
This Quarterly Report on Form�10-Q contains �forward-looking statements� within the meaning of Section�27A of the Securities Act of 1933, as amended, and Section�21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general.� These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions.� These statements are generally identified by the use of such words as �may,� �could,� �should,� �would,� �believe,� �anticipate,� �forecast,� �estimate,� �expect,� �intend,� �plan,� �project,� �outlook,� �will,� �potential� and similar statements of a future or forward-looking nature.� Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance.� Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below.� If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected.� Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the �Risk Factors� section of our Annual Report on Form�10-K for the year ended December�31, 2013, which include, without limitation:
�
������������������������������������������ The loss of existing distribution channels or inability to access new distribution channels;
�
������������������������������������������ A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;
�
������������������������������������������ The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;
�
������������������������������������������ The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;
�
������������������������������������������ Our inability to provide sufficient capital to support new investment products;
�
������������������������������������������ The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
�
������������������������������������������ Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner;
�
������������������������������������������ Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;
�
������������������������������������������ A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds; and
�
������������������������������������������ Our inability to attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment management advisory business.
�
�
The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the �SEC�), including the information in Item 1 �Business� and Item 1A �Risk Factors� of Part�I and Item 7 �Management�s Discussion and Analysis of Financial Condition and Results of Operations� of Part�II to our Annual Report on Form�10-K for the year ended December�31, 2013 and as updated in our quarterly reports on Form�10-Q for the year ending December�31, 2014.� All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
�
Overview
�
Founded in 1937, we are one of the oldest mutual fund complexes in the United States, with expertise in a broad range of investment styles and across a variety of market environments.� Our earnings and cash flows are heavily dependent on financial market conditions.� Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.
�
We derive our revenues by providing investment management services, investment product underwriting and distribution, and shareholder services administration to the Waddell�& Reed Advisors Group of Mutual Funds (the �Advisors Funds�),�Ivy Funds (the �Ivy Funds�),�Ivy Funds Variable Insurance Portfolios (the �Ivy Funds VIP�) and InvestEd Portfolios (�InvestEd�) (collectively, the Advisors Funds,�Ivy Funds,�Ivy Funds VIP and InvestEd are referred to as the �Funds�), and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of Rule�12b-1 asset-based service and distribution fees, fees earned on fee-based asset allocation products and related advisory services, distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products we sell have various commission structures and the revenues received from those sales vary based on the type of product and dollar amount sold. �Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts.� Our major expenses are for commissions, employee compensation, field support, dealer services and information technology.
�
One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our retail products are distributed through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors and various retirement platforms, and through our Advisors channel sales force of independent financial advisors.� Through the Institutional channel, we serve as sub-advisor for domestic and foreign distributors of investment products and manage investments for pension funds, Taft-Hartley plans and endowments.
�
�
Company Highlights
�
������������������ In August�2014, we completed a fund adoption transaction agreement with Emerging Managers Group, L.P. through which Ivy Investment Management Company assumed responsibility as investment adviser and Ivy Funds Distributor,�Inc. serves as distributor of the Selector Management Fund SICAV, an umbrella UCITS fund range domiciled in Luxembourg, (collectively,�Ivy Investment Management Company and Ivy Funds Distributor,�Inc. are referred to as �Ivy�).� This agreement allows Ivy to serve the non U.S. resident customer market through national broker-dealer firms in the United States and establish greater international distribution of Ivy�s investment management capabilities.
�
������������������ In October�2014, we launched the Ivy Mid Cap Income Opportunities Fund, an equity portfolio focusing primarily on income-producing mid-capitalization companies.
�
������������������ Operating revenues of $409.6 million in the third quarter of 2014 increased $62.5 million, or 18%, compared to the third quarter of 2013.
�
������������������ We recorded an intangible asset impairment charge of $7.9 million ($5.0 million net of taxes) related to our subadvisory agreement to manage certain mutual funds products for Mackenzie Financial Corporation.
�
������������������ Operating income of $125.1 million in the third quarter of 2014 increased $21.9 million, or 21%, compared to the third quarter of 2013, and net income of $74.6 million increased $6.2 million, or 9%, over this same period.
�
������������������ Our operating margin was 30.6% for the third quarter of 2014, an improvement from 29.8% for the same period a year ago.
�
������������������ Our assets under management increased 13% from $113.7 billion at September�30, 2013 to $128.9 billion at September�30, 2014.
�
������������������ Company-wide sales exceeded $100.0 million for nine investment strategies during the third quarter of 2014; of these investment strategies, sales for one strategy exceeded $500.0 million and sales for two strategies exceeded $1.0 billion.
�
������������������ The long-term redemption rate in the Wholesale channel increased to 40.3% during the third quarter of 2014, compared to 25.7% during the same period in 2013, primarily driven by redemptions in the Ivy Asset Strategy Fund and the Ivy High Income Fund.
�
������������������ Our balance sheet remains solid, and we ended the third quarter of 2014 with cash and investments of $772.9 million.
�
�
Assets Under Management
�
Assets under management at September�30, 2014 decreased 5% from $135.6 billion at June�30, 2014, and increased 13% compared to $113.7 billion at September�30, 2013.
�
Change in Assets Under Management(1)
�
� |
� |
Third�Quarter�2014 |
� | |||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | |
� |
� |
(in�millions) |
� | |||||||
Beginning Assets |
� |
$ |
71,671 |
� |
45,797 |
� |
18,165 |
� |
135,633 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Sales(2) |
� |
4,269 |
� |
1,322 |
� |
328 |
� |
5,919 |
� | |
Redemptions |
� |
(7,008 |
) |
(1,146 |
) |
(727 |
) |
(8,881 |
) | |
Net Exchanges |
� |
112 |
� |
(112 |
) |
� |
� |
� |
� | |
Net Flows |
� |
(2,627 |
) |
64 |
� |
(399 |
) |
(2,962 |
) | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Market Depreciation |
� |
(2,669 |
) |
(953 |
) |
(163 |
) |
(3,785 |
) | |
Ending Assets |
� |
$ |
66,375 |
� |
44,908 |
� |
17,603 |
� |
128,886 |
� |
�
� |
� |
Third�Quarter�2013 |
� | |||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | |
� |
� |
(in�millions) |
� | |||||||
Beginning Assets |
� |
$ |
53,860 |
� |
38,172 |
� |
12,312 |
� |
104,344 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Sales(2) |
� |
5,191 |
� |
1,242 |
� |
386 |
� |
6,819 |
� | |
Redemptions |
� |
(3,723 |
) |
(1,071 |
) |
(550 |
) |
(5,344 |
) | |
Net Exchanges |
� |
83 |
� |
(83 |
) |
� |
� |
� |
� | |
Net Flows |
� |
1,551 |
� |
88 |
� |
(164 |
) |
1,475 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Market Appreciation |
� |
4,250 |
� |
2,507 |
� |
1,168 |
� |
7,925 |
� | |
Ending Assets |
� |
$ |
59,661 |
� |
40,767 |
� |
13,316 |
� |
113,744 |
� |
�
�
Assets under management increased to $128.9 billion at September�30, 2014 compared to $126.5 billion on December�31, 2013 due to inflows of $2.9 billion offset by market depreciation of $0.6 billion.
�
� |
� |
Year�to�Date�2014 |
� | |||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | |
� |
� |
(in�millions) |
� | |||||||
Beginning Assets |
� |
$ |
67,055 |
� |
43,667 |
� |
15,821 |
� |
126,543 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Sales(2) |
� |
16,150 |
� |
4,214 |
� |
3,075 |
� |
23,439 |
� | |
Redemptions |
� |
(14,933 |
) |
(3,350 |
) |
(2,257 |
) |
(20,540 |
) | |
Net Exchanges |
� |
(173 |
) |
(312 |
) |
485 |
� |
� |
� | |
Net Flows |
� |
1,044 |
� |
552 |
� |
1,303 |
� |
2,899 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Market Appreciation (Depreciation) |
� |
(1,724 |
) |
689 |
� |
479 |
� |
(556 |
) | |
Ending Assets |
� |
$ |
66,375 |
� |
44,908 |
� |
17,603 |
� |
128,886 |
� |
�
� |
� |
Year�to�Date�2013 |
� | |||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | |
� |
� |
(in�millions) |
� | |||||||
Beginning Assets |
� |
$ |
48,930 |
� |
35,660 |
� |
11,775 |
� |
96,365 |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Sales(2) |
� |
15,262 |
� |
3,949 |
� |
1,195 |
� |
20,406 |
� | |
Redemptions |
� |
(10,863 |
) |
(3,201 |
) |
(1,830 |
) |
(15,894 |
) | |
Net Exchanges |
� |
211 |
� |
(211 |
) |
� |
� |
� |
� | |
Net Flows |
� |
4,610 |
� |
537 |
� |
(635 |
) |
4,512 |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Market Appreciation |
� |
6,121 |
� |
4,570 |
� |
2,176 |
� |
12,867 |
� | |
Ending Assets |
� |
$ |
59,661 |
� |
40,767 |
� |
13,316 |
� |
113,744 |
� |
�
(1)�������� Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value for which we receive no commissions.
(2)�������� Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and investment income.
�
�
Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.
�
Average Assets Under Management
�
� |
� |
Third�Quarter�2014 |
� | ||||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | ||
� |
� |
(in�millions) |
� | ||||||||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Asset Class: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Equity |
� |
$ |
55,866 |
� |
33,630 |
� |
17,046 |
� |
$ |
106,542 |
� |
Fixed Income |
� |
13,375 |
� |
10,105 |
� |
893 |
� |
24,373 |
� | ||
Money Market |
� |
158 |
� |
2,030 |
� |
� |
� |
2,188 |
� | ||
Total |
� |
$ |
69,399 |
� |
45,765 |
� |
17,939 |
� |
$ |
133,103 |
� |
�
� |
� |
Third�Quarter�2013 |
� | ||||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | ||
� |
� |
(in�millions) |
� | ||||||||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Asset Class: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Equity |
� |
$ |
45,696 |
� |
29,027 |
� |
12,277 |
� |
$ |
87,000 |
� |
Fixed Income |
� |
11,303 |
� |
9,151 |
� |
565 |
� |
21,019 |
� | ||
Money Market |
� |
197 |
� |
1,672 |
� |
� |
� |
1,869 |
� | ||
Total |
� |
$ |
57,196 |
� |
39,850 |
� |
12,842 |
� |
$ |
109,888 |
� |
�
� |
� |
Year�to�Date�2014 |
� | ||||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | ||
� |
� |
(in�millions) |
� | ||||||||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Asset Class: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Equity |
� |
$ |
55,535 |
� |
32,879 |
� |
16,336 |
� |
$ |
104,750 |
� |
Fixed Income |
� |
13,670 |
� |
9,877 |
� |
772 |
� |
24,319 |
� | ||
Money Market |
� |
170 |
� |
2,008 |
� |
� |
� |
2,178 |
� | ||
Total |
� |
$ |
69,375 |
� |
44,764 |
� |
17,108 |
� |
$ |
131,247 |
� |
�
� |
� |
Year�to�Date�2013 |
� | ||||||||
� |
� |
Wholesale |
� |
Advisors |
� |
Institutional |
� |
Total |
� | ||
� |
� |
(in�millions) |
� | ||||||||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Asset Class: |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Equity |
� |
$ |
43,162 |
� |
27,573 |
� |
11,922 |
� |
$ |
82,657 |
� |
Fixed Income |
� |
11,008 |
� |
9,481 |
� |
699 |
� |
21,188 |
� | ||
Money Market |
� |
180 |
� |
1,483 |
� |
� |
� |
1,663 |
� | ||
Total |
� |
$ |
54,350 |
� |
38,537 |
� |
12,621 |
� |
$ |
105,508 |
� |
�
�
Results of Operations � Three and Nine Months Ended September�30, 2014 as Compared with Three and Nine Months Ended September�30, 2013
�
Net Income
�
� |
� |
Three�months�ended |
� |
� |
� | |||
� |
� |
September�30, |
� |
� |
� | |||
� |
� |
2014 |
� |
2013 |
� |
Variance |
� | |
� |
� |
� |
� |
� |
� |
� |
� | |
Net Income |
� |
$ |
74,586 |
� |
68,419 |
� |
9 |
% |
� |
� |
� |
� |
� |
� |
� |
� | |
Earnings per share, basic and diluted |
� |
$ |
0.89 |
� |
0.80 |
� |
11 |
% |
� |
� |
� |
� |
� |
� |
� |
� | |
Operating Margin |
� |
30.6 |
% |
29.8 |
% |
3 |
% |
�
� |
� |
Nine�months�ended |
� |
� |
� | |||
� |
� |
September�30, |
� |
� |
� | |||
� |
� |
2014 |
� |
2013 |
� |
Variance |
� | |
� |
� |
� |
� |
� |
� |
� |
� | |
Net Income |
� |
$ |
232,438 |
� |
174,239 |
� |
33 |
% |
� |
� |
� |
� |
� |
� |
� |
� | |
Earnings per share, basic and diluted |
� |
$ |
2.74 |
� |
2.03 |
� |
35 |
% |
� |
� |
� |
� |
� |
� |
� |
� | |
Operating Margin |
� |
30.4 |
% |
27.2 |
% |
12 |
% |
�
Total Revenues
�
Total revenues increased 18% to $409.6�million for the three months ended September�30, 2014 compared to the three months ended September�30, 2013 due to an increase in average assets under management of 21% partially offset by a sales decrease of 13%.� For the nine months ended September�30, 2014, total revenues increased $205.3 million, or 21%, compared to the same period in the prior year primarily due to an increase in average assets under management of 24% and an increase in sales of 15%.
�
� |
� |
Three�months�ended |
� |
� |
� | |||
� |
� |
September�30, |
� |
� |
� | |||
� |
� |
2014 |
� |
2013 |
� |
Variance |
� | |
� |
� |
(in�thousands,�except�percentage�data) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Investment management fees |
� |
$ |
197,783 |
� |
165,559 |
� |
19 |
% |
Underwriting and distribution fees |
� |
173,047 |
� |
146,863 |
� |
18 |
% | |
Shareholder service fees |
� |
38,728 |
� |
34,667 |
� |
12 |
% | |
Total revenues |
� |
$ |
409,558 |
� |
347,089 |
� |
18 |
% |
�
�
� |
� |
Nine�months�ended |
� |
� |
� | |||
� |
� |
September�30, |
� |
� |
� | |||
� |
� |
2014 |
� |
2013 |
� |
Variance |
� | |
� |
� |
(in�thousands,�except�percentage�data) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Investment management fees |
� |
$ |
579,444 |
� |
470,223 |
� |
23 |
% |
Underwriting and distribution fees |
� |
507,315 |
� |
423,879 |
� |
20 |
% | |
Shareholder service fees |
� |
113,849 |
� |
101,248 |
� |
12 |
% | |
Total revenues |
� |
$ |
1,200,608 |
� |
995,350 |
� |
21 |
% |
�
Investment Management Fee Revenues
�
Investment management fee revenues are earned by providing investment advisory services to the Funds and to institutional and separate accounts.� Investment management fee revenues for the third quarter of 2014 increased $32.2 million, or 19%, from last year�s third quarter.� For the nine month period ended September�30, 2014, investment management fee revenues increased $109.2 million, or 23%, compared to the same period in 2013.
�
Revenues from investment management services provided to our retail mutual funds, which are distributed through the Wholesale and Advisors channels, were $182.1 million for the quarter ended September�30, 2014.� Revenues increased $28.4 million, or 19%, compared to the third quarter of 2013, while the related retail average assets under management increased 19% to $115.2 billion. Management fee waivers of $3.4 million and $2.8 million were recorded as an offset to investment management fees for the three month period ended September�30, 2014 and September�30, 2013, respectively. Of the total management fee waivers recorded, $2.0 million and $1.7 million were related to money market accounts for the third quarter of 2014 and 2013, respectively.� For the nine months ended September�30, 2014, revenues from investment management services provided to our retail mutual funds were $535.1 million.� Revenues increased $100.1 million, or 23%, compared to the first nine months of 2013, while the related retail average assets under management increased 23% to $114.1 billion.� Management fee waivers of $8.9 million and $7.4 million were recorded as an offset to investment management fees for the nine months ending September�30, 2014 and September�30, 2013, respectively. Of the total management fee waivers recorded, $6.0 million and $4.6 million were related to money market accounts for the first nine months of 2014 and 2013, respectively.
�
Institutional account revenues were $15.7 million for the third quarter of 2014, representing an increase of $3.9 million, or 33%, from the third quarter of 2013, while average assets under management increased 40%.� For the nine month period ended September�30, 2014, institutional account revenues were $44.3 million, an increase of 26% compared to the same period in 2013, and average assets under management increased 36%.� For both periods, account revenues increased less than the related average assets under management due to a decline in the average management fee rate.� The decline in the average management fee rate was driven by a mix-shift of assets into investment styles and account types with lower management fee rates.
�
The long-term redemption rate (which excludes money market fund redemptions) in the Wholesale channel was 40.3% in the third quarter of 2014 and 28.9% year-to-date, compared to 25.7% in the third quarter of 2013 and 26.6% for the first nine months of 2013.� The increased rate in the third quarter of 2014 was driven primarily by redemptions in the Ivy Asset Strategy Fund and Ivy High Income Fund.� Prolonged redemptions in the Wholesale channel could negatively affect revenues in future periods.� In the Advisors channel, the long-term redemption rate was 8.2% for the quarter ended September�30, 2014 compared to 8.7% in the third quarter of 2013.�� For the nine months ended September�30, 2014, the Advisor channel�s long-term redemption rate decreased to 8.1% compared to 9.1% for the same period in 2013.� We expect the Advisors channel long-term redemption rate to remain lower than that of the industry average due to the personal and customized nature in which our financial advisors provide service to our clients by focusing on meeting their long-term financial objectives.� The long-term redemption rate for our Institutional channel was 16.1% and 17.0% for the third quarter of 2014 and 2013, respectively, and 17.6% for the nine month period ended September�30, 2014 compared to 19.4% for the same period in 2013.
�
�
Our overall redemption rate of 20.4% for the first nine months of 2014 compares positively to the current year-to-date industry average of approximately 23%, based on data from the Investment Company Institute.
�
Underwriting and Distribution Fee Revenues and Expenses
�
The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution method within the respective Wholesale or Advisors channel:
�
� |
� |
Third�Quarter�2014 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Revenue |
� |
$ |
59,807 |
� |
113,240 |
� |
173,047 |
� |
Expenses - Direct |
� |
(75,775 |
) |
(79,700 |
) |
(155,475 |
) | |
Expenses - Indirect |
� |
(13,317 |
) |
(28,454 |
) |
(41,771 |
) | |
Net Distribution (Costs)/Excess |
� |
$ |
(29,285 |
) |
5,086 |
� |
(24,199 |
) |
�
� |
� |
Third�Quarter�2013 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Revenue |
� |
$ |
52,472 |
� |
94,391 |
� |
146,863 |
� |
Expenses - Direct |
� |
(67,107 |
) |
(64,550 |
) |
(131,657 |
) | |
Expenses - Indirect |
� |
(10,409 |
) |
(26,980 |
) |
(37,389 |
) | |
Net Distribution (Costs)/Excess |
� |
$ |
(25,044 |
) |
2,861 |
� |
(22,183 |
) |
�
� |
� |
Year�to�Date�2014 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Revenue |
� |
$ |
179,608 |
� |
327,707 |
� |
507,315 |
� |
Expenses - Direct |
� |
(232,309 |
) |
(231,264 |
) |
(463,573 |
) | |
Expenses - Indirect |
� |
(37,643 |
) |
(86,589 |
) |
(124,232 |
) | |
Net Distribution (Costs)/Excess |
� |
$ |
(90,344 |
) |
9,854 |
� |
(80,490 |
) |
�
� |
� |
Year�to�Date�2013 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Revenue |
� |
$ |
150,493 |
� |
273,386 |
� |
423,879 |
� |
Expenses - Direct |
� |
(195,349 |
) |
(187,001 |
) |
(382,350 |
) | |
Expenses - Indirect |
� |
(32,638 |
) |
(80,473 |
) |
(113,111 |
) | |
Net Distribution (Costs)/Excess |
� |
$ |
(77,494 |
) |
5,912 |
� |
(71,582 |
) |
�
�
The following tables summarize the significant components of underwriting and distribution fee revenues segregated by distribution channel:
�
� |
� |
Third�Quarter�2014 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Underwriting and distribution fee revenues |
� |
� |
� |
� |
� |
� |
� | |
Rule�12b-1 service and distribution fees |
� |
$ |
57,267 |
� |
31,172 |
� |
88,439 |
� |
Fee-based asset allocation product revenues |
� |
� |
� |
52,459 |
� |
52,459 |
� | |
Sales commissions on front-end load mutual fund and variable annuity sales |
� |
1,232 |
� |
16,988 |
� |
18,220 |
� | |
Sales commissions on other products |
� |
� |
� |
6,634 |
� |
6,634 |
� | |
Other revenues |
� |
1,308 |
� |
5,987 |
� |
7,295 |
� | |
Total |
� |
$ |
59,807 |
� |
113,240 |
� |
173,047 |
� |
�
� |
� |
Third�Quarter�2013 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Underwriting and distribution fee revenues |
� |
� |
� |
� |
� |
� |
� | |
Rule�12b-1 service and distribution fees |
� |
$ |
50,026 |
� |
27,339 |
� |
77,365 |
� |
Fee-based asset allocation product revenues |
� |
� |
� |
39,638 |
� |
39,638 |
� | |
Sales commissions on front-end load mutual fund and variable annuity sales |
� |
1,374 |
� |
16,523 |
� |
17,897 |
� | |
Sales commissions on other products |
� |
� |
� |
5,202 |
� |
5,202 |
� | |
Other revenues |
� |
1,072 |
� |
5,689 |
� |
6,761 |
� | |
Total |
� |
$ |
52,472 |
� |
94,391 |
� |
146,863 |
� |
�
� |
� |
Year�to�Date�2014 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Underwriting and distribution fee revenues |
� |
� |
� |
� |
� |
� |
� | |
Rule�12b-1 service and distribution fees |
� |
$ |
171,772 |
� |
90,302 |
� |
262,074 |
� |
Fee-based asset allocation product revenues |
� |
� |
� |
149,154 |
� |
149,154 |
� | |
Sales commissions on front-end load mutual fund and variable annuity sales |
� |
4,902 |
� |
51,253 |
� |
56,155 |
� | |
Sales commissions on other products |
� |
� |
� |
19,439 |
� |
19,439 |
� | |
Other revenues |
� |
2,934 |
� |
17,559 |
� |
20,493 |
� | |
Total |
� |
$ |
179,608 |
� |
327,707 |
� |
507,315 |
� |
�
�
� |
� |
Year�to�Date�2013 |
� | |||||
� |
� |
Wholesale |
� |
Advisors |
� |
Total |
� | |
� |
� |
(in�thousands) |
� | |||||
� |
� |
� |
� |
� |
� |
� |
� | |
Underwriting and distribution fee revenues |
� |
� |
� |
� |
� |
� |
� | |
Rule�12b-1 service and distribution fees |
� |
$ |
143,893 |
� |
78,747 |
� |
222,640 |
� |
Fee-based asset allocation product revenues |
� |
� |
� |
110,959 |
� |
110,959 |
� | |
Sales commissions on front-end load mutual fund and variable annuity sales |
� |
3,780 |
� |
51,491 |
� |
55,271 |
� | |
Sales commissions on other products |
� |
� |
� |
15,998 |
� |
15,998 |
� | |
Other revenues |
� |
2,820 |
� |
16,191 |
� |
19,011 |
� | |
Total |
� |
$ |
150,493 |
� |
273,386 |
� |
423,879 |
� |
�
Underwriting and distribution revenues earned in the third quarter of 2014 increased by $26.2 million, or 18%, compared to the third quarter of 2013.� Rule�12b-1 asset based service and distribution fees increased $11.1 million, or 14%, quarter over quarter driven by a 16% increase in average mutual fund assets under management for which we earn Rule�12b-1 revenues.� Approximately 75% of Rule�12b-1 revenues earned are a pass-through to direct underwriting and distribution expenses.� In our Advisors channel, revenues from fee-based asset allocation products continued to be meaningful, increasing to 46% of Advisor channel underwriting and distribution revenues in the third quarter of 2014 compared to 42% in the third quarter of 2013.� Fee-based asset allocation assets under management grew from $13.0 billion at September�30, 2013 to $16.6 billion at September�30, 2014, generating an increase of fee-based asset allocation revenue of $12.8 million, or 32%, as advisors increasingly utilize fee-based programs for their clients.
�
For the nine months ended September�30, 2014, underwriting and distribution revenues increased $83.4�million, or 20%, compared with the nine months ended September�30, 2013.� Rule�12b-1 asset based service and distribution fees increased $39.4 million, or 18%, compared to the first nine months of 2013, driven by a 19% increase in average mutual fund assets under management for which we earn Rule�12b-1 revenues.� In our Advisors channel, revenues from fee-based asset allocation products during the nine months ended September�30, 2014 increased $38.2 million, or 34%, compared to the prior year period.
�
Underwriting and distribution expenses for the third quarter of 2014 increased by $28.2 million, or 17%, compared to the third quarter of 2013.� Direct expenses in the Wholesale channel increased by $8.7 million due to increased average wholesale assets under management year over year, which resulted in higher dealer compensation and Rule�12b-1 asset-based service and distribution expenses paid to third-party distributors.� In the Advisors channel, direct expenses grew faster than revenue due to increased advisor payouts.� Across both channels, indirect expenses for the third quarter of 2014 increased $4.4 million, or 12%, compared to the quarter ended September�30, 2013, primarily due to increased marketing expenses, business meetings and travel expenses, employee compensation and sales convention expenses.
�
For the nine months ended September�30, 2014, underwriting and distribution expenses increased by $92.3 million, or 19%, compared to the first nine months of 2013.� Direct expenses in the Wholesale channel increased by $37.0 million as a result of an increase in average wholesale assets under management and higher sales volume year over year.� We incurred higher dealer compensation, Rule�12b-1 asset-based service and distribution expenses paid to third-party distributors and higher wholesaler commissions.� In the Advisors channel, direct expenses grew faster than revenue due to increased advisor payouts.� Indirect expenses, across both channels, during the nine months ended September�30, 2014 increased $11.1 million, or 10%, compared with the first nine months of 2013, primarily due to increased marketing expenses, computer services and software expenses, field management compensation and sales convention expenses.
�
Shareholder Service Fee Revenue
�
Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees.� Transfer agency fees and portfolio accounting and administration fees are asset-based revenues or account-based revenues, while custodian fees from retirement plan accounts are based on the number of client accounts.
�
�
During the third quarter of 2014, shareholder service fee revenue increased $4.1 million, or 12%, over the third quarter of 2013.� Asset-based fees increased $3.3 million for the same period. Of the increase in asset-based fees, fees for the I, Y and R share classes increased $3.1 million, or 34%, compared to the third quarter of 2014.� Assets in the I, Y and R share classes grew from a quarterly average of $24.2 billion at September�30, 2013 to an average of $32.4 billion at September�30, 2014, representing an increase of 34%.� Account-based fees during the third quarter of 2014 increased $0.8 million quarter over quarter due to a 3% increase in the number of accounts compared to the third quarter in 2013.� For the nine month period ended September�30, 2014, shareholder service fee revenue increased $12.6 million, or 12%, compared to the same period in 2013.� For the same time period, asset-based fees increased $10.3 million.� Asset-based fees during the nine months ended September�30, 2014 for the I, Y and R share classes increased $9.6 million, or 37%.� Assets in the I, Y and R share classes grew from an average of $22.7 billion at September�30, 2013 to an average of $31.2 billion at September�30, 2014, representing an increase of 37%.� Account-based fees during the nine months ended September�30, 2014 increased $2.4 million compared to the first nine months of 2013 due to a 3% increase in the number of accounts compared to the same period in 2013.
�
Total Operating Expenses
�
Operating expenses increased $40.6 million, or 17%, in the third quarter of 2014 compared to the third quarter of 2013, primarily due to increased underwriting and distribution expenses, increased general and administrative costs and an intangible asset impairment charge.� For the nine months ended September�30, 2014, operating expenses increased $111.1 million, or 15%, compared to the first nine months of 2013, primarily due to increased underwriting and distribution expenses, increased general and administrative costs and an intangible asset impairment charge.� Underwriting and distribution expenses are discussed above.
�
� |
� |
Three�Months�Ended |
� |
� |
� | |||
� |
� |
September�30, |
� |
� |
� | |||
� |
� |
2014 |
� |
2013 |
� |
Variance |
� | |
� |
� |
(in�thousands,�except�percentage�data) |
� | |||||
Underwriting and distribution |
� |
$ |
197,246 |
� |
169,046 |
� |
17 |
% |
Compensation and related costs |
� |
48,375 |
� |
49,472 |
� |
-2 |
% | |
General and administrative |
� |
24,924 |
� |
20,462 |
� |
22 |
% | |
Subadvisory fees |
� |
2,203 |
� |
1,667 |
� |
32 |
% | |
Depreciation |
� |
3,786 |
� |
3,172 |
� |
19 |
% | |
Intangible asset impairment |
� |
7,900 |
� |
� |
� |
NM |
� | |
Total operating expenses |
� |
$ |
284,434 |
� |
243,819 |
� |
17 |
% |
�
� |
� |
Nine�Months�Ended |
� |
� |
� | |||
� |
� |
September�30, |
� |
� |
� | |||
� |
� |
2014 |
� |
2013 |
� |
Variance |
� | |
� |
� |
(in�thousands,�except�percentage�data) |
� | |||||
Underwriting and distribution |
� |
$ |
587,805 |
� |
495,461 |
� |
19 |
% |
Compensation and related costs |
� |
146,973 |
� |
145,003 |
� |
1 |
% | |
General and administrative |
� |
75,863 |
� |
63,608 |
� |
19 |
% | |
Subadvisory fees |
� |
6,149 |
� |
10,442 |
� |
-41 |
% | |
Depreciation |
� |
10,576 |
� |
9,621 |
� |
10 |
% | |
Intangible asset impairment |
� |
7,900 |
� |
� |
� |
NM |
� | |
Total operating expenses |
� |
$ |
835,266 |
� |
724,135 |
� |
15 |
% |
�
Compensation and Related Costs
�
Compensation and related costs during the third quarter of 2014 decreased $1.1 million, or 2%, compared to the third quarter of 2013.� Share-based compensation decreased $1.2 million due to the impact of adjustments to the forfeiture rate in 2014 and a decrease in non-employee advisor (independent contractor) stock award amortization expense. We also incurred lower incentive compensation expense and decreased pension expense during the third quarter of 2014. Offsetting the decreases were higher base salaries and payroll taxes due to increased headcount and annual salary increases.
�
�
For the nine months ended September�30, 2014, compensation and related costs increased $2.0 million, or 1%, compared to the first nine months of 2013. Share-based compensation increased $1.4 million due to higher amortization expense associated with our nonvested restricted stock.� Adjustments to the forfeiture rate of nonvested restricted stock in 2014 partially offset this share-based compensation increase.� Base salaries and payroll taxes increased $3.6 million due to increased headcount and annual salary increases. Offsetting these increases were lower incentive compensation expense and pension expense.
�
General and Administrative Costs
�
General and administrative expenses increased $4.5 million to $24.9 million for the third quarter of 2014, compared to the third quarter of 2013.� The increase is due to increased technology consulting and computer services and software costs related to the acceleration of technology infrastructure initiatives, as well as increased dealer services costs and legal costs.� A majority of dealer services costs represent pass-through costs to third party dealers and are based on higher asset levels in certain share classes.
�
For the nine months ended September�30, 2014, general and administrative expenses increased $12.3 million to $75.9 million, compared to the same period in 2013.� Included in the nine months ended September�30, 2013 were one-time structuring, offering and organizational costs for the launch of the Ivy High Income Opportunities Fund in the amount of $6.6 million.� Excluding these charges in 2013, general and administrative costs increased $18.9 million.� The increase is primarily due to increased technology consulting and computer service and software costs, increased dealer service costs on higher asset levels in certain share classes, increased legal costs, increased temporary office staff expense and increased fund expenses.
�
Intangible Asset Impairment
�
During the third quarter of 2014, we recorded an intangible asset impairment charge of $7.9 million related to our subadvisory agreement to manage certain mutual fund products for Mackenzie Financial Corporation (�MFC�) recorded in connection with our purchase of Mackenzie Investment Management,�Inc. in 2002.��� The impairment charge was a result of a decline in assets under management attributable to a realignment of MFC�s fund offerings and additional asset reductions.� It is possible that the assets we manage for MFC may decrease in the future, which would require us to assess the need for an additional writedown of the intangible asset associated with our subadvisory agreement with MFC.
�
At September�30, 2014, the remaining balance of our subadvisory intangible asset was $8.4 million.� The deferred tax liability established as a part of purchase accounting related to this intangible asset was $3.1 million as of September�30, 2014.
�
Subadvisory Fees
�
Subadvisory fees represent fees paid to other asset managers for providing advisory services for certain mutual fund portfolios.� Gross management fee revenues for products subadvised by others were $4.1 million for the three months ended September�30, 2014 compared to $3.2 million for the third quarter of 2013 due to a 37% increase in subadvised average net assets under management.� For the nine months ended September�30, 2014, gross management fee revenues for products subadvised by others were $11.6 million compared to $20.6 million for the same period in 2013 due to a 51% decrease in average net assets under management.� The decrease in subadvised average net assets under management is a result of internalizing the management of the Global Natural Resources funds after the portfolio manager�s retirement from MFC, the subadvisor, during the third quarter of 2013.� Subadvisory expenses during the three and nine months ended September�30, 2014 followed the same pattern compared to the same periods in 2013.
�
Subadvised ending assets under management at September�30, 2014 were $2.5 billion compared to $1.8 billion at September�30, 2013.
�
�
Investment and Other Income (Loss),�Interest Expense and Taxes
�
Investment and other losses was $1.2 million for the quarter ended September�30, 2014, compared to investment and other income of $5.2 million in the same period in 2013.� We recorded realized gains of $1.3 million on the sale of available for sale mutual fund holdings during the third quarter of 2014 compared to $2.2 million in the third quarter of 2013. In our mutual fund trading portfolio, we recorded mark-to-market losses of $3.5 million during the third quarter of 2014 compared to gains of $2.8 million for the three months ended September�30, 2013.� We recorded mutual fund dividend income of $0.4 during the quarters ended September�30, 2014 and 2013.� We recorded losses to our investment in a limited partnership of $1.1 million in the third quarter of 2013.
�
For the nine months ended September�30, 2014 and 2013, investment and other income was $8.8 million and $10.6 million, respectively.� We recorded realized gains of $3.9 million on the sale of available for sale mutual fund holdings during the first nine months of 2014, compared to $7.9 million during the first nine months of 2013.� In our mutual fund trading portfolio, we recorded mark-to-market gains of $2.0 million during the nine months ended September�30, 2014, compared to gains of $2.9 million during the first nine months ended September�30 2013. We recorded mutual fund dividend income of $1.6 million during the first nine months of 2014, compared to $1.0 million during the same period in 2013.� The first nine months of 2013 included a $2.9 million loss related to the Company�s investment in a limited partnership.
�
Interest expense was $2.8 million in the third quarter of 2014 and 2013, and $8.3 million and $8.5 million for the nine month periods ended September�30, 2014 and 2013, respectively.
�
Our effective income tax rate was 38.4% for the third quarter of 2014, as compared to 35.2% for the third quarter of 2013.� Due to the sale of a subsidiary in 2013, the Company has deferred tax assets related to capital loss carryforwards, which are available to offset current and future capital gains.� A valuation allowance was recorded on this capital loss when realized to the extent that this loss exceeded available capital gains. The valuation allowance was necessary due to the limited carryforward period permitted by law on losses of this character.� During the third quarter of 2014, a decrease in the fair value of the Company�s trading securities portfolio increased the valuation allowance, thereby increasing income tax expense by $0.9 million.� During the third quarter of 2013, the valuation allowance decreased by $1.7 million due to an increase in the fair value of the Company�s trading securities portfolio and realized capital gains on securities classified as available for sale.
�
The third quarter 2014 and 2013 effective income tax rates, removing the effects of the valuation allowance, would have been 37.7% and 36.9%, respectively.� The adjusted effective tax rate in the third quarter of 2014 was higher primarily due to adjustments of prior estimates of tax based upon actual tax return filings.� Additionally, the third quarter 2014 tax rate was higher due to a charge for a tax position on which the outcome is uncertain.
�
Our effective income tax rate was 36.5% for the nine months ended September�30, 2014, as compared to 36.2% for the nine months ended September�30, 2013.� During 2014, an increase in the Company�s trading securities portfolio and realized capital gains on securities classified as available for sale allowed for a release of the valuation allowance, thereby reducing income tax expense by $2.1 million. �Additionally, the Company closed a transaction that recharacterized tax losses on a limited partnership investment from capital to ordinary, thereby releasing the valuation allowance and reducing income tax expense by $1.5 million.� During 2013, the valuation allowance decreased $3.2 million due to realized capital gains on the sale of securities classified as available for sale and an increase in the fair value of the Company�s trading securities portfolio.
�
Removing the effects of the valuation allowance for the nine months ended September�30, 2014 and 2013, the effective income tax rate would have been 37.5% and 37.4%, respectively.� The adjusted effective tax rate in 2014 was higher primarily due to adjustments of prior estimates of tax based upon actual tax return filings.
�
The Company expects its future effective tax rate, exclusive of any increases or reductions to the valuation allowance, state tax incentives, unanticipated state tax legislative changes, and unanticipated fluctuations in earnings to range from 37% to 39%.
�
�
Liquidity and Capital Resources
�
Our operations provide much of the cash necessary to fund our priorities, as follows:
�
������������������ Finance internal growth
�
������������������ Pay dividends
�
������������������ Repurchase our stock
�
Finance Internal Growth
�
We use cash to fund growth in our distribution channels. �Our Wholesale channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales. �We continue to invest in our Advisors channel by providing additional support to our advisors through home office resources, wholesaling efforts and enhanced technology tools.� Across both channels, we provide seed money for new products.
�
We are currently investing in technology initiatives to modernize and optimize our technology environment.� Initiatives underway include upgrading our infrastructure, network and security, moving to distributed applications and building system architecture.
�
Pay Dividends
�
We paid quarterly dividends on our Class�A common stock that resulted in financing cash outflows of $86.8 million and $72.1 million for the first nine months of 2014 and 2013, respectively.� The total dividend to be paid on November�3, 2014 to stockholders of record as of October�13, 2014 is approximately $28.6 million.
�
Repurchase Our Stock
�
We repurchased 1,522,270 shares and 1,187,839 shares of our Class�A common stock in the open market or privately during the nine months ended September�30, 2014 and 2013, respectively, resulting in cash outflows of $96.1 million and $52.5 million, respectively.
�
Operating Cash Flows
�
Cash from operations, our primary source of funds, increased $78.8 million for the nine months ended September�30, 2014 compared to the nine months ended September�30, 2013.� The increase is primarily due to increased net income compared to the same period in 2013.
�
During the first nine months of 2014, we contributed $20.0 million to our pension plan.� We are considering additional contributions in 2014.
�
Investing Cash Flows
�
Investing activities consist primarily of the purchase, sale and maturities of available for sale investment securities, as well as capital expenditures.� We expect our 2014 capital expenditures to be in the range of $30.0 to $35.0 million.
�
Financing Cash Flows
�
As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in the first nine months of 2014 and 2013.
�
Future Capital Requirements
�
Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements.� Expected short-term uses of cash include dividend payments, interest payments on outstanding debt, income tax payments, seed money for new products, share repurchases, payment of deferred commissions to our financial advisors and third-parties, pension funding, capital expenditures and home office leasehold improvements, and could include strategic acquisitions.
�
Expected long-term capital requirements include indebtedness, operating leases and purchase obligations, and potential settlement of tax liabilities.� Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure and home office expansion, strategic acquisitions, payment of dividends, income tax payments, seed money for new products, pension funding, repurchases of our Class�A common stock and payment of upfront fund commissions for Class�C shares and
�
�
certain fee-based asset allocation products.� Payment of upfront fund commissions for certain fee-based asset allocation products may continue to decline in future periods due to changes in advisor compensation plans.
�
Critical Accounting Policies and Estimates
�
Management believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company�s critical accounting policies and estimates are disclosed in the �Critical Accounting Policies and Estimates� section of our Form�10-K for the year ended December�31, 2013 (the �2013 Form�10-K�).
�
�
Supplemental Information
�
� |
� |
Third |
� |
Third |
� |
� |
� |
Year�to |
� |
Year�to |
� |
� |
� | ||
� |
� |
Quarter |
� |
Quarter |
� |
� |
� |
Date |
� |
Date |
� |
� |
� | ||
� |
� |
2014 |
� |
2013 |
� |
Change |
� |
2014 |
� |
2013 |
� |
Change |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Channel highlights |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Number of wholesalers |
� |
59 |
� |
49 |
� |
20.4 |
% |
59 |
� |
49 |
� |
20.4 |
% | ||
Number of advisors |
� |
1,759 |
� |
1,784 |
� |
-1.4 |
% |
1,759 |
� |
1,784 |
� |
-1.4 |
% | ||
Advisor productivity (in thousands)(1) |
� |
$ |
64.6 |
� |
49.7 |
� |
30.0 |
% |
$ |
187.9 |
� |
146 |
� |
28.7 |
% |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Redemption rates - long term assets |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Wholesale |
� |
40.3 |
% |
25.7 |
% |
� |
� |
28.9 |
% |
26.6 |
% |
� |
� | ||
Advisors |
� |
8.2 |
% |
8.7 |
% |
� |
� |
8.1 |
% |
9.1 |
% |
� |
� | ||
Institutional |
� |
16.1 |
% |
17.0 |
% |
� |
� |
17.6 |
% |
19.4 |
% |
� |
� | ||
Total |
� |
26.1 |
% |
18.6 |
% |
� |
� |
20.4 |
% |
19.4 |
% |
� |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Operating highlights |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Organic growth (decay) annualized |
� |
-8.7 |
% |
5.7 |
% |
� |
� |
3.1 |
% |
6.2 |
% |
� |
� | ||
Total assets under management (in millions) |
� |
$ |
128,886 |
� |
113,744 |
� |
13.3 |
% |
$ |
128,886 |
� |
113,744 |
� |
13.3 |
% |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Operating margin |
� |
30.6 |
% |
29.8 |
% |
� |
� |
30.4 |
% |
27.2 |
% |
� |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Diversification (company total) |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
As % of Sales |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Asset Strategy |
� |
24.9 |
% |
25.9 |
% |
� |
� |
29.1 |
% |
29.3 |
% |
� |
� | ||
Fixed Income |
� |
28.8 |
% |
31.8 |
% |
� |
� |
25.4 |
% |
31.0 |
% |
� |
� | ||
Other |
� |
46.3 |
% |
42.3 |
% |
� |
� |
45.5 |
% |
39.7 |
% |
� |
� | ||
As % of Assets Under Management |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Asset Strategy |
� |
32.0 |
% |
33.8 |
% |
� |
� |
32.0 |
% |
33.8 |
% |
� |
� | ||
Fixed Income |
� |
18.2 |
% |
19.0 |
% |
� |
� |
18.2 |
% |
19.0 |
% |
� |
� | ||
Other |
� |
49.8 |
% |
47.2 |
% |
� |
� |
49.8 |
% |
47.2 |
% |
� |
� | ||
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Shareholder service fees |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | ||
Average assets for I, Y, and R share classes (in millions) |
� |
$ |
32,392 |
� |
24,207 |
� |
33.8 |
% |
$ |
31,171 |
� |
22,704 |
� |
37.3 |
% |
Number of shareholder accounts (in thousands) |
� |
4,380 |
� |
4,237 |
� |
3.4 |
% |
4,380 |
� |
4,237 |
� |
3.4 |
% |
�
(1)�������� Advisors� productivity is calculated by dividing underwriting and distribution revenues for the Advisors channel by the average number of advisors during the year.
�
�
Item 3.�������������������������������� Quantitative and Qualitative Disclosures About Market Risk
�
We are primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices.� The Company has had no significant changes in its market risk policies or its market risk sensitive instruments and positions from that previously reported in the Company�s 2013 Form�10-K
�
Item 4.�������������������������������� Controls and Procedures
�
The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the �Exchange Act�) is recorded, processed, summarized and reported within the time periods specified in the SEC�s rules�and forms and that such information is accumulated and communicated to the Company�s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.� A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.� The Company�s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company�s disclosure controls and procedures (as defined in Rule�13a-15(e)�and 15d-15(e)�of the Exchange Act) as of September�30, 2014, have concluded that the Company�s disclosure controls and procedures were effective as of September�30, 2014.
�
The Company�s internal control over financial reporting (as defined in Exchange Act Rule�13a-15(f)�and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.� There were no changes in the Company�s internal control over financial reporting that occurred during the fiscal quarter ended September�30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company�s internal control over financial reporting.� However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
�
�
�
Item 1. ����������������������������� Legal Proceedings
�
We discuss legal proceedings in the �Contingencies� note to our unaudited consolidated financial statements included in this Quarterly Report on Form�10-Q.
�
Item 1A.����������������������� Risk Factors
�
The Company has had no material changes to its Risk Factors from those previously reported in the Company�s 2013 Form�10-K.
�
Item 2.�������������������������������� Unregistered Sales of Equity Securities and Use of Proceeds
�
The following table sets forth certain information about the shares of Class�A common stock we repurchased during the third quarter of 2014.
�
Period |
� |
Total�Number |
� |
Average |
� |
Total�Number�of |
� |
Maximum�Number�(or |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
July�1 - July�31 |
� |
543,813 |
� |
$ |
56.60 |
� |
543,813 |
� |
n/a (1) |
� |
August�1 - August�31 |
� |
50,149 |
� |
51.81 |
� |
50,149 |
� |
n/a (1) |
� | |
September�1 - September�30 |
� |
20,100 |
� |
52.01 |
� |
20,100 |
� |
n/a (1) |
� | |
� |
� |
� |
� |
� |
� |
� |
� |
� |
� | |
Total |
� |
614,062 |
� |
$ |
56.06 |
� |
614,062 |
� |
� |
� |
�
(1)�������� On August�31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our Class�A common stock on the open market.� Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i)�3% of our outstanding Class�A common stock or (ii)�$50 million of our Class�A common stock.� We may repurchase our Class�A common stock through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems.� Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased.� Our Board of Directors reviewed and ratified the stock repurchase program in October�2012.� During the third quarter of 2014, all stock repurchases were made pursuant to the repurchase program and 1,962 shares, reflected in the table above, were purchased in connection with funding employee income tax withholding obligations arising from the vesting of nonvested shares.
�
�
Item 6.�������������������������������� Exhibits
�
3.1������������������������������ Amended and Restated Bylaws of Waddell�& Reed Financial,�Inc.� Filed as Exhibit�3.1 to the Company�s Current Report on Form�8-K, File No.�001-13913, filed October�20, 2014 and incorporated herein by reference.
�
31.1*���������������� Section�302 Certification of Chief Executive Officer
�
31.2*���������������� Section�302 Certification of Chief Financial Officer
�
32.1**��������� Section�906 Certification of Chief Executive Officer
�
32.2**��������� Section�906 Certification of Chief Financial Officer
�
101*������������������� Materials from the Waddell�& Reed Financial,�Inc. Quarterly Report on Form�10-Q for the quarter ended September�30, 2014, formatted in Extensible Business Reporting Language (XBRL):� (i)�Consolidated Balance Sheets, (ii)�Consolidated Statements of Income, (iii)�Consolidated Statements of Comprehensive Income, (iv)�Consolidated Statement of Stockholders� Equity, (v)�Consolidated Statements of Cash Flows, and (vi)�related Notes to the Unaudited Consolidated Financial Statements, tagged in detail.
�
*�� Filed herewith
** Furnished herewith
�
�
�
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 31st day of October�2014.
�
�
� |
WADDELL�& REED FINANCIAL,�INC. | |
� |
� | |
� |
�By: |
/s/ Henry J. Herrmann |
� |
� |
Chief Executive Officer, Chairman of the Board and Director |
� |
� |
(Principal Executive Officer) |
� |
� |
� |
� |
� |
� |
� |
�By: |
/s/ Brent K. Bloss |
� |
� |
Senior Vice President, Chief Financial Officer and Treasurer |
� |
� |
(Principal Financial Officer) |
� |
� |
� |
� |
� |
� |
� |
�By: |
/s/ Melissa A. Clouse |
� |
� |
Vice President and Controller |
� |
� |
(Principal Accounting Officer) |
�
Exhibit�31.1
�
I, Henry J. Herrmann, certify that:
�
1.������������� I have reviewed this Quarterly Report on Form�10-Q of Waddell�& Reed Financial,�Inc.;
�
2.������������� Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
�
3.������������� Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
�
4.������������� The registrant�s other certifying officer(s)�and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e)�and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules�13a-15(f)�and 15d-15(f)) for the registrant and have:
�
a)���������������������������� Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
�
b)���������������������������� Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
�
c)����������������������������� Evaluated the effectiveness of the registrant�s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
�
d)���������������������������� Disclosed in this report any change in the registrant�s internal control over financial reporting that occurred during the registrant�s most recent fiscal quarter (the registrant�s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant�s internal control over financial reporting; and
�
5.������������� The registrant�s other certifying officer(s)�and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant�s auditors and the audit committee of registrant�s board of directors (or persons performing the equivalent functions):
�
�
a)������������������������������ All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant�s ability to record, process, summarize and report financial information; and
�
b)������������������������������ Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�s internal control over financial reporting.
�
�
Date: October�30, 2014 |
� |
� |
� |
� |
/s/ Henry J. Herrmann |
� |
Henry J. Herrmann |
� |
Chief Executive Officer |
�
Exhibit�31.2
�
I, Brent K. Bloss, certify that:
�
1.������������� I have reviewed this Quarterly Report on Form�10-Q of Waddell�& Reed Financial,�Inc.;
�
2.������������� Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
�
3.������������� Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
�
4.������������� The registrant�s other certifying officer(s)�and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e)�and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules�13a-15(f)�and 15d-15(f)) for the registrant and have:
�
a)���������������������������� Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
�
b)���������������������������� Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
�
c)����������������������������� Evaluated the effectiveness of the registrant�s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
�
d)���������������������������� Disclosed in this report any change in the registrant�s internal control over financial reporting that occurred during the registrant�s most recent fiscal quarter (the registrant�s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant�s internal control over financial reporting; and
�
5.������������� The registrant�s other certifying officer(s)�and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant�s auditors and the audit committee of registrant�s board of directors (or persons performing the equivalent functions):
�
�
a)������������������������������ All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant�s ability to record, process, summarize and report financial information; and
�
b)������������������������������ Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�s internal control over financial reporting.
�
�
Date: October�30, 2014 |
� |
� |
� |
� |
/s/ Brent K. Bloss |
� |
Brent K. Bloss |
� |
Senior Vice President, |
� |
Chief Financial Officer and Treasurer |
�
Exhibit�32.1
�
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
�
I, Henry J. Herrmann, Chief Executive Officer of Waddell�& Reed Financial,�Inc. (the �Company�) hereby certify, pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section�1350 (the �Act�), that:
�
1.������������������������������������� The Company�s Quarterly Report on Form�10-Q for the quarter ended September�30, 2014 (the �Report�) dated October�31, 2014 and filed with the United States Securities and Exchange Commission fully complies with the requirements of Section�13(a)�or 15(d)�of the Securities Exchange Act of 1934, as amended; and
�
2.������������������������������������� The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
�
�
Dated: October�30, 2014 |
� |
� |
� |
� |
/s/ Henry J. Herrmann |
� |
Henry J. Herrmann |
� |
Chief Executive Officer |
�
Exhibit�32.2
�
CERTIFICATION OF CHIEF FINANCIAL OFFICER
�
I, Brent K. Bloss, Senior Vice President, Chief Financial Officer and Treasurer of Waddell�& Reed Financial,�Inc. (the �Company�) hereby certify, pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section�1350 (the �Act�), that:
�
1.������������������������������������� The Company�s Quarterly Report on Form�10-Q for the quarter ended September�30, 2014 (the �Report�) dated October�31, 2014 and filed with the United States Securities and Exchange Commission fully complies with the requirements of Section�13(a)�or 15(d)�of the Securities Exchange Act of 1934, as amended; and
�
2.������������������������������������� The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
�
�
Dated: October�30, 2014 |
� |
� |
� |
� |
/s/ Brent K. Bloss |
� |
Brent K. Bloss |
� |
Senior Vice President, |
� |
Chief Financial Officer and Treasurer |
�
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Medigene AG reports Financial Results and Business Update for Q1 2024
- CGG Announces its Q1 Financial Results on Tuesday 14th May 2024, after Market Close
- CTT Systems AB (publ.) - Interim Report First Quarter 2024
Create E-mail Alert Related Categories
SEC FilingsSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!